PRINCIPAL UTILITIES FUND INC /MD/, 485APOS, 1999-12-30

PRINCIPAL UTILITIES FUND INC /MD/
485APOS, 1999-12-30

Previous: BLACKROCK BROAD INVESTMENT GRADE 2009 TERM TRUST INC, NSAR-B, 1999-12-30

Next: CORPORATE INCOME FUND MON PYMT SER 320 DEFINED ASSET FDS, 497, 1999-12-30

Registration No. 33-53062

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

POST-EFFECTIVE AMENDMENT NO. 18 TO

FORM N-1A

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

and

REGISTRATION STATEMENT

under

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

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

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

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

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

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

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

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

If appropriate, check the following box:

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

PRINCIPAL MUTUAL FUNDS

DOMESTIC GROWTH-ORIENTED FUNDS

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

INTERNATIONAL GROWTH-ORIENTED FUNDS

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

PARTNERS FUNDS

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

INCOME-ORIENTED FUNDS

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

MONEY MARKET FUND

Principal Cash Management Fund, Inc.

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

The date of this Prospectus is ____________.

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

TABLE OF CONTENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FUND DESCRIPTIONS.

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

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

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

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

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

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

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

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

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

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

Fund Performance

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

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

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

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

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

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

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

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

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

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % % %

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

Examples

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

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

Day-to-day Fund Management

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

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

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

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

Examples

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

Day-to-day Fund Management

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

Class A Class B Class C

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

Total Fund Operating Expenses % % %

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

Examples

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

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

Day-to-day Fund Management

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

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

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

Since __________

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

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

Examples

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

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

Day-to-day Fund Management

Since _____________

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

Since ___________

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

"1998" -13.62
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

Annual Total Returns

"1998" -5.68
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

Annual Total Returns

"1998" -17.42
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

Annual Total Returns

"1998" 14.4
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

PARTNERS FUND

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

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

Examples

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

Day-to-day Fund Management

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

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

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

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

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

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

Since _____
(Fund's inception)

PARTNERS FUND

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

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

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

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

Since _____
(Fund's inception)

INCOME-ORIENTED FUND

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

INCOME-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

INCOME-ORIENTED FUND

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

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

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

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

Main Risks

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

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

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

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

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

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

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

Annaul Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

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

Day-to-day Fund Management

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

INCOME-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

"1997" 6.63
"1998" 6.7
"1999"

Calendar Years Ended December

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

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

Examples

Day-to-day Fund Management

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

INCOME-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.

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

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

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

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

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

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

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

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

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

Examples

1 Year 3 Years 5 Years 10 Years

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

Day-to-day Fund Management

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

Since ______ Alice Robertson

THE COSTS OF INVESTING

Fees and Expenses of the Funds

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

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

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

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

Redemptions During Redemptions During
Year Year 1

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

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

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

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

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

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

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

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

The amount invested is The holding period of the investment is

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

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

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

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

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

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

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

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

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

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

SALES CHARGE WAIVER OR REDUCTION (Class A shares)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

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

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

The Sub-Advisors

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

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

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

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

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

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

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

PRICING OF FUND SHARES

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

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

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

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

DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

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

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

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

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

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

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

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

HOW TO BUY SHARES

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

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

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

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

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

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

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

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

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

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

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

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

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

HOW TO REDEEM (SELL) SHARES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS

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

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

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

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

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

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

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

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

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

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

GENERAL INFORMATION ABOUT A FUND ACCOUNT

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

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

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

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

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

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

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

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

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

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

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

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

SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS

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

INTERNATIONAL GROWTH-ORIENTED FUNDS

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

INCOME-ORIENTED FUNDS

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

MONEY MARKET FUND

811-03585 Principal Cash Management Fund, Inc.

PARTNERS FUNDS

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

PRINCIPAL MUTUAL FUNDS

DOMESTIC GROWTH-ORIENTED FUNDS

INCOME-ORIENTED FUNDS

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

INTERNATIONAL GROWTH-ORIENTED FUNDS

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

MONEY MARKET FUND

Principal Cash Management Fund, Inc.

PARTNERS FUNDS

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

The date of this Prospectus is March 1, 2000.

TABLE OF CONTENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FUND DESCRIPTIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

o are customers of Principal Residential Mortgage, Inc.;

o are customers of Principal Bank; and

o have existing Principal Mutual Fund Class R share accounts.

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

DOMESTIC GROWTH-ORIENTED FUND

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

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

Day-to-day Fund Management

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

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

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

Examples

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

Day-to-day Fund Management

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

DOMESTIC GROWTH-ORIENTED FUND

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:

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

Annual Total Returns

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

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

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

Day-to-day Fund Management

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

DOMESTIC GROWTH-ORIENTED FUND

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

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.

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

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

Day-to-day Fund Management

Since _________ Manager:

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

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

EXAMPLES

Day to Day Fund Management

Since __________
(Fund's Inception)

DOMESTIC GROWTH-ORIENTED FUND

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

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

Day-to-day Fund Management

Since ______ Manager:

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

Annual Total Returns

"1998" -13.62
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

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

<FN>
* Period from December 31, 1997, date A shares first offered to the
public, through December 31, 1999.
** Period from December 31, 1997, date R shares first offered to eligible
purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

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

Total Fund Operating Expenses % %

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 2.40% for Class R Shares and
1.90% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.

Examples

Day-to-day Fund Management

Since December 1997 Manager: Kelly D. Rush, CFA. Assistant Director-Investment
- Commercial Real Estate of Principal Capital Management since 1996.

DOMESTIC GROWTH-ORIENTED FUND

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

Annual Total Returns

"1998" -5.68
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 2.30% for Class R Shares and
1.80% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.

Examples

Day-to-day Fund Management

Since December 1997 Co-Manager: Mark T. Williams, CFA. Portfolio Manager of
Invista since 1995.
Since December 1997 Co-Manager: John F. McClain, Portfolio Manager of Invista
since 1995.

DOMESTIC GROWTH-ORIENTED FUND

Main Strategies

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

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.

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

Annual Total Returns

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

</FN>
</TABLE>

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

Day-to-day Fund Management

Since April 1993 Manager: Catherine A. Zaharis, CFA. Portfolio Manager of
Invista since 1987.

INTERNATIONAL GROWTH-ORIENTED FUND

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

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.

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

Annual Total Returns

"1998" -17.42
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

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

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

</FN>
</TABLE>

Fund Operating Expenses

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

Total Fund Operating Expenses % %

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 3.00% for Class R Shares and
2.50% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.

Examples

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

Day-to-day Fund Management

Since May 1997 Manager: Kurtis D. Spieler, CFA. Portfolio Manager of
Invista since 1995.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL FUND, INC.

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

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

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

Calendar Years Ended December 31

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

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

Day-to-day Fund Management

Since April 1994 Manager: Scott D. Opsal, CFA. Executive Vice President and
Chief Investment Officer of Invista since 1997.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.

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

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

Annual Total Returns

"1998" 14.4
"1999"

Calendar Year Ended December 31

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

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

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

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

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

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

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

Examples

1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $

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

Day-to-day Fund Management

Since May 1997 Manager: Darren K. Sleister, CFA. Portfolio Manager of
Invista since 1995.

PARTNERS FUND

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

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

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

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

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

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: 2.10% for Class R Shares and 1.60% for Class A Shares. The
effect of the waiver is to reduce the Fund's annual operating
expenses.

Examples

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

Day-to-day Fund Management

Since November 1999
(Fund's inception)

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

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

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

PARTNERS FUND

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

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

Examples

1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------
Class A $ $ N/A N/A

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

Class A N/A N/A
Class R N/A N/A

Day-to-day Fund Management

Since _____
(Fund's inception)

PARTNERS FUND

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

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

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

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

Examples

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

Day-to-day Fund Management

Since _____
(Fund's inception)

INCOME-ORIENTED FUND

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

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.

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

Annual Total Returns

"1990" 4.64
"1991" 17.45
"1992" 8.61
"1993" 12.77
"1994" -4.35
"1995" 22.28
"1996" 2.27
"1997" 10.96
"1998" 7.14
"1999"

Calendar Years Ended December 31

The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

Highest .% (quarter ended )
Lowest . (quarter ended )

Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.

<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years

<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers BAA Corporate Index % % %
Class R * -- Lipper Corporate Debt BBB Rated Fund Average

<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................

Total Fund Operating Expenses % %

Examples

Day-to-day Fund Management

Since November 1996 Manager: Scott A. Bennett, CFA. Assistant Director -
Securities Investment of Principal Capital
Management since 1996.

INCOME-ORIENTED FUND

In addition, the Fund may invest in money market instruments.

Investor Profile
The Fund is generally a suitable investment if you want monthly dividends to
provide income or to be reinvested in additional Fund shares to produce growth
and prefer to have the repayment of principal and interest on most of the
securities in which the Fund invests to be back by the U.S. Government or its
agencies.

Annual Total Returns

"1990" 9.52
"1991" 16.83
"1992" 6.13
"1993" 9.16
"1994" -4.89
"1995" 19.19
"1996" 3.85
"1997" 9.69
"1998" 7.19
"1999"

Calendar Years Ended December 31

The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

Highest .% (quarter ended )
Lowest .% (quarter ended )

Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.

<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years

<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers GNMA Index % % %
Class R * -- Lipper GNMA Fund Average

<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................

Total Fund Operating Expenses % %

Examples

Day-to-day Fund Management

Since May 1985 Manager: Martin J. Schafer, CFA. Portfolio Manager of Invista
since 1992.

INCOME-ORIENTED FUND

During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):

0.74% in securities rated A 46.72% in securities rated Ba
2.62% in securities rated Baa 52.59% in securities rated B
2.64% in securities rated C 0.10% in securities rated D

The above percentage for securities rated Ba includes 2.89% of unrated
securities and securities rated B includes 2.52% of unrated securities which
have been determined by the Manager to be of comparable quality.

Main Risks
Investors assume special risks when investing in the Fund. Compared to higher
rated securities, lower rated securities may:
o have a more volatile market value, generally reflecting specific
events affecting the issuer;
o be subject to greater risk of loss of income and principal (issuers
are generally not as financially secure);
o have a lower volume of trading, making it more difficult to value or
sell the security; and
o be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.

Annual Total Returns

"1990" -11.66
"1991" 28.74
"1992" 13.09
"1993" 12.1
"1994" -0.65
"1995" 15.61
"1996" 12.54
"1997" 9.68
"1998" -1.28
"1999"

Calendar Years Ended December 31

The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

Highest .% (quarter ended )
Lowest .% (quarter ended )

Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.

<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years

<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers High Yield Composite Bond Index % % %
Class R * -- Lipper High Current Yield Fund Average

<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................

Total Fund Operating Expenses % %

Examples

Day-to-day Fund Management

Since April 1998 Manager: Mark P. Denkinger, CFA. Assistant Director -
Securities Investment of Principal Capital Management
since 1998.

INCOME-ORIENTED FUND

Under unusual market or economic conditions, for temporary defensive purposes
the Fund may invest up to 100% of its assets in the cash or cash equivalents.

As with all mutual funds, the value of the Fund's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.

Investor Profile
The Fund is generally a suitable investment if you want monthly dividends to
generate income or to reinvest for modest growth. You must be willing to accept
some volatility in the value of your investment but do not want dramatic
volatility.

Annual Total Returns

"1997" 6.63
"1998" 6.7
"1999"

Calendar Years Ended December

The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

Highest .% (quarter ended )
Lowest .% (quarter ended )

Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.

<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years

<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Lehman Brothers Intermediate Government/Corporate Index % % %
Class R ** -- Lipper Short-Intermediate Investment Grade Debt
Fund Average

<FN>
* Period from February 29, 1996, date shares first offered to the public,
through December 31, 1999.
** Period from February 29, 1996, date R shares first offered to eligible
purchasers, through December 31, 1999.

</FN>
</TABLE>

Fund Operating Expenses

Class A Class R
Management Fees*............... % %
12b-1 Fees.....................
Other Expenses.................

Total Fund Operating Expenses % %

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.60% for Class R Shares and
1.00% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.

Examples

Day-to-day Fund Management

Since February 1996 Manager: Martin J. Schafer, CFA. Portfolio Manager of
Invista since 1992.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.

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:

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income without incurring much principal risk or your short-term
needs.

Annual Total Returns

"1990" 7.63
"1991" 5.8
"1992" 3.38
"1993" 2.63
"1994" 3.77
"1995" 5.44
"1996" 4.96
"1997" 4.88
"1998" 5.15
"1999"

Calendar Years Ended December 31

The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

Highest .% (quarter ended )
Lowest .% (quarter ended )

Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R * --

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.

Fund Operating Expenses

Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................

Total Fund Operating Expenses % %

Examples

Day-to-day Fund Management

Since March 1983 Co-Manager: Michael R.Johnson. Assistant Director - Securities
Trading of Principal Capital Management since 1994.

Since _________ Co-Manager: Alice Robertson

THE COSTS OF INVESTING

Fees and Expenses of the Funds

This table describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.
<TABLE>
Shareholder Fees
(fees paid directly from your investment)

<CAPTION>
Maximum Sales Load Imposed Contingent
on Purchases of Class R sharesRedemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge

<S> <C> <C> <C> <C>
All Funds None None None None

* A wire charge of $6.00 will be deducted for all wire transfers.
</TABLE>

Class R shares of the Principal Mutual Funds are sold without a front-end sales
charge and do not have a contingent deferred sales charge. There is no sales on
shares of any of the Funds purchased with reinvested dividends or other
distributions.

Class R shares automatically convert into Class A shares (based on share prices,
not numbers of shares) 49 months after purchase. Class R shares provide you the
benefit of putting all your dollars to work from the time of investment, but
(until conversion) have higher ongoing fees and lower dividends than Class A
shares.

Only Class R shares are offered in this prospectus. Class A shares are only
described because Class R shares convert to Class A shares. Orders for Class R
shares of $500,000 or more are treated as orders for Class A shares (unless you
include a written instruction that the order should be treated as an order for
Class R shares.)

Class A shares of the Cash Management Fund are sold without a sales charge.
Class A shares of the other Funds are sold with a sales charge that is a
variable percentage based on the amount of the purchase. This table shows the
sales charge for those funds which is based on the amount of your purchase.
<TABLE>
<CAPTION>
All Funds (Except
LargeCap Stock Index and LargeCap Stock Index and Sales Charge for
Limited Term Bond Funds) Limited Term Bond Funds Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price

All Funds Except LargeCap Stock
Offering Net Amount Offering Net Amount LargeCap Stock Index Index and Limited
Amount invested Price Invested Price Invested and Limited Term Bond Term Bond Funds

The front-end sales charge is waived on an investment of $1 million or more in
Class A shares. There may be a CDSC on shares sold within 18 months of the
purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% (0.25% for the
LargeCap Stock Index and Limited Term Bond Funds) of the lesser of the current
market value or the initial purchase price of the shares sold. The CDSC is
waived on shares sold to fund a Principal Mutual Fund 401(a) or Principal Mutual
Fund 401(k) retirement plan, except redemptions which are the result of
termination of the plan or transfer of plan assets.

The CDSC is also waived:
o on shares sold to satisfy IRS minimum distribution rules
o using a periodic withdrawal plan. (You may sell up to 10% of the value of
the shares subject to a CDSC without paying the CDSC.)

Broker-dealers that sell Principal Mutual Funds are paid a certain percentage of
the sales charge in exchange for their services. At the option of Princor
Financial Services Corporation, the amount paid to a dealer may be more or less
than that shown in the chart above. The amount paid depends on the services
provided. Amounts paid to dealers on purchases without an front-end sales charge
are determined by and paid for by Princor.

SALES CHARGE WAIVER OR REDUCTION

Waiver of sales charge. A Fund's Class A shares may be purchased without a sales
charge:

o by its Directors, Principal Life and its subsidiaries and their employees,
officers, directors (active or retired), brokers or agents. This also
includes their immediate family members and trusts for the benefit of these
individuals;
o by the Principal Employees' Credit Union;
o by non-ERISA clients of Invista Capital Management LLC and Principal
Capital Management LLC;
o by any employee or Registered Representative (and their employees) of an
authorized broker-dealer;
o through broker-dealers, investment advisors and other financial
institutions that have entered into an agreement with Princor which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or similar program under which clients
pay a fee to the broker-dealer, investment advisor or financial
institution;
o by unit investment trusts sponsored by Principal Life Insurance Company
and/or its subsidiaries or affiliates;
o by certain employee welfare benefit plan customers of Principal Life with
Plan Deposit Accounts;
o by participants who receive distributions from certain annuity contracts
offered by Principal Life (except for shares of Tax-Exempt Bond Fund);
o to the extent the investment represents the proceeds of a total surrender
of certain Principal Life issued unregistered group annuity contracts to
fund an employer plan if Principal Life waives any applicable CDSC or other
contract surrender charge;
o using cash payments received from the Principal Bank under its awards
program;
o to the extent the investment represents redemption proceeds from certain
unregistered group annuity contracts issued by Principal Life to fund an
employer's 401(a) plan where such proceeds are used to fund the employer's
401(a) plan; and
o to the extent the purchase proceeds represent a distribution from a
terminating 401(a) plan if the employer or plan trustee has entered into a
written agreement with Princor permitting the group solicitation of
employees/participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above.

o your purchase of Class A shares must take place within the first 180 days
of your Registered Representative's affiliation with the authorized
broker-dealer;
o your investments must represent the sales proceeds from other mutual fund
shares (you must have paid a front-end sales charge or a CDSC) and the sale
must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you are
eligible for waiver of the front-end sales charge.
o you must send Princor either:
o the check for the sales proceeds (endorsed to Principal Mutual Funds)
or
o a copy of the confirmation statement from the other mutual fund
showing the sale transaction. If you place your order to buy Principal
Mutual Fund shares on the telephone, you must send us a copy of the
confirmation within 21 days of placing the order. If we do not receive
the confirmation within 21 days, we will sell enough of your Class A
shares to pay the sales charge that otherwise would have been charged.

NOTE:Please be aware that the sale of your other mutual funds shares may be
subject to federal (and state) income taxes. In addition, you may pay a
surrender charge to the other mutual fund.

Ongoing fees. Each Fund pays ongoing operating fees to its Manager, Underwriter
and others who provide services to the Fund. They reduce the value of each share
you own.

Distribution (12b-1) Fees
Each of the Funds (except the Cash Management Fund for Class A shares) has
adopted a Distribution Plan under Rule 12b-1 of the Investment Company Act of
1940. Under the Plan, the Fund pays a fee to Princor based on the average daily
net asset value of the Fund. These ongoing fees pay expenses relating to
distribution fees for the sale of Fund shares and for services provided by
Princor and other selling dealers to shareholders. Because they are ongoing
fees, over time they may exceed other types of sales charges.

The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
o Class R shares (except LargeCap Stock Index Fund) 0.75%
o Class R shares of the LargeCap Stock Index Fund 0.65%
o Class A shares (except Cash Management, LargeCap Stock Index
and Limited Term Bond Funds) 0.25%
o Class A shares of the LargeCap Stock Index and
Limited Term Bond Funds 0.15%

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.

Securities and Investment Practices
Equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.

Debt securities are sensitive to changes in interest rates. In general, bond
prices rise when interest rates fall and fall when interest rates rise. Longer
term bonds and zero coupon bonds are generally more sensitive to interest rate
changes.

Repurchase Agreements and Loaned Securities
Each of the Principal Mutual Funds may invest a portion of its assets in
repurchase agreements. Repurchase agreements typically involve the purchase of
debt securities from a financial institution such as a bank, savings and loan
association or broker-dealer. A repurchase agreement provides that the Fund
sells back to the seller and that the seller repurchases the underlying
securities at a specified price on a specific date. Repurchase agreements may be
viewed as loans by a Fund collateralized by the underlying securities. This
arrangement results in a fixed rate of return that is not subject to market
fluctuation while the Fund holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected Fund bears a risk of
loss. To minimize such risks, the Fund enters into repurchase agreements only
with large, well-capitalized and well-established financial institutions. In
addition, the value of the collateral underlying the repurchase agreement is
always at least equal to the repurchase price, including accrued interest.

Each of the Principal Mutual Funds may lend its portfolio securities to
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions.

Hedging is a technique used in an attempt to reduce risk. If a Fund's Manager or
Sub-Advisor hedges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investment, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or to increase
return. These techniques may increase the volatility of a Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the other party to the
transaction does not perform as promised. Additionally, there is the risk of
government action through exchange controls that would restrict the ability of
the Fund to deliver or receive currency.

Forward Commitments
Each of the Income-Oriented Funds and the Balanced Fund may enter into forward
commitment agreements. These agreements call for the Fund to purchase or sell a
security on a future date at a fixed price. Each of these Funds may also enter
into contracts to sell its investments either on demand or at a specific
interval.

Warrants
Each of the Funds (except Cash Management and Government Securities Income) may
invest up to 5% of its assets in warrants. Up to 2% of a Fund's assets may be
invested in warrants which are not listed on either the New York or American
Stock Exchanges.

Risks of High Yield Securities
The Balanced, Bond, and High Yield Funds may, to varying degrees, invest in debt
securities rated lower than BBB by S&P or Baa by Moody's or, if not rated,
determined to be of equivalent quality by the Manager. Such securities are
sometimes referred to as high yield or "junk bonds" and are considered
speculative.

Options
Each of the Funds (except Cash Management) may buy and sell certain types of
options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the following Funds may invest in foreign securities (securities of
non-U.S. companies) to the indicated percentage of its assets. (Debt securities
issued in the United States pursuant to a registration statement filed with the
Securities and Exchange Commission are not treated as foreign securities for
purposes of these limitations.)

o International, International Emerging Markets and International SmallCap
Funds - 100%;
o Partners Aggressive Growth, Partners LargeCap Growth and Real Estate Funds
- 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%; and
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Fund's investment in foreign securities may
also result in higher custodial costs and the costs associated with currency
conversions.

Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Boards
of Directors of the Funds have adopted Daily Pricing and Valuation Procedures
for the Funds. These procedures outline the steps to be followed by the Manager
and/or Sub-Advisor to establish a reliable market or fair value if a reliable
market value is not available through normal market quotations. The Executive
Committee of the Boards of Directors oversees this process.

Unseasoned Issuers
The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers
are companies with a record of less than three years continuous operation,
including the operation of predecessors and parents. Unseasoned issuers by their
nature have only a limited operating history which can be used for evaluating
the companies growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the companies management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.

Temporary Defensive Measures
For temporary defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Funds, the Bond and Limited Term Bond Funds, may
invest without limit in cash and cash equivalents. For this purpose, cash
equivalents include: bank certificates of deposit, bank acceptances, repurchase
agreements, commercial paper, and commercial paper master notes which are
floating rate debt instruments without a fixed maturity. In addition, a Fund may
purchase U.S. Government securities, preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock.

Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in a Fund's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year. Funds with high turnover rates (more than
100%) often have higher transaction costs (which are paid by the Fund) and may
generate short-term capital gains (on which you pay taxes even if you don't sell
any of your shares during the year).

You can find the turnover rate for each Fund, except for the Cash Management,
LargeCap Stock Index, Partners Aggressive Growth, Partners LargeCap Growth and
Partners MidCap Growth Funds, in the Fund's Financial Highlights table.

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Sub-Advisors

Funds: Balanced, Blue Chip, Capital Value, Government Securities
Income, Growth, International, International Emerging Markets,
International SmallCap, LargeCap Stock Index, Limited Term
Bond, MidCap, SmallCap, and Utilities.
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company
and an affiliate of the Manager, was founded in 1985. It
manages investments for institutional investors, including
Principal Life. Assets under management as of __________ were
approximately $____ billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.

Fund: Partners Aggressive Growth
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York,
NY 10020, provides a broad range of portfolio management
services to customers in the U.S. and abroad. As of _______,
Morgan Stanley managed investments totaling approximately
$_____ billion as named fiduciary or fiduciary adviser.
On December 1, 1998, Morgan Stanley Assets Management Inc.
changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain
instances using the name Morgan Stanley Asset Management.

Fund: Partners LargeCap Growth
Sub-Advisor: Duncan-Hurst Capital Management, Inc. was founded in 1990.
Its address is 4365 Executive Drive, Suite 1520, San Diego, CA
92121. Duncan-Hurst currently manages assets of $ ______
billion for institutional and individual investors.

Fund: Partners MidCap Growth
Sub-Advisor: Turner Investment Partners, Inc., 1235 Westlake Drive, Suite
350, Berwyn, PA 19312, is a professional investment management
firm founded in 1990. As of ____, Turner had discretionary
management authority with respect to approximately $______
billion in assets. Turner has provided investment advisory
services to investment companies since 1992.

Balanced 0.58%
Blue Chip 0.46%
Bond 0.48%
Capital Value 0.37%
Cash Management 0.44%
Government Securities Income 0.45%
Growth 0.38%
High Yield 0.60%
International 1.25%
International Emerging Markets 0.68%
International SmallCap 1.20%
Limited Term Bond 0.50%*
MidCap 0.56%
Real Estate 0.90%
SmallCap 0.85%
Tax-Exempt Bond 0.46%
Utilities 0.59%
* Before waiver.

PRICING OF FUND SHARES

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.

DIVIDENDS AND DISTRIBUTIONS

The Growth-Oriented and Income-Oriented Funds pay most of their net dividend
income to you every year. The payment schedule is:
<TABLE>
<CAPTION>

Funds Record Date Payable Date
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced, Real Estate three business days before March 24, June 24,
and Utilities each payable date September 24 and December 24
(or previous business day)

Blue Chip three business days before June 24 or December 24
each payable date (or previous business day)

Capital Value, Growth, International, three business days before December 24
International Emerging Markets, each payable date (or previous business day)
International SmallCap, LargeCap
Growth Stock Index, MidCap,
Partners Aggressive Growth,
Partners LargeCap Growth,
Partners MidCap Growth
and SmallCap

Bond, Government Securities three business days before monthly on the 24th
Income, High Yield and each payable date (or previous business day)
Limited Term Bond
</TABLE>

NOTE: Payment of income dividends and capital gains shortly after you buy
shares has the effect of reducing the share price by the amount of the
payment.

Distributions from a Fund, whether received in cash or reinvested in
additional shares, may be subject to federal (and state) income tax.

HOW TO BUY SHARES

Fill out the Principal Mutual Fund or Principal Mutual Fund IRA application
completely. You must include:
o the name(s) you want to appear on the account;
o the Principal Mutual Fund(s) you want to invest in;
o the amount of the investment;
o your Social Security number or Taxpayer I.D. number;
o investor information (used to help your Registered Representative confirm
that your investment selection is consistent with your goals and
circumstances) ;
o employer information; and
o other required information (may include corporate resolutions, trust
agreements, etc.).

Each Fund requires a minimum initial investment:
o Regular Accounts $1,000
o Uniform Transfer to Minor Accounts $500
o IRA Accounts $500

Subsequent investment minimums are $100 per Fund. However, if your subsequent
investment are made using an Automatic Investment Plan, the investment minimum
is $50 per Fund.

NOTE:The minimum investment applies on a fund level, not on the total
investment being made. Minimums may be waived on accounts set up for:
certain employee benefit plans; Principal Mutual Fund asset allocation
programs; Automatic Investment Plans; and Cash Management Accounts.

Invest by mail:
o Send a check and completed application to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Make your check payable to Principal Mutual Funds.
o Your purchase will be priced at the next share price calculated after
Principal Mutual Funds receives your completed paperwork.

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).

HOW TO SELL SHARES

After you place a sell order in proper form, shares are sold using the next
share price calculated. There is no additional charge for a sale of Class R
shares. However, you will be charged a $6 wire fee if you have the sale proceeds
wired to your bank. Generally, the sale proceeds are sent out on the next
business day after the sell order has been placed. At your request, the check
will be sent overnight (a $15 overnight fee will be deducted from your account
unless other arrangements are made). A Fund can only sell shares after your
check making the Fund investment has cleared your bank. To avoid the
inconvenience of a delay in obtaining sale proceeds, shares may be purchased
with a cashier's check, money order or certified check. A sell order from one
owner is binding on all joint owners.

Your request for a distribution from your IRA must be in writing. You may obtain
a distribution form by telephoning us (1-800-247-4123) or writing to Princor at
P.O. Box 10423, Des Moines, Iowa 50309. Distributions from an IRA may be taken
as:
o lump sum of the entire interest in the IRA;
o partial interest in the IRA; or
o periodic payments of either a fixed amount of amounts based on certain life
expectancy calculations.

Tax penalties may apply to distributions before the IRA participant reaches age
50 1/2.

Selling shares may create a gain or a loss for federal (and state) income tax
purposes. You should maintain accurate records for use in preparing your income
tax returns.

Generally, sales proceeds checks are:
o payable to the owner(s) on the account (as shown in the account
registration) and
o mailed to address on the account (if not changed within last month) or
previously authorized bank account.

For other payment arrangements, please call Principal Mutual Funds
(1-800-247-4123).

Within 60 days after the sale of shares, the amount of the sale proceeds can be
reinvested in any Principal Mutual Funds' Class R shares (or Class A shares
acquired by conversion of Class R shares into Class A shares). This is a one
time privilege that permits you to reinvest the amount of the sales proceeds in
shares of the same Class of shares of the Funds without a sales charge. The
transaction is considered a sale for federal (and state) income tax purposes
even if the proceeds are reinvested. If a loss is realized on the sale, the
reinvestment may be subject to the "wash sale" rules resulting in the
postponement of the recognition of the loss for tax purposes.

Sell shares by mail
o Send a letter or distribution form (call us at 1-800-247-4123 for the form)
which is signed by the owner of the account to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Specify the Fund and account number.
o Specify the number of shares or the dollar amount to be sold.
o A signature guarantee* will be required if the:
o sell order is for more than $100,000;
o account address has been changed within one month of the sell order;
or
o check is payable to a party other than the account shareholder(s) or
Principal Life Insurance Company.

* If required, the signature(s) must be guaranteed by a commercial bank,
trust company, credit union, savings and loan, national securities
exchange member or brokerage firm. A signature guaranteed by a notary
public or savings bank is not acceptable.

* The Fund and transfer agent reserve the right to refuse telephone
orders to sell shares. The shareholder is liable for a loss resulting
from a fraudulent telephone order that the Fund reasonably believes is
genuine. Each Fund will use reasonable procedures to assure
instructions are genuine. If the procedures are not followed, the Fund
may be liable for loss due to unauthorized or fraudulent transactions.
The procedures include: recording all telephone instructions,
requesting personal identification information (name, phone number,
social security number, birth date, etc.) and sending written
confirmation to the address on the account.

Sell shares by checkwriting (Class A shares of Cash Management Fund only)
o Checkwriting must be elected on initial application or by written request
to Principal Mutual Funds.
o The Fund can only sell shares after your check making the Fund investment
has cleared your bank.
o Checks must be written for at least $100.
o Checks are drawn on Norwest Bank Iowa, N.A. and its rules concerning
checking accounts apply.
o If the account does not have sufficient funds to cover the check, it is
marked "Insufficient Funds" and returned (the Fund may revoke checkwriting
on accounts on which "Insufficient Funds" checks are drawn).
o Accounts may not be closed by withdrawal check (accounts continue to earn
dividends until checks clear and the exact value of the account is not
known until the check is received by Norwest).
o Not available for Principal Mutual Funds IRAs, 403(b)s, SEPs, SIMPLES,
SAR-SEPs or certain employee benefit plans or shares subject to a CDSC or
on shares for which a certificate has been issued.

Periodic withdrawal plan
You may set up a periodic withdrawal plan on a monthly, quarterly, semiannual or
annual basis to:
o sell a fixed number of shares ($25 initial minimum amount);
o sell enough shares to provide a fixed amount of money ($25 initial minimum
amount);
o pay insurance or annuity premiums or deposits to Principal Life Insurance
Company (call us at 1-800-247-4123 for details); and
o to provide an easy method of making monthly installment payments (if the
service is available from your creditor who must supply the necessary
forms).

Your periodic withdrawal plan continues until:
o you instruct us to stop; or
o your Fund account balance is zero.

Withdrawal payments are sent on or before the third business day after the date
of the sale. It may take an additional three business days for your financial
institution to post this payment to your account at that financial institution.
Sales made under your periodic withdrawal plan will reduce and may eventually
exhaust your account. The Funds do not normally accept purchase payments for
shares of any Fund except the Cash Management Fund while a periodic withdrawal
plan is in effect (unless the purchase represents a substantial addition to your
account).

The Fund from which the periodic withdrawal is made makes no recommendation as
to either the number of shares or the fixed amount that you withdraw.

HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS

Your shares in the Funds. The purchase date of the exchanged shares is used to
measure the length of time you have owned the acquired shares. The minimum
amount that may be exchanged into any Principal Mutual Fund must be at least
$300 on an annual basis.

Automatic exchange election.
This election authorizes an exchange from one Principal Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange by:
o completing the Automatic Exchange Election section of the application;
o calling us (1-800-247-4123) if telephone privileges apply to the account
from which the exchange is to be made; or
o sending us your written instructions.

Your automatic exchange continues until:
o you instruct us to stop; or
o your Fund account balance is zero.

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

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.

Minimum Account Balance
Generally, the Funds do not have a minimum required balance. Because of the
disproportional high cost of maintaining small accounts, the Funds reserve the
right to set a minimum and sell all shares in an account with a value of less
than $300. The sales proceeds would then be mailed to you. These involuntary
sales will not be triggered just by market conditions. If a Fund exercises this
right, you will be notified that the redemption is going to be made. You will
have 30 days to make an additional investment and bring your account up to the
required minimum. The Funds reserve the right to increase the required minimum.

Telephone Instructions
The Funds reserve the right to refuse telephone instructions. You are liable for
a loss resulting from a fraudulent telephone instruction that we reasonably
believe is genuine. We will use reasonable procedures to assure instructions are
genuine. If the procedures are not followed, we may be liable for loss due to
unauthorized or fraudulent transactions. The procedures include: recording all
telephone instructions, requesting personal identification information (name,
phone number, social security number, birth date, etc.) and sending written
confirmation to the shareholder's address of record.

Financial Statements
You will receive an annual financial statement for the Funds, examined by the
Funds' independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement which is
unaudited. The following financial highlights are based on financial statements
which were audited by Ernst & Young LLP.

Financial Highlights (will be filed by amendment)

Additional information about the Funds is available in the Statement of
Additional Information dated March 1, 1999, and which is part of this
prospectus. Information about the Funds' investments is also available in the
Funds' annual and semiannual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during its last
fiscal year. The Statement of Additional Information and annual and semiannual
reports can be obtained free of charge by writing or telephoning Princor
Financial Services Corporation, P.O. Box 10423, Des Moines, IA 50306. Telephone
1-800-247-4123.

Information about the Funds can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 800-SEC-0330. Reports and other information about the Funds are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.

The U.S. Government does not insure or guarantee an investment in any of the
Funds. There can be no assurance the Money Market Fund will be able to maintain
a stable share price of $1.00 per share.

SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS

INTERNATIONAL GROWTH-ORIENTED FUNDS

811-08249 Principal International Emerging Markets Fund, Inc.
811-03183 Principal International Fund, Inc.
811-08251 Principal International SmallCap Fund, Inc.

INCOME-ORIENTED FUNDS

811-05172 Principal Bond Fund, Inc.
811-04226 Principal Government Securities Income Fund, Inc.
811-05174 Principal High Yield Fund, Inc.
811-07453 Principal Limited Term Bond Fund, Inc.

MONEY MARKET FUND

811-03585 Principal Cash Management Fund, Inc.

PARTNERS FUNDS

811-09567 Principal Partners Aggressive Growth Fund, Inc.
811- Principal Partners LargeCap Growth Fund, Inc.
811- Principal Partners MidCap Growth Fund, Inc.

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.

Statement of Additional Information

dated March 1, 2000

This Statement of Additional Information is not a prospectus but is a part of
the prospectuses for the Funds listed above. The most recent prospectuses dated
March 1, 2000 and shareholder report are available without charge. Please call
1-800-247-4123 to request a copy. The prospectus for Class A, Class B and Class
C shares of all funds may also be viewed on our web site at
www.principal.com/funds.

<PAGE>

TABLE OF CONTENTS

Investment Policies and Restrictions of the Funds................. 3
Growth-Oriented Funds............................................. 5
Income-Oriented Funds ............................................ 10
Money Market Fund................................................. 14
Funds' Investments................................................ 15
Management of the Fund............................................ 26
Manager and Sub-Advisors.......................................... 31
Cost of Manager's Services........................................ 32
Brokerage on Purchases and Sales of Securities.................... 36
How to Purchase Shares............................................ 39
Offering Price of Funds' Shares................................... 41
Distribution Plan................................................. 48
Determination of Net Asset Value of Funds' Shares ................ 51
Performance Calculation........................................... 52
Tax Treatment of Funds, Dividends and Distributions ............. 58
General Information and History................................... 60
Financial Statements ............................................. 60
Appendix A........................................................ 61

INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS

The following information about the Principal Mutual Funds, a family of
separately incorporated, open-end management investment companies, commonly
called mutual funds, supplements the information provided in the Prospectuses
under the caption "CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS".

There are three categories of Principal Mutual Funds:

Growth-Oriented Funds which include:
o ten Funds which seek capital appreciation primarily through investments in
equity securities (Capital Value Fund, Growth Fund, International Emerging
Markets Fund, International Fund, International SmallCap Fund, MidCap Fund,
Partners Aggressive Growth Fund, Partners LargeCap Growth Fund, Partners
MidCap Growth Fund and SmallCap Fund);
o one Fund which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Fund);
o one Fund which seeks growth of capital and growth of income primarily
through investments in common stocks of well-capitalized, established
companies (Blue Chip Fund);
o one Fund which seeks to generate total return by investing primarily in
equity securities of companies principally engaged in the real estate
industry (Real Estate Fund);
o one Fund which seeks to approximate the performance of the Standard &
Poor's 500 Composite Stock Price Index (LargeCap Stock Index Fund); and
o one Fund which seeks current income and long-term growth of income and
capital by investing primarily in equity and fixed-income securities of
companies in the public utilities industry (Utilities Fund).

Income-Oriented Funds which include five funds which seek primarily a high level
of income through investments in debt securities (Bond Fund, Government
Securities Income Fund, High Yield Fund, Limited Term Bond Fund and Tax-Exempt
Bond Fund).

Money Market Fund which seeks primarily a high level of income through
investments in short-term debt securities (Cash Management Fund).

In seeking to achieve its investment objective, each Fund has adopted as matters
of fundamental policy certain investment restrictions which cannot be changed
without approval by the holders of the lesser of: (i) 67% of the Fund's shares
present or represented at a shareholders' meeting at which the holders of more
than 50% of such shares are present or represented by proxy; or (ii) more than
50% of the outstanding shares of the Fund. Similar shareholder approval is
required to change the investment objective of each of the Funds. The following
discussion provides for each Fund a statement of its investment objective, a
description of its investment restrictions that are matters of fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of fundamental policy and may be changed without shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security, and any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectuses or the Statement of
Additional Information is not fundamental and may be changed by the respective
Fund's Board of Directors.

The Table on the next page graphically illustrates each Fund's emphasis on
producing current income or capital growth and the stability of the market value
of the Fund's portfolio. These illustrations represent comparative relationships
only with regard to the investment objectives sought by the Funds. Relative
income, stability and growth may vary among the Funds with certain market
conditions. The illustrations are not intended and should not be construed as
projected relative performances of the Principal Mutual Funds.

INCOME-ORIENTED FUNDS

PRINCIPAL LIMITED TERM BOND FUND . . . for investors seeking a high level of
current income combined with a relative high level of stability of principal by
investing in fixed-income securities with maturities of 5 years or less.

PRINCIPAL GOVERNMENT SECURITIES INCOME FUND . . . for investors seeking a high
level of current income, liquidity, and relative safety from a portfolio
emphasizing GNMA securities.

PRINCIPAL BOND FUND . . . for investors seeking high current income from a
portfolio of higher quality bonds.

PRINCIPAL TAX-EXEMPT BOND FUND . . . for investors seeking a high level of
current income exempt from federal income tax, consistent with preservation of
capital.

PRINCIPAL HIGH YIELD FUND . . . for investors seeking higher current income from
a portfolio of lower or non-rated fixed-income securities.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND . . . for investors seeking income, liquidity and
the stability of money market securities.

GROWTH ORIENTED
INTERNATIONAL FUNDS

PRINCIPAL INTERNATIONAL FUND . . . for investors seeking growth from common
stocks of companies domiciled in any of the major nations of the world.

PRINCIPAL INTERNATIONAL SMALLCAP FUND . . . for investors seeking long-term
growth from equities from non-United States companies with relatively small
market capitalization.

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND . . . for investors seeking
long-term growth by investing in stocks of companies in emerging market
countries.

GROWTH-ORIENTED DOMESTIC FUNDS

PRINCIPAL UTILITIES FUND . . . for investors seeking current income and
long-term growth of income and capital from securities issued by public
utilities companies.

PRINCIPAL REAL ESTATE FUND . . . for investors seeking long-term capital growth
and current income from securities of companies primarily engaged in the real
estate industry.

PRINCIPAL BALANCED FUND . . . for investors seeking total return from a flexible
portfolio of common stocks, corporate bonds and money market securities.

PRINCIPAL BLUE CHIP FUND . . . for investors seeking growth of capital and
growth of income from stocks of well capitalized, established companies.

PRINCIPAL CAPITAL VALUE FUND . . . for investors seeking long-term capital
appreciation, with growth of income as a secondary objective.

PRINCIPAL GROWTH FUND . . . for investors seeking long-term growth opportunities
from a common stock portfolio.

PRINCIPAL MIDCAP FUND . . . for investors seeking long-term capital growth from
securities of emerging and other growth-oriented companies.

PRINCIPAL SMALLCAP FUND . . . for investors seeking long-term growth of capital
from a portfolio of investment securities issued by companies domiciled in the
United States with comparatively smaller market capitalization.

PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND . . . for investors seeking long-term
capital appreciation from a portfolio of primarily equity securities.

* These illustrations represent comparative relationships only with regard to
the investment objectives sought by the funds. Relative income, stability and
growth may vary among the funds with certain market conditions. In no way should
the illustrations be construed as projected relative performances of the
Principal funds.

GROWTH-ORIENTED FUNDS

Investment Objectives

Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective.

Principal Blue Chip Fund, Inc. ("Blue Chip Fund") seeks to achieve growth of
capital and growth of income by investing primarily in common stocks of well
capitalized, established companies.

Principal Capital Value Fund, Inc. ("Capital Value Fund") seeks to achieve
primarily long-term capital appreciation and secondarily growth of investment
income through the purchase primarily of common stocks, but the Fund may invest
in other securities.

Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital through the
purchase primarily of common stocks, but the Fund may invest in other
securities.

Principal International Emerging Markets Fund, Inc. ("International Emerging
Markets Fund") seeks to achieve long-term growth of capital by investing
primarily in equity securities of issuers in emerging market countries.

Principal International Fund, Inc. ("International Fund") seeks long-term growth
of capital by investing in a portfolio of equity securities of companies
domiciled in any of the nations of the world.

Principal International SmallCap Fund, Inc. ("International SmallCap Fund")
seeks to achieve long-term growth of capital by investing primarily in equity
securities of non-United States companies with comparatively smaller market
capitalizations.

Principal LargeCap Stock Index Fund, Inc. ("LargeCap Stock Index") seeks
long-term growth of capital. The Fund attempts to mirror the investment results
of the Standard & Poor's 500 Composite Stock Price Index.

Principal MidCap Fund, Inc. ("MidCap Fund") seeks to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.

Principal Partners Aggressive Growth Fund, Inc. ("Partners Aggressive Growth
Fund") seeks to provide long-term capital appreciation by investing primarily in
equity securities.

Principal Partners LargeCap Growth Fund, Inc. ("Partners LargeCap Growth Fund")
seeks long-term growth of capital by investing primarily in common stocks of
larger capitalization domestic companies.

Principal Partners MidCap Growth Fund, Inc. ("Partners MidCap Growth Fund")
seeks to provide long-term capital growth by investing primarily in medium
capitalization U.S. companies with strong earnings growth potential.

Principal Real Estate Fund, Inc. ("Real Estate Fund") seeks to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry.

Principal SmallCap Fund, Inc. ("SmallCap Fund") seeks to achieve long-term
growth of capital by investing primarily in equity securities of companies with
comparatively smaller market capitalizations.

Principal Utilities Fund, Inc. ("Utilities Fund") seeks to provide high current
income and long-term growth of income and capital. The Fund seeks to achieve its
objective by investing primarily in equity and fixed income securities of
companies in the public utilities industry.

Investment Restrictions

LargeCap Stock Index Fund, Partners Aggressive Growth Fund, Partners LargeCap
Growth Fund and Partners MidCap Growth Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The LargeCap Stock Index
Fund, Partners Aggressive Growth Fund, Partners LargeCap Growth Fund and
Partners MidCap Growth Fund each may not:

(1) Issue any senior securities as defined in the Investment Company Act of
1940, as amended. Purchasing and selling securities and futures contracts
and options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.

(2) Invest in physical commodities or commodity contracts (other than foreign
currencies), but it may purchase and sell financial futures contracts,
options on such contracts, swaps and securities backed by physical
commodities.

(3) Invest in real estate, although it may invest in securities that are
secured by real estate and securities of issuers that invest or deal in
real estate.

(4) Borrow money, except that it may (a) borrow from banks (as defined in the
Investment Company Act of 1940, as amended) or other financial institutions
or through reverse repurchase agreements in amounts up to 33 1/3% of its
total assets (including the amount borrowed); (b) to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes; (c) obtain short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities; and (d)
purchase securities on margin to the extent permitted by applicable law
(the deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered purchase of
securities on margin).

(5) Make loans, except that the Fund may (a) purchase and hold debt obligations
in accordance with its investment objective and policies; (b) enter into
repurchase agreements; and (c) lend its portfolio securities without
limitation against collateral (consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities) equal at all times to not less than 100% of the value of
the securities loaned. This limit does not apply to purchases of debt
securities or commercial paper.

(6) Invest more than 5% of its total assets in the securities of any one issuer
(other than obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities) or purchase more than 10%
of the outstanding voting securities of any one issuer, except that this
limitation shall apply only with respect to 75% of the total assets of the
Fund. This restriction does not apply to the Partners LargeCap Growth Fund.

(7) Act as an underwriter of securities, except to the extent that the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.

(8) Concentrate its investments in any particular industry, except that the
Fund may invest up to 25% of the value of its total assets in a single
industry, provided that, when the Fund has adopted a temporary defensive
posture, there shall be no limitation on the purchase of obligations issued
or guaranteed by the United States Government or its agencies or
instrumentalities. This restriction applies to the LargeCap Stock Index
Fund except to the extent that the Standard & Poor's Stock Index also is so
concentrated.

(9) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that equals
or exceeds the securities sold short).

Each of these Funds has also adopted the following restrictions that are not
fundamental policies and that may be changed without shareholder approval. It is
contrary to each Fund's present policy to:

(1) Invest more than 15% of its net assets in illiquid securities and in
repurchase agreements maturing in more than seven days except to the extent
permitted by applicable law.

(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put or
call options, futures contracts and options on futures contracts are not
deemed to be pledges or other encumbrances.

(3) Invest in companies for the purpose of exercising control or management.

(4) Invest more than 25% (10% for the LargeCap Stock Index and Partners MidCap
Growth Funds) of its total assets in securities of foreign issuers.

(5) Enter into (a) any futures contracts and related options for non-bona fide
hedging purposes within the meaning of Commodity Futures Trading Commission
(CFTC) regulations if the aggregate initial margin and premiums required to
establish such positions will exceed 5% of the fair market value of the
Fund's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; and (b) any
futures contracts if the aggregate amount of such Fund's commitments under
outstanding futures contracts positions would exceed the market value of
its total assets.

(6) Invest more than 5% of its total assets in real estate limited partnership
interests or real estate investment trusts. This restriction does not apply
to the Partners MidCap Growth Fund.

(7) Acquire securities of other investment companies, except as permitted by
the Investment Company Act of 1940, as amended, or any rule, order or
interpretation thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange. The Fund may
purchase securities of closed-end investment companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.

Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, Real Estate Fund,
SmallCap Fund and Utilities Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Balanced Fund, Blue
Chip Fund, International Fund, International Emerging Markets Fund,
International SmallCap Fund, MidCap Fund, Real Estate Fund, SmallCap Fund and
Utilities Fund each may not:

(1) Issue any senior securities as defined in the Investment Company Act of
1940. Purchasing and selling securities and futures contracts and options
thereon and borrowing money in accordance with restrictions described below
do not involve the issuance of a senior security.

(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(3) Invest in commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such contracts.

(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(5) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets at the time of the
borrowing.

(6) Make loans, except that the Fund may (i) purchase and hold debt obligations
in accordance with its investment objective and policies, (ii) enter into
repurchase agreements, and (iii) lend its portfolio securities without
limitation against collateral (consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities) equal at all times to not less than 100% of the value of
the securities loaned.

(7) Invest more than 5% of its total assets in the securities of any one issuer
(other than obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities) or purchase more than 10%
of the outstanding voting securities of any one issuer, except that these
limitations shall apply only with respect to 75% of the Fund's total
assets.

(8) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

(9) Concentrate its investments in any particular industry or industries,
except that:
(a) the Utilities Fund may not invest less than 25% of its total assets in
securities of companies in the public utilities industry,
(b) the Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund and
SmallCap Fund each may invest not more than 25% of the value of its
total assets in a single industry, and
(c) the Real Estate Fund may not invest less than 25% of its total assets
in securities of companies in the real estate industry.

(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that equals
or exceeds the securities sold short) or purchase any securities on margin,
except it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in connection
with transactions in options and financial futures contracts is not
considered the purchase of securities on margin.

(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although the Fund may invest in securities of issuers which
invest in or sponsor such programs.

Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:

(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
The value of any options purchased in the Over-the-Counter market are
included as part of this 15% limitation.

(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange. The 2% limitation for the International Fund also includes
warrants not listed on the Toronto Stock Exchange. The 2% limitation for
the International Emerging Markets Fund and International SmallCap Fund
also includes warrants not listed on the Toronto Stock Exchange and the
Chicago Board Options Exchange.

(3) Purchase securities of any issuer having less than three years' continuous
operation (including operations of any predecessors) if such purchase would
cause the value of the Fund's investments in all such issuers to exceed 5%
of the value of its total assets.

(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.

(5) Invest in companies for the purpose of exercising control or management.

(6) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes; not for speculation.

(7) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

(8) Invest in arbitrage transactions.

(9) Invest in real estate limited partnership interests except that this
restriction shall not apply to the Real Estate Fund.

(10) Invest in mineral leases.

The Balanced Fund, Blue Chip Fund, MidCap Fund, SmallCap Fund and Utilities Fund
have also adopted a restriction, which is not a fundamental policy and may be
changed without shareholder approval, that each such Fund may not invest more
than 20% of its total assets in securities of foreign issuers.

The Real Estate Fund has adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
invest more than 25% of its total assets in securities of foreign issuers.

The Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, SmallCap Fund and
Utilities Fund have also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that each Fund may not
invest more than 10% of its assets in securities of other investment companies,
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding voting securities of any one
investment company except in connection with a merger, consolidation or plan of
reorganization and the Funds may purchase securities of closed-end companies in
the open market where no underwriter or dealer's commission or profit, other
than a customary broker's commission, is involved.

The Utilities Fund has also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
own more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.

Capital Value Fund and Growth Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Capital Value Fund and
Growth Fund each may not:

(1) Concentrate its investments in any one industry. No more than 25% of the
value of its total assets will be invested in any one industry.

(2) Purchase the securities of any issuer if the purchase will cause more than
5% of the value of its total assets to be invested in the securities of any
one issuer (except U.S. Government securities).

(3) Purchase the securities of any issuer if the purchase will cause more than
10% of the voting securities, or any other class of securities of the
issuer, to be held by the Fund.

(4) Underwrite securities of other issuers, except that the Fund may acquire
portfolio securities under circumstances where if sold the Fund might be
deemed an underwriter for purposes of the Securities Act of 1933.

(5) Purchase securities of any company with a record of less than three years'
continuous operation (including that of predecessors) if the purchase would
cause the value of the Fund's aggregate investments in all such companies
to exceed 5% of the Fund's total assets.

(6) Engage in the purchase and sale of illiquid interests in real estate. For
this purpose, readily marketable interests in real estate investment trusts
are not interests in real estate.

(7) Invest in commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such contracts.

(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of one percent (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.

(9) Purchase securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The Fund may not sell
securities short (except where the Fund holds or has the right to obtain at
no added cost a long position in the securities sold that equals or exceeds
the securities sold short). The deposit or payment of margin in connection
with transactions in options and financial futures contracts is not
considered the purchase of securities on margin. The Fund will not issue or
acquire put and call options.

(10) Invest more than 5% of its assets at the time of purchase in rights and
warrants (other than those that have been acquired in units or attached to
other securities).

(11) Invest more than 20% of its total assets in securities of foreign issuers.
In addition:

(12) The Fund may not make loans, except that the Fund may (i) purchase and hold
debt obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash or
securities issued or guaranteed by the United States Government or its
agencies or instrumentalities) equal at all times to not less than 100% or
the value of the securities loaned.

(13) The Fund does not propose to borrow money except for temporary or emergency
purposes from banks in an amount not to exceed the lesser of (i) 5% of the
value of the Fund's assets, less liabilities other than such borrowings, or
(ii) 10% of the Fund's assets taken at cost at the time such borrowing is
made. The Fund may not pledge, mortgage, or hypothecate its assets (at
value) to an extent greater than 15% of the gross assets taken at cost. The
deposit of underlying securities and other assets in escrow and other
collateral arrangements in connection with transactions in put and call
options, futures contracts and options on futures contracts are not deemed
to be pledges or other encumbrances.

Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval, each Fund
may not:

(1) Invest in companies for the purpose of exercising control or management.

(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange.

(3) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.

(4) Invest in real estate limited partnership interests.

(5) Invest in interests in oil, gas, or other mineral exploration or
development programs, but the Fund may purchase and sell securities of
companies which invest or deal in such interests.

(6) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any
one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connect with a merger,
consolidation or plan of reorganization.

(7) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes, not for speculation.

(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

INCOME-ORIENTED FUNDS

Investment Objectives

Principal Bond Fund, Inc. ("Bond Fund") seeks to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.

Principal Government Securities Income Fund, Inc. ("Government Securities Income
Fund") seeks a high level of current income, liquidity and safety of principal
by purchasing obligations issued or guaranteed by the United States Government
or its agencies, with emphasis on Government National Mortgage Association
Certificates ("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest. There are certain risks
unique to GNMA Certificates.

Principal High Yield Fund, Inc. ("High Yield Fund") seeks high current income
primarily by purchasing high yielding, lower or non-rated fixed income
securities which are believed to not involve undue risk to income or principal.
Capital growth is a secondary objective when consistent with the objective of
high current income.

Principal Limited Term Bond Fund, Inc. ("Limited Term Bond Fund") seeks a high
level of current income consistent with a relatively high level of principal
stability by investing in a portfolio of securities with a dollar weighted
average maturity of five years or less.

Principal Tax-Exempt Bond Fund, Inc. ("Tax-Exempt Bond Fund") seeks as high a
level of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective primarily
through the purchase of investment grade quality, tax-exempt fixed income
obligations.

Investment Restrictions

Bond Fund, High Yield Fund and Limited Term Bond Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Bond Fund, High Yield
Fund and Limited Term Bond Fund each may not:

(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(3) Invest in commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such contracts.

(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(5) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets at the time of the
borrowing.

(8) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

(9) Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its total
assets in a single industry.

(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although the Fund may invest in securities of issuers which
invest in or sponsor such programs.

Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:

(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange.

(4) Purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization or by purchase in the
open market of securities of closed-end companies where no underwriter or
dealer's commission or profit, other than a customary broker's commission,
is involved, and if immediately thereafter not more than 10% of the value
of the Fund's total assets would be invested in such securities.

(5) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.

(6) Invest in companies for the purpose of exercising control or management.

(7) Invest more than 20% of its total assets in securities of foreign issuers.

(8) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes; not for speculation.

(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

(10) Invest in arbitrage transactions.

(11) Invest in real estate limited partnership interests.

Government Securities Income Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Government Securities
Income Fund may not:

(1) Issue any senior securities.

(2) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities, except that
the Fund may maintain reasonable amounts in cash or commercial paper or
purchase short-term debt securities not issued or guaranteed by the United
States Government or its agencies or instrumentalities for daily cash
management purposes or pending selection of particular long-term
investments. There is no limit on the amount of its assets which may be
invested in the securities of any one issuer of obligations issued by the
United States Government or its agencies or instrumentalities.

(3) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of GNMA
certificates held in its portfolio.

(4) Engage in the purchase and sale of interests in real estate, including
interests in real estate investment trusts (although it will invest in
securities secured by real estate or interests therein, such as
mortgage-backed securities) or invest in commodities or commodity
contracts, oil and gas interests, or mineral exploration or development
programs.

(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(6) Sell securities short or purchase any securities on margin, except it may
obtain such short-term credits as are necessary for the clearance of
transactions. The deposit or payment of margin in connection with
transactions in options and financial futures contracts is not considered
the purchase of securities on margin.

(7) Invest in companies for the purpose of exercising control or management.

(8) Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph (2) and
may enter into repurchase agreements for such securities, and may lend its
portfolio securities without limitation against collateral consisting of
cash, or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities, which is equal at all times to 100% of
the value of the securities loaned.

(9) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets.

(10) Enter into repurchase agreements maturing in more than seven days if, as a
result, thereof, more than 10% of the Fund's total assets would be invested
in such repurchase agreements and other assets without readily available
market quotations.

(11) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts.

(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

The Fund has also adopted the following restrictions which are not fundamental
policies and may be changed without shareholder approval. It is contrary to the
Fund's current policy to:

(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.

(3) Invest in real estate limited partnership interests.

(4) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any
one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connection with a
merger, consolidation or plan of reorganization.

Tax-Exempt Bond Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Tax-Exempt Bond Fund
may not:

(1) Issue any senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
purchasing any securities on a when-issued or delayed delivery basis; or
(b) borrowing money in accordance with restrictions described below.

(2) Purchase any securities other than Municipal Obligations and Taxable
Investments as defined in the Prospectus and Statement of Additional
Information.

(3) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning more than one-half
of 1% (0.5%) of the securities of the issuer together own beneficially more
than 5% of such securities.

(6) Invest in companies for the purpose of exercising control or management.

(7) Invest more than:
(a) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that these limitations shall apply only with respect to 75% of
the Fund's total assets.
(b) 15% of its total assets in securities that are not readily marketable
and in repurchase agreements maturing in more than seven days.

(8) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(9) Invest in commodities or commodity futures contracts.

(10) Write, purchase or sell puts, calls or combinations thereof.

(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers which invest in
or sponsor such programs.

(12) Make short sales of securities.

(13) Purchase any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions.

(14) Make loans, except that the Fund may purchase and hold debt obligations in
accordance with its investment objective and policies, enter into
repurchase agreements, and may lend its portfolio securities without
limitation against collateral, consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities, which is equal at all times to 100% of the value of the
securities loaned.

(15) Borrow money, except for temporary or emergency purposes from banks in an
amount not to exceed 5% of the value of the Fund's total assets at the time
the loan is made.

(16) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.

The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to invest in real estate limited partnership interests.

The identification of the issuer of a Municipal Obligation depends on the terms
and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, the subdivision is deemed the
sole issuer. Similarly, in the case of an industrial development bond, if that
bond is backed only by the assets and revenues of the non-governmental user,
then such non-governmental user is deemed the sole issuer. If, in either case,
the creating government or some other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of such
government or other entity. However, that guarantee is not deemed a security
issued by the guarantor if the value of all securities issued or guaranteed by
the guarantor and owned by the Fund does not exceed 10% of the value of the
Fund's total assets.

The Fund may invest without limit in debt obligations of issuers located in the
same state and in debt obligations which are repayable out of revenue sources
generated from economically related projects or facilities. Sizable investments
in such obligations could increase the risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, but it will not invest more than 20% of its total assets in any Municipal
Obligation the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax.

MONEY MARKET FUND

Investment Objectives

Principal Cash Management Fund, Inc. ("Cash Management Fund") seeks as high a
level of income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing in a
portfolio of money market instruments.

Investment Restrictions

Cash Management Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Cash Management Fund
may not:

(1) Concentrate its investments in any one industry. No more than 25% of the
value of its total assets will be invested in securities of issuers having
their principal activities in any one industry, other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or obligations of domestic branches of U.S. banks and
savings institutions. (See "Bank Obligations").

(2) Purchase the securities of any issuer if the purchase will cause more than
5% of the value of its total assets to be invested in the securities of any
one issuer (except securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities).

(3) Purchase the securities of any issuer if the purchase will cause more than
10% of the outstanding voting securities of the issuer to be held by the
Fund (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities).

(4) Act as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under the federal securities laws.

(5) Purchase securities of any company with a record of less than 3 years
continuous operation (including that of predecessors) if the purchase would
cause the value of the Fund's aggregate investments in all such companies
to exceed 5% of the value of the Fund's total assets.

(6) Engage in the purchase and sale of illiquid interests in real estate,
including interests in real estate investment trusts (although it may
invest in securities secured by real estate or interests therein) or invest
in commodities or commodity contracts, oil and gas interests, or mineral
exploration or development programs.

(7) Purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization.

(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(9) Purchase securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The Fund will not
effect a short sale of any security. The Fund will not issue or acquire put
and call options, straddles or spreads or any combination thereof.

(10) Invest in companies for the purpose of exercising control or management.

(11) The Fund may not make loans, except that the Fund may (i) purchase and hold
debt obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash or
securities issued or guaranteed by the United States Government or its
agencies or instrumentalities) equal at all times to not less than 100% or
the value of the securities loaned.

(12) Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities, in an amount not to exceed the
lesser of (i) 5% of the value of the Fund's assets, or (ii) 10% of the
value of the Fund's net assets taken at cost at the time such borrowing is
made. The Fund will not issue senior securities except in connection with
such borrowings. The Fund may not pledge, mortgage, or hypothecate its
assets (at value) to an extent greater than 10% of the net assets.

(13) Invest in time deposits maturing in more than seven days; time deposits
maturing from two business days through seven calendar days may not exceed
10% of the value of the Fund's total assets.

(14) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.

The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to:

(1) Invest in real estate limited partnership interests.

FUNDS' INVESTMENTS

The following information supplements the discussion of the Funds' investment
objectives and policies in the Prospectuses under the caption "CERTAIN
INVESTMENT STRATEGIES AND RELATED RISKS."

Selections of equity securities for the Funds (except the LargeCap Stock Index,
Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap Growth
Funds) are made based on an approach described broadly as "top-down" fundamental
analysis. Three basic steps are involved in this analysis.

o First is the continuing study of basic economic factors in an effort to
conclude what the future general economic climate is likely to be over the
next one to two years.
o Second, given some conviction as to the likely economic climate, the
Manager or Sub-Advisor attempts to identify the prospects for the major
industrial, commercial and financial segments of the economy. By looking at
such factors as demand for products, capacity to produce, operating costs,
pricing structure, marketing techniques, adequacy of raw materials and
components, domestic and foreign competition, and research productivity,
the Manager or Sub-Advisor evaluates the prospects for each industry for
the near and intermediate term.
o Finally, determinations are made regarding earnings prospects for
individual companies within each industry by considering the same types of
factors described above. These earnings prospects are evaluated in relation
to the current price of the securities of each company.

In selecting securities for the Partners Aggressive Growth Fund and the Partners
LargeCap Growth Fund, the Sub-Advisors, Morgan Stanley Asset Management ("Morgan
Stanley") and Duncan-Hurst Capital Management, Inc. ("Duncan-Hurst"),
respectively, follow a flexible investment program in looking for companies with
above average capital appreciation potential. The Sub-Advisor focuses on
companies with consistent or rising earnings growth records and compelling
business strategies. The Sub-Advisor continually and rigorously studies company
developments, including business strategy, management focus and financial
results, to identify companies with earnings growth and business momentum. In
addition, the Sub-Advisor closely monitors analysts' expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations. Valuation is of secondary importance and is viewed in the context
of prospects for sustainable earnings growth and the potential for positive
earnings surprises in relation to consensus expectations.

The Sub-Advisor for the Partners MidCap Growth Fund, Turner Investment Partners,
Inc. ("Turner"), selects securities that it believes to have strong earnings
growth potential. Turner seeks to purchase securities that are well diversified
across economic sectors and to maintain sector concentrations that approximate
the economic sector weightings comprising the Russell Midcap Growth Index (or
such other appropriate index selected by Turner). Any remaining assets may be
invested in securities issued by smaller capitalization companies and larger
capitalization companies, warrants and rights to purchase common stocks, and it
may invest to 10% of its total assets in ADRs. Turner will only purchase
securities that are traded on registered exchanges or the over-the-counter
market in the United States.

The Sub-Advisor for the LargeCap Stock Index Fund, Invista Capital Management,
LLC ("Invista"), allocates Fund assets in approximately the same weightings as
the S&P 500. Invista may omit or remove any S&P 500 stocks from the Fund if it
determines that the stock is not sufficiently liquid. In addition, Invista may
exclude or remove a stock from the Fund if extraordinary events or financial
conditions lead it to believe that such stock should not be a part of the Fund's
assets. Fund assets may be invested in futures and options.

Restricted Securities

Each of the Funds has adopted investment restrictions that limit its investments
in restricted securities or other illiquid securities to 15% (10% for the
Government Securities Income Fund and the Money Market Fund) of its assets. The
Board of Directors of each of the Growth-Oriented and Income-Oriented Funds has
adopted procedures to determine the liquidity of Rule 4(2) short-term paper and
of restricted securities under Rule 144A. Securities determined to be liquid
under these procedures are excluded from the preceding investment restriction.

Generally, restricted securities are not readily marketable because they are
subject to legal or contractual restrictions upon resale. They are sold only in
a public offering with an effective registration statement or in a transaction
which is exempt from the registration requirements of the Securities Act of
1933. When registration is required, a Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than existed when it decided to
sell. Restricted securities and other securities not readily marketable are
priced at fair value as determined in good faith by or under the direction of
the Board of Directors.

Foreign Securities

Each of the following Funds may invest in foreign securities to the indicated
percentage of its assets:

o International, International Emerging Markets and International SmallCap
Funds - 100%;
o Partners Aggressive Growth, Partners LargeCap Growth and Real Estate Funds
- 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%;
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

Debt securities issued in the United States pursuant to a registration statement
filed with the Securities and Exchange Commission are not treated as foreign
securities for purposes of these limitations.

Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Fund's investment in foreign securities may
also result in higher custodial costs and the costs associated with currency
conversions.

Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Boards
of Directors of the Funds have adopted Daily Pricing and Valuation Procedures
for the Funds which set forth the steps to be followed by the Manager and
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. Oversight of this
process is provided by the Executive Committee of the Boards of Directors.

Securities of Smaller Companies

The Funds may invest in securities of companies with small- or mid-sized market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Investments in companies with smaller
market capitalizations may involve greater risks and price volatility (wide,
rapid fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant factors within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.

Unseasoned Issuers

The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers
are companies with a record of less than three years continuous operation,
including the operation of predecessors and parents. Unseasoned issuers by their
nature have only a limited operating history which can be used for evaluating
the companies growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the companies management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.

Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts

The Funds (except Cash Management) may each engage in the practices described
under this heading. The Tax-Exempt Bond Fund may invest in financial futures
contracts as described under this heading. In the following discussion, the
terms "the Fund," "each Fund" or "the Funds" refer to each of these Funds.

Spread Transactions

Each Fund may purchase covered spread options. Such covered spread options
are not presently exchange listed or traded. The purchase of a spread
option gives the Fund the right to put, or sell, a security that it owns at
a fixed dollar spread or fixed yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. The
risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be available. The
purchase of spread options can be used to protect each Fund against adverse
changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. The security covering
the spread option is maintained in a segregated account by each Fund's
custodian. The Funds do not consider a security covered by a spread option
to be "pledged" as that term is used in the Funds' policy limiting the
pledging or mortgaging of assets.

Options on Securities and Securities Indices

Each Fund may write (sell) and purchase call and put options on securities
in which it invests and on securities indices based on securities in which
the Fund invests. The International Fund would only write covered call
options on its portfolio securities; it does not write or purchase put
options. The Funds may write call and put options to generate additional
revenue, and may write and purchase call and put options in seeking to
hedge against a decline in the value of securities owned or an increase in
the price of securities which the Fund plans to purchase.

Writing Covered Call and Put Options. When a Fund writes a call option, it
gives the purchaser of the option the right to buy a specific security at a
specified price at any time before the option expires. When a Fund writes a
put option, it gives the purchaser of the option the right to sell to the
Fund a specific security at a specified price at any time before the option
expires. In both situations, the Fund receives a premium from the purchaser
of the option.

The premium received by a Fund reflects, among other factors, the current
market price of the underlying security, the relationship of the exercise
price to the market price, the time period until the expiration of the
option and interest rates. The premium generates additional income for the
Fund if the option expires unexercised or is closed out at a profit. By
writing a call, a Fund limits its opportunity to profit from any increase
in the market value of the underlying security above the exercise price of
the option, but it retains the risk of loss if the price of the security
should decline. By writing a put, a Fund assumes the risk that it may have
to purchase the underlying security at a price that may be higher than its
market value at time of exercise.

The Funds write only covered options and comply with applicable regulatory
and exchange cover requirements. The Funds usually (and the International
Fund must) own the underlying security covered by any outstanding call
option. With respect to an outstanding put option, each Fund deposits and
maintains with its custodian cash, U.S. Government securities or other
liquid securities with a value at least equal to the exercise price of the
option.

Once a Fund has written an option, it may terminate its obligation before
the option is exercised. The Fund executes a closing transaction by
purchasing an option of the same series as the option previously written.
The Fund has a gain or loss depending on whether the premium received when
the option was written exceeds the closing purchase price plus related
transaction costs.

Purchasing Call and Put Options. When a Fund purchases a call option, it
receives, in return for the premium it pays, the right to buy from the
writer of the option the underlying security at a specified price at any
time before the option expires. A Fund purchases call options in
anticipation of an increase in the market value of securities that it
intends ultimately to buy. During the life of the call option, the Fund is
able to buy the underlying security at the exercise price regardless of any
increase in the market price of the underlying security. In order for a
call option to result in a gain, the market price of the underlying
security must exceed the sum of the exercise price, the premium paid and
transaction costs.

When a Fund purchases a put option, it receives, in return for the premium
it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. A Fund
purchases put options in anticipation of a decline in the market value of
the underlying security. During the life of the put option, the Fund is
able to sell the underlying security at the exercise price regardless of
any decline in the market price of the underlying security. In order for a
put option to result in a gain, the market price of the underlying security
must decline, during the option period, below the exercise price enough to
cover the premium and transaction costs.

Once a Fund purchases an option, it may close out its position by selling
an option of the same series as the option previously purchased. The Fund
has a gain or loss depending on whether the closing sale price exceeds the
initial purchase price plus related transaction costs.

None of the Funds will invest more than 5% of its assets in the purchase of
call and put options on individual securities, securities indices and
financial futures contracts.

Options on Securities Indices. Each Fund may purchase and sell put and call
options on any securities index based on securities in which the Fund may
invest. Securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than
price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual
purchase or sale of securities. The Funds engage in transactions in put and
call options on securities indices for the same purposes as they engage in
transactions in options on securities. When a Fund writes call options on
securities indices, it holds in its portfolio underlying securities which,
in the judgment of the Manager or Sub-Advisor, correlate closely with the
securities index and which have a value at least equal to the aggregate
amount of the securities index options.

Risks Associated with Options Transactions. An options position may be
closed out only on an exchange which provides a secondary market for an
option of the same series. The Funds generally purchase or write only those
options for which there appears to be an active secondary market. However,
there is no assurance that a liquid secondary market on an exchange exists
for any particular option, or at any particular time. If a Fund is unable
to effect closing sale transactions in options it has purchased, it has to
exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities. If a
Fund is unable to effect a closing purchase transaction for a covered
option that it has written, it is not able to sell the underlying
securities, or dispose of the assets held in a segregated account, until
the option expires or is exercised. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited
than for exchange-traded options and may also involve the risk that
broker-dealers participating in such transactions might fail to meet their
obligations.

Futures Contracts and Options on Futures Contracts

Each Fund may purchase and sell financial futures contracts and options on
those contracts. Financial futures contracts are commodities contracts
based on financial instruments such as U.S. Treasury bonds or bills or on
securities indices such as the S&P 500 Index. Futures contracts, options on
futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). Through the
purchase and sale of futures contracts and related options, a Fund seeks to
hedge against a decline in securities owned by the Fund or an increase in
the price of securities which the Fund plans to purchase. The Partners
Aggressive Growth Fund may also purchase and sell futures contracts and
related options to maintain cash reserves while simulating full investment
in equity securities and to keep substantially all of its assets exposed to
the market.

Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund is obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it is obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction
costs are less or more than the price of the initial sale or on whether the
price of an offsetting sale is more or less than the price of the initial
purchase plus transaction costs. Although the Funds usually liquidate
futures contracts on financial instruments in this manner, they may make or
take delivery of the underlying securities when it appears economically
advantageous to do so. A futures contract based on a securities index
provides for the purchase or sale of a group of securities at a specified
future time for a specified price. These contracts do not require actual
delivery of securities but result in a cash settlement. The amount of the
settlement is based on the difference in value of the index between the
time the contract was entered into and the time it is liquidated (at its
expiration or earlier if it is closed out by entering into an offsetting
transaction).

When a futures contract is purchased or sold a brokerage commission is
paid. Unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities (generally about 5% of the contract amount) is deposited by the
Fund with its custodian for the benefit of the futures commission merchant
through which the Fund engages in the transaction. This amount is known as
"initial margin." It does not involve the borrowing of funds by the Fund to
finance the transaction. It instead represents a "good faith" deposit
assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Fund upon termination of the
futures contract if all the Fund's contractual obligations have been
satisfied.

Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures
contract fluctuates, a process known as "marking to market." The
fluctuations make the long or short positions in the futures contract more
or less valuable. If the position is closed out by taking an opposite
position prior to the settlement date of the futures contract, a final
determination of variation margin is made. Any additional cash is required
to be paid to or released by the broker and the Fund realizes a loss or
gain.

In using futures contracts, the Fund seeks to establish more certainly than
would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Fund proposes to acquire. A
Fund, for example, sells futures contracts in anticipation of a rise in
interest rates which would cause a decline in the value of its debt
investments. When this kind of hedging is successful, the futures contract
increases in value when the Fund's debt securities decline in value and
thereby keep the Fund's net asset value from declining as much as it
otherwise would. A Fund also sells futures contracts on securities indices
in anticipation of or during a stock market decline in an endeavor to
offset a decrease in the market value of its equity investments. When a
Fund is not fully invested and anticipates an increase in the cost of
securities it intends to purchase, it may purchase financial futures
contracts. When increases in the prices of equities are expected, a Fund
purchases futures contracts on securities indices in order to gain rapid
market exposure that may partially or entirely offset increases in the cost
of the equity securities it intends to purchase.

Options on Futures Contracts. The Funds may also purchase and write call
and put options on futures contracts. A call option on a futures contract
gives the purchaser the right, in return for the premium paid, to purchase
a futures contract (assume a long position) at a specified exercise price
at any time before the option expires. A put option gives the purchaser the
right, in return for the premium paid, to sell a futures contract (assume a
short position), for a specified exercise price, at any time before the
option expires.

Upon the exercise of a call, the writer of the option is obligated to sell
the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put,
the writer of the option is obligated to purchase the futures contract
(deliver a short position to the option holder) at the option exercise
price, which will presumably be higher than the current market price of the
contract in the futures market. However, as with the trading of futures,
most options are closed out prior to their expiration by the purchase or
sale of an offsetting option at a market price that reflects an increase or
a decrease from the premium originally paid. Options on futures can be used
to hedge substantially the same risks addressed by the direct purchase or
sale of the underlying futures contracts. For example, if a Fund
anticipates a rise in interest rates and a decline in the market value of
the debt securities in its portfolio, it might purchase put options or
write call options on futures contracts instead of selling futures
contracts.

If a Fund purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself.
But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the
event of an adverse market movement, however, the Fund is not subject to a
risk of loss on the option transaction beyond the price of the premium it
paid plus its transaction costs.

When a Fund writes an option on a futures contract, the premium paid by the
purchaser is deposited with the Fund's custodian. The Fund must maintain
with its custodian all or a portion of the initial margin requirement on
the underlying futures contract. It assumes a risk of adverse movement in
the price of the underlying futures contract comparable to that involved in
holding a futures position. Subsequent payments to and from the broker,
similar to variation margin payments, are made as the premium and the
initial margin requirement are marked to market daily. The premium may
partially offset an unfavorable change in the value of portfolio
securities, if the option is not exercised, or it may reduce the amount of
any loss incurred by the Fund if the option is exercised.

Risks Associated with Futures Transactions. There are a number of risks
associated with transactions in futures contracts and related options. A
Fund's successful use of futures contracts is subject to the Manager's or
Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Fund's portfolio securities. For example, if a Fund is hedged
against the possibility of an increase in interest rates which would
adversely affect debt securities held by the Fund and the prices of those
debt securities instead increases, the Fund loses part or all of the
benefit of the increased value of its securities it hedged because it has
offsetting losses in its futures positions. Other risks include imperfect
correlation between price movements in the financial instrument or
securities index underlying the futures contract, on the one hand, and the
price movements of either the futures contract itself or the securities
held by the Fund, on the other hand. If the prices do not move in the same
direction or to the same extent, the transaction may result in trading
losses.

Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires
a secondary market on the relevant contract market. The Fund enters into a
futures contract or related option only if there appears to be a liquid
secondary market. There can be no assurance, however, that such a liquid
secondary market exists for any particular futures contract or related
option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances,
the Fund continues to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Fund has insufficient cash, it may be required to sell portfolio securities
to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to perform
under the terms of the futures contracts it holds. The inability to close
out futures positions also could have an adverse impact on the Fund's
ability effectively to hedge its portfolio.

Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This
daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been
reached in a particular type of contract, no more trades may be made on
that day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to
the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.

Limitations on the Use of Futures and Options on Futures Contracts. Each
Fund intends to come within an exclusion from the definition of "commodity
pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.

None of the Funds will purchase or sell futures contracts or options
thereon for non-bona fide hedging purposes if immediately thereafter the
aggregate initial margin and premiums exceed 5% of the fair market value of
the Fund's assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into (except that in
the case of an option that is in-the-money at the time of purchase, the
in-the-money amount generally may be excluded in computing the 5%).

The Funds may enter into futures contracts and related options transactions
only for bona fide hedging purposes as permitted by the CFTC and for other
appropriate risk management purposes, if any, which the CFTC deems
appropriate for mutual funds excluded from the regulations governing
commodity pool operators, and to a limited extent to enhance returns. The
Funds (other than Partners Aggressive Growth) are not permitted to engage
in speculative futures trading. Each Fund determines that the price
fluctuations in the futures contracts and options on futures used for
hedging or risk management purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to
purchase. In pursuing traditional hedging activities, each Fund may sell
futures contracts or acquire puts to protect against a decline in the price
of securities that the Fund owns. Each Fund may purchase futures contracts
or calls on futures contracts to protect the Fund against an increase in
the price of securities the Fund intends to purchase before it is in a
position to do so.

When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it places any asset, including equity securities and
non-investment grade debt in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the
amount of initial margin held for the account of its broker equals the
market value of the futures contract.

The Funds do not maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions
(marked to market) exceeds the current market value of that portion of its
securities portfolio being hedged by those futures and options plus or
minus the unrealized gain or loss on those open positions, adjusted for the
historical volatility relationship between that portion of the portfolio
and the contracts (i.e., the Beta volatility factor). To the extent a Fund
writes call options on specific securities in that portion of its
portfolio, the value of those securities is deducted from the current
market value of that portion of the securities portfolio. If this
limitation is exceeded at any time, the Fund takes prompt action to close
out the appropriate number of open short positions to bring its open
futures and options positions within this limitation.

Forward Foreign Currency Exchange Contracts

The International, International Emerging Markets, International SmallCap,
Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap Growth
Funds may, but are not obligated to, enter into forward foreign currency
exchange contracts only under two circumstances. First, when a Fund is entering
into a contract for the purchase or sale of a security denominated in a foreign
currency and wants to "lock-in" the U.S. dollar price of the security. Second,
when the Sub-Advisor believes that the currency of a particular foreign country
in which a portion of a Fund's securities are denominated may suffer a
substantial decline against the U.S. dollar. A Fund generally does not enter
into a forward contract with a term of greater than one year.

The International, International Emerging Markets International SmallCap,
Partners Aggressive Growth and Partners LargeCap Growth Funds enter into forward
foreign currency exchange contracts only for the purpose of "hedging," that is
limiting the risks associated with changes in the relative rates of exchange
between the U.S. dollar and foreign currencies in which securities owned by a
Fund are denominated or exposed. They do not enter into such forward contracts
for speculative purposes. A Fund sets up a separate account with the Custodian
to place foreign securities denominated in the currency for which the Fund has
entered into forward contracts under the second circumstance, as set forth
above, for the term of the forward contract. It should be noted that the use of
forward foreign currency exchange contracts does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange between the currencies that can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, they also tend to limit
any potential gain which might result if the value of the currency increases.

Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations.
They could also cause hedges the Fund has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Currency exchange rates may also fluctuate based on factors extrinsic to a
country's economy. Buyers and sellers of currency futures contracts are subject
to the same risks that apply to the use of futures contracts generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures contracts is relative new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available.

Repurchase Agreements

All Funds may invest in repurchase agreements. None of the Growth-Oriented or
Income-Oriented Funds may enter into repurchase agreements that do not mature
within seven days if any such investment, together with other illiquid
securities held by the Fund, amount to more than 15% of its assets. The Money
Market Fund does not enter into repurchase agreements that do not mature within
seven days of such investment together with other illiquid securities held by
the Fund, amount to more than 10% of its assets. Repurchase agreements typically
involve the acquisition by the Fund of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. A
repurchase agreement provides that the Fund sells back to the seller and that
the seller repurchases the underlying securities at a specified price and at a
fixed time in the future. Repurchase agreements may be viewed as loans by a Fund
collateralized by the underlying securities. This arrangement results in a fixed
rate of return that is not subject to market fluctuation during the Fund's
holding period. Although repurchase agreements involve certain risks not
associated with direct investments in debt securities, each of the Funds follows
procedures established by its Board of Directors which are designed to minimize
such risks. These procedures include entering into repurchase agreements only
with large, well-capitalized and well-established financial institutions which
the Fund's Manager or Sub-Advisor believes present minimum credit risks. In
addition, the value of the collateral underlying the repurchase agreement is
always at least equal to the repurchase price, including accrued interest. In
the event of a default or bankruptcy by a selling financial institution, the
affected Fund bears a risk of loss. In seeking to liquidate the collateral, a
Fund may be delayed in or prevented from exercising its rights and may incur
certain costs. Further to the extent that proceeds from any sale upon a default
of the obligation to repurchase are less than the repurchase price, the Fund
could suffer a loss.

Lending of Portfolio Securities

All Funds may lend their portfolio securities. None of the Funds intends to lend
its portfolio securities if as a result the aggregate of such loans made by the
Fund would exceed 30% (33 1/3 for the Partners Aggressive Growth Fund) of its
total assets. Portfolio securities may be lent to unaffiliated broker-dealers
and other unaffiliated qualified financial institutions provided that such loans
are callable at any time on not more than five business days' notice and that
cash or government securities equal to at least 100% of the market value of the
securities loaned, determined daily, is deposited by the borrower with the Fund
and is maintained each business day in a segregated account. While such
securities are on loan, the borrower pays the Fund any income accruing thereon.
The Fund may invest any cash collateral, thereby earning additional income, and
may receive an agreed-upon fee from the borrower. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan belongs to the
Fund and its shareholders. A Fund pays reasonable administrative, custodial and
other fees in connection with such loans and may pay a negotiated portion of the
interest earned on the cash or government securities pledged as collateral to
the borrower or placing broker. A Fund does not vote securities that have been
loaned, but it may call a loan of securities in anticipation of an important
vote.

When-Issued and Delayed Delivery Securities

Each of the Funds may from time to time purchase securities on a when-issued
basis and may purchase or sell securities on a delayed delivery basis. The price
of such a transaction is fixed at the time of the commitment, but delivery and
payment take place on a later settlement date, which may be a month or more
after the date of the commitment. No interest accrues to the purchaser during
this period. The securities are subject to market fluctuation which involve the
risk for the purchaser that yields available in the market at the time of
delivery are higher than those obtained in the transaction. Each Fund only
purchases securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities. However, a Fund may sell the securities
before the settlement date, if such action is deemed advisable. At the time a
Fund commits to purchase securities on a when-issued or delayed delivery basis,
it records the transaction and reflects the value of the securities in
determining its net asset value. Each Fund also establishes a segregated account
with its custodian bank in which it maintains cash or other liquid assets equal
in value to the Fund's commitments for when-issued or delayed delivery
securities. The availability of liquid assets for this purpose and the effect of
asset segregation on a Fund's ability to meet its current obligations, to honor
requests for redemption and to have its investment portfolio managed properly
limit the extent to which the Fund may engage in forward commitment agreements.
Except as may be imposed by these factors, there is no limit on the percent of a
Fund's total assets that may be committed to transactions in such agreements.

Money Market Instruments

The Cash Management Fund invests all of its available assets in money market
instruments maturing in 397 days or less. The types of instruments which this
Fund purchases are described below.

(1) U.S. Government Securities -- Securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.

(2) U.S. Government Agency Securities -- Obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government.

o U.S. agency obligations include, but are not limited to, the Bank for
Co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
o U.S. instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration.

Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality.

(3) Bank Obligations -- Certificates of deposit, time deposits and bankers'
acceptances of U.S. commercial banks having total assets of at least one
billion dollars and overseas branches of U.S. commercial banks and foreign
banks, which in the Manager's opinion, are of comparable quality. However,
each such bank with its branches has total assets of at least five billion
dollars, and certificates, including time deposits of domestic savings and
loan associations having at least one billion dollars in assets which are
insured by the Federal Savings and Loan Insurance Corporation. The Fund may
acquire obligations of U.S. banks which are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.

Any obligations of foreign banks must be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of U.S.
banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. For example, an issuing bank may be able to maintain
that the liability for an investment is solely that of the overseas branch
which could expose the Fund to a greater risk of loss. In addition,
obligations of foreign banks or of overseas branches of U.S. banks may be
affected by governmental action in the country of domicile of the branch or
parent bank. Examples of adverse foreign governmental actions include the
imposition of currency controls, the imposition of withholding taxes on
interest income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium. Deposits
in foreign banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Fund only buys short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Fund considers these factors along with
other appropriate factors in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by
the Fund. The Fund invests in certificates of deposit of selected banks
having less than one billion dollars of assets providing the certificates
do not exceed the level of insurance (currently $100,000) provided by the
applicable government agency.

A certificate of deposit is issued against funds deposited in a bank or
savings and loan association for a definite period of time, at a specified
rate of return. Normally they are negotiable. However, the Fund
occasionally invests in certificates of deposit which are not negotiable.
Such certificates may provide for interest penalties in the event of
withdrawal prior to their maturity. A bankers' acceptance is a short-term
credit instrument issued by corporations to finance the import, export,
transfer or storage of goods. They are termed "accepted" when a bank
guarantees their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at maturity.

(4) Commercial Paper -- Short-term promissory notes issued by U.S. or foreign
corporations.

(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures which at
the time of purchase have 397 days or less remaining to maturity.

(6) Repurchase Agreements -- Instruments under which securities are purchased
from a bank or securities dealer with an agreement by the seller to
repurchase the securities at the same price plus interest at a specified
rate. (See "FUND INVESTMENTS - Repurchase Agreements.")

(7) Taxable Municipal Obligations -- Short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.

The ratings of nationally recognized statistical rating organization (NRSRO),
such as Moody's Investor Services, Inc. ("Moody's") and Standard and Poor's
("S&P"), which are described in Appendix A, represent their opinions as to the
quality of the money market instruments which they undertake to rate. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. These ratings, including ratings of NRSROs other than Moody's and
S&P, are the initial criteria for selection of portfolio investments, but the
Manager further evaluates these securities.

Municipal Obligations

The Tax-Exempt Bond Fund can invest in "Municipal Obligations." Municipal
Obligations are obligations issued by or on behalf of states, territories, and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, including municipal
utilities, or multi-state agencies or authorities. The interest on Municipal
Obligations is exempt from federal income tax in the opinion of bond counsel to
the issuer. Three major classifications of Municipal Obligations are: Municipal
Bonds, which generally have a maturity at the time of issue of one year or more,
Municipal Notes, which generally have a maturity at the time of issue of six
months to three years, and Municipal Commercial Paper, which generally has a
maturity at the time of issue of 30 to 270 days.

The term "Municipal Obligations" includes debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works, and electric utilities.
Other public purposes for which Municipal Obligations are issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and lending such funds to other public institutions and facilities.

Industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide for the construction, equipment, repair or improvement
of privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking facilities,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. They are considered
to be Municipal Obligations if the interest paid thereon qualifies as exempt
from federal income tax in the opinion of bond counsel to the issuer, even
though the interest may be subject to the federal alternative minimum tax.

Municipal Bonds. Municipal Bonds may be either "general obligation" or "revenue"
issues. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source (e.g., the user of the facilities being
financed), but not from the general taxing power. Industrial development bonds
and pollution control bonds in most cases are revenue bonds and generally do not
carry the pledge of the credit of the issuing municipality. The payment of the
principal and interest on industrial revenue bonds depends solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. The Fund may also invest in "moral obligation" bonds
which are normally issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.

Municipal Notes. Municipal Notes usually are general obligations of the issuer
and are sold in anticipation of a bond sale, collection of taxes or receipt of
other revenues. Payment of these notes is primarily dependent upon the issuer's
receipt of the anticipated revenues. Other notes include "Construction Loan
Notes" issued to provide construction financing for specific projects, and "Bank
Notes" issued by local governmental bodies and agencies to commercial banks as
evidence of borrowings. Some notes ("Project Notes") are issued by local
agencies under a program administered by the United States Department of Housing
and Urban Development. Project Notes are secured by the full faith and credit of
the United States.

Bond Anticipation Notes (BANs) are usually general obligations of state and
local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.

Tax Anticipation Notes (TANs) are issued by state and local governments to
finance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. TANs are usually general obligations
of the issuer. A weakness in an issuer's capacity to raise taxes due to, among
other things, a decline in its tax base or a rise in delinquencies, could
adversely affect the issuer's ability to meet its obligations on outstanding
TANs.

Revenue Anticipation Notes (RANs) are issued by governments or governmental
bodies with the expectation that future revenues from a designated source will
be used to repay the notes. In general they also constitute general obligations
of the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely affect an
issuer's ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.

Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.

Bank Notes are notes issued by local governmental bodies and agencies such as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working-capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.

Municipal Commercial Paper. Municipal Commercial Paper refers to short-term
obligations of municipalities which may be issued at a discount and may be
referred to as Short-Term Discount Notes. Municipal Commercial Paper is likely
to be used to meet seasonal working capital needs of a municipality or interim
construction financing. Generally they are repaid from general revenues of the
municipality or refinanced with long-term debt. In most cases Municipal
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.

Variable and Floating Rate Obligations. Certain Municipal Obligations,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and debt instruments issued by domestic banks or corporations
may carry variable or floating rates of interest. Such instruments bear interest
at rates which are not fixed, but which vary with changes in specified market
rates or indices, such as a bank prime rate or tax-exempt money market index.
Variable rate notes are adjusted to current interest rate levels at certain
specified times, such as every 30 days. A floating rate note adjusts
automatically whenever there is a change in its base interest rate adjustor,
e.g., a change in the prime lending rate or specified interest rate indices.
Typically such instruments carry demand features permitting the Fund to redeem
at par.

A Fund's right to obtain payment at par on a demand instrument upon demand could
be affected by events occurring between the date the Fund elects to redeem the
instrument and the date redemption proceeds are due which affects the ability of
the issuer to pay the instrument at par value. The Manager monitors on an
ongoing basis the pricing, quality and liquidity of such instruments and
similarly monitors the ability of an issuer of a demand instrument, including
those supported by bank letters of credit or guarantees, to pay principal and
interest on demand. Although the ultimate maturity of such variable rate
obligations may exceed one year, the Funds treat the maturity of each variable
rate demand obligation as the longer of (i) the notice period required before
the Fund is entitled to payment of the principal amount through demand, or (ii)
the period remaining until the next interest rate adjustment. Floating rate
instruments with demand features are deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through demand.

The Funds may purchase participation interests in variable rate Municipal
Obligations (such as industrial development bonds). A participation interest
gives the purchaser an undivided interest in the Municipal Obligation in the
proportion that its participation interest bears to the total principal amount
of the Municipal Obligation. A Fund has the right to demand payment on seven
days' notice, for all or any part of the Fund's participation interest in the
Municipal Obligation, plus accrued interest. Each participation interest is
backed by an irrevocable letter of credit or guarantee of a bank. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank. Banks will retain a service and letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to the excess of the interest
paid on the Municipal Obligations over the negotiated yield at which the
instruments were purchased by the Funds. No Fund committed during the last
fiscal year or intends to commit during the present fiscal year more than 5% of
its net assets to participation interests.

Other Municipal Obligations. Other kinds of Municipal Obligations are
occasionally available in the marketplace, and a Fund may invest in such other
kinds of obligations to the extent consistent with its investment objective and
limitations. Such obligations may be issued for different purposes and with
different security than those mentioned above.

Risks of Municipal Obligations. The yields on Municipal Obligations are
dependent on a variety of factors, including general economic and monetary
conditions, money market factors, conditions in the Municipal Obligations
market, size of a particular offering, maturity of the obligation, and rating of
the issue. Each Fund's ability to achieve its investment objective also depends
on the continuing ability of the issuers of the Municipal Obligations in which
it invests to meet their obligation for the payment of interest and principal
when due.

Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act. They are also subject to federal or state laws, if any,
which extend the time for payment of principal or interest, or both, or impose
other constraints upon enforcement of such obligations or upon municipalities to
levy taxes. The power or ability of issuers to pay, when due, principal of and
interest on Municipal Obligations may also be materially affected by the results
of litigation or other conditions.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals
will be introduced in the future. If such a proposal was enacted, the ability of
the Funds to pay "exempt interest" dividends may be adversely affected. Each
Fund would reevaluate its investment objective and policies and consider changes
in its structure.

Taxable Investments of the Tax-Exempt Bond Fund

The Tax-Exempt Bond Fund may invest up to 20% of its assets in taxable
short-term investments consisting of: Obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities; domestic bank
certificates of deposit and bankers' acceptances; short-term corporate debt
securities such as commercial paper; and repurchase agreements ("Taxable
Investments"). These investments must have a stated maturity of one year or less
at the time of purchase and must meet the following standards: banks must have
assets of at least $1 billion; commercial paper must be rated at least "A" by
S&P or "Prime" by Moody's or, if not rated, must be issued by companies having
an outstanding debt issue rated at least "A" by S&P or Moody's; corporate bonds
and debentures must be rated at least "A" by S&P or Moody's. Interest earned
from Taxable Investments is taxable to investors. When, in the opinion of the
Fund's Manager, it is advisable to maintain a temporary "defensive" posture, the
Fund may invest more than 20% of its total assets in Taxable Investments. At
other times, Taxable Investments, Municipal Obligations that do not meet the
quality standards required for the 80% portion of the portfolio and Municipal
Obligations the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax will not exceed 20% of the
Fund's total assets.

Portfolio Turnover

Portfolio turnover normally differs for each Fund, varies from year to year (as
well as within a year) and is affected by portfolio sales necessary to meet cash
requirements for redemptions of Fund shares. This requirement may in some cases
limit the ability of a Fund to effect certain portfolio transactions. The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses which are paid by
the Fund.

No portfolio turnover rate can be calculated for the Cash Management Fund
because of the short maturities of the securities in which it invests. No
turnover rates are calculated for the new Funds (LargeCap Stock Index, Partners
LargeCap Growth and Partners MidCap Growth).

The portfolio turnover rates for each of the other Funds for its most recent and
immediately preceding fiscal periods were as follows (annualized when reporting
period is less than one year):

Balanced Fund 24.2% and 57.0%
Blue Chip Fund 16.4% and 0.5%
Bond Fund 48.9% and15.2%
Capital Value Fund 44.5% and 23.2%
Government Securities Income Fund 19.4% and 17.1%
Growth Fund 32.4% and21.9%
High Yield Fund 86.1% and 65.9%
International Emerging Markets Fund 95.8% and 45.2%
International Fund 58.7% and 38.7%
International SmallCap Fund 191.5% and99.8%
Limited Term Bond Fund 20.9% and 23.8%
MidCap Fund 59.9% and 25.1%
Real Estate Fund 55.1% and 60.4%
SmallCap Fund 100.7% and 20.5%
Tax-Exempt Bond Fund 15.6% and 6.6%
Utilities Fund 23.5% and 11.9%

MANAGEMENT OF THE FUND

Board of Directors

Under Maryland law, a Board of Directors oversees each of the Funds. The
Directors have financial or other relevant experience and meet several times
during the year to review contracts, Fund activities and the quality of services
provided to the Funds. Other than serving as Directors, most of the Board
members have no affiliation with the Funds or service providers.

The current Directors and Officers are shown below. Each person also has the
same position with the Principal Variable Contracts Fund, Inc. which is also
sponsored by Principal Life Insurance Company. Unless an address is shown, the
mailing address for the Directors and Officers is Principal Financial Group, Des
Moines, Iowa 50392.

* John E. Aschenbrenner, 50, Director. Executive Vice President, Principal
Life Insurance Company since 2000; Senior Vice President, 1996-2000; Vice
President - Individual Markets 1990-1996. Director, Principal Management
Corporation and Princor Financial Services Corporation.

@ James D. Davis, 65, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.

*& Ralph C. Eucher, 47, Director and President. Vice President, Principal Life
Insurance Company since 1999. Director and President, Princor Financial
Services Corporation and Principal Management Corporation since 1999. Prior
thereto, Second Vice President, Principal Life Insurance Company.

@ Pamela A. Ferguson, 56, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.

Richard W. Gilbert, 59, Director. 1357 Asbury Avenue, Winnetka, Illinois.
President, Gilbert Communications, Inc. since 1993. Prior thereto,
President and Publisher, Pioneer Press.

*& J. Barry Griswell, 50, Director and Chairman of the Board. President and
CEO, Principal Life Insurance Company since 2000; President, 1998-2000;
Executive Vice President, 1996-1998; Senior Vice President, 1991-1996.
Director and Chairman of the Board, Principal Management Corporation and
Princor Financial Services Corporation.

@ William C. Kimball, 52, 4700 Westown Parkway, Suite 300, West Des Moines,
Iowa 50266-6730. Chairman and CEO, Medicap Pharmacies, Inc. since 1998.
Prior thereto, President and CEO.

& Barbara A. Lukavsky, 59, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.

* Craig L. Bassett, 47, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.

* Michael J. Beer, 39, Financial Officer. Executive Vice President, Princor
Financial Services Corporation and Principal Management Corporation since
1999. Senior Vice President and Chief Operating Officer, 1997-1999. Vice
President and Chief Operating Officer, 1995-1997. Prior thereto, Financial
Officer.

Michael W. Cumings, 48, Assistant Counsel. Counsel, Principal Life
Insurance Company since 1989.

* Arthur S. Filean, 61, Vice President and Secretary. Vice President, Princor
Financial Services Corporation, since 1990. Vice President, Principal
Management Corporation, since 1996.

* Ernest H. Gillum, 44, Assistant Secretary. Vice President - Compliance and
Product Development, Princor Financial Services Corporation and Principal
Management Corporation, since 1998. Prior thereto, Assistant Vice
President, Registered Products, 1995-1998. Prior thereto, Product
Development and Compliance Officer.

Jane E. Karli, 42, Assistant Treasurer. Assistant Treasurer, Principal Life
Insurance Company since 1998; Senior Accounting and Custody Administrator
1994-1998; Prior thereto, Senior Investment Cost Accountant.

* Michael D. Roughton, 48, Counsel. Vice President and Associate General
Counsel, Principal Life Insurance Company, since 1999. Counsel 1994-1999.
Counsel, Invista Capital Management, Inc., Princor Financial Services
Corporation, Principal Investors Corporation and Principal Management
Corporation.

* Considered to be "Interested Persons" as defined in the Investment Company
Act of 1940, as amended, because of current or former affiliation with the
Manager or Principal Life.

@ Member of Audit and Nominating Committee

& Member of Executive Committee (which is selected by the Board and which may
exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the
Board.)
COMPENSATION TABLE*
fiscal year ended October 31, 1999

Compensation from Compensation from
Director Each Principal Mutual Fund Fund Complex

James D. Davis $1,350 $53,250
Pamela A. Ferguson 1,200 47,700
Richard W. Gilbert 1,350 50,850
Barbara A. Lukavsky 1,200 47,700

* None of the Funds provide retirement benefits for any of the directors.

As of _______________ Principal Life Insurance Company, a life insurance company
organized in 1879 under the laws of Iowa, its subsidiaries and affiliates owned
of record a percentage of the outstanding voting shares of each Fund:

% of Outstanding
Fund Shares Owned

Balanced Fund %
Blue Chip Fund
Bond Fund
Capital Value Fund
Cash Management Fund
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund
International Fund
International SmallCap Fund
LargeCap Stock Index Fund
Limited Term Bond Fund
MidCap Fund
Partners Aggressive Growth Fund*
Partners LargeCap Growth Fund*
Partners MidCap Growth Fund*
Real Estate Fund
SmallCap Fund
Tax-Exempt Bond Fund
Utilities Fund

* represents start-up capital.

As of __________the Officers and Directors of each Fund as a group owned less
than 1% of the outstanding shares of any Class of any of the Funds.

As of __________, the following shareholders of the Funds owned 5% or more of
the outstanding shares of any Class of the Funds:

MANAGER AND SUB-ADVISORS

The Manager of each of the Funds is Principal Management Corporation, a
wholly-owned subsidiary of Princor Financial Services Corporation which is a
wholly-owned subsidiary of Principal Financial Services, Inc. Principal
Financial Services, Inc. is a holding company which is a wholly-owned subsidiary
of Principal Financial Group, Inc. The Principal Financial Group, Inc. is a
holding company which is a wholly-owned subsidiary of Principal Mutual Holding
Company. The address of the Manager is the Principal Financial Group, Des
Moines, Iowa 50392-0200. The Manager was organized on January 10, 1969 and since
that time has managed various mutual funds sponsored by Principal Life Insurance
Company.

The Manager has executed agreements with various Sub-Advisors. Under those
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Fund. For these
services, each Sub-Advisor is paid a fee by the Manager.

Funds: Balanced, Blue Chip, Capital Value, Government Securities
Income, Growth, International, International Emerging Growth,
International SmallCap, LargeCap Stock Index, Limited Term
Bond, MidCap, SmallCap and Utilities Funds.
Sub-Advisor: Invista, an indirectly wholly-owned subsidiary of Principal
Life Insurance Company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional
investors, including Principal Life Insurance Company. Assets
under management at ____________ were approximately $___
billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309.

Fund: Partners Aggressive Growth Fund
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York, NY
10020, provides a broad range of portfolio management services
to customers in the U.S. and abroad. As of _____________,
Morgan Stanley, together with its affiliated institutional
asset management companies, managed investments of
approximately $175 billion as named fiduciary or fiduciary
advisor. On December 1, 1998, Morgan Stanley Asset Management
Inc. changed it name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain
instances using the name Morgan Stanley Asset Management.

Fund: Partners LargeCap Growth Fund
Sub-Advisor: Duncan-Hurst Capital Management Inc. ("Duncan-Hurst"), was
founded in 1990. Its address is 4365 Executive Drive, Suite
1520, San Diego CA 92121. Duncan-Hurst currently manages
assets of $____ billion for institutional and individual
investors.

Fund: Partners MidCap Growth Fund
Sub-Advisor: Turner Investment Partners, Inc. ("Turner"), 1235 Westlake
Drive, Suite 350, Berwyn PA 19312, is a professional
investment management firm founded in 1990. As of __________,
Turner had discretionary management authority with respect to
approximately $____ billion in assets. Turner has provided
investment advisory services to investment companies since
1992.

The Manager, each of the Sub-Advisors and each of the Funds have adopted a Code
of Ethics designed to prevent persons with access to information regarding the
portfolio trading activity of the Funds from using that information for their
personal benefit. In certain circumstances personal securities trading is
permitted in accordance with procedures established by the Code of Ethics. The
Boards of Directors for the Manager, each of the Sub-Advisors and each of the
Funds periodically review their respective Code of Ethics.

Each of the persons affiliated with a Fund who is also an affiliated person of
the Manager or Invista is named below, together with the capacities in which
such person is affiliated:

<TABLE>
<CAPTION>
Name Office Held With Each Fund Office Held With The Manager/Invista

<S> <C> <C>
John E. Aschenbrenner Director Director (Manager)
Michael J. Beer Financial Officer Vice President and Chief Operating Officer (Manager)
Ralph C. Eucher Director and President Director and President (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Vice President, Compliance and Product Development (Manager)
J. Barry Griswell Director and Chairman of the Board Director and Chairman of the Board (Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
</TABLE>

COST OF MANAGER'S SERVICES

For providing the investment advisory services, and specified other services,
the Manager, under the terms of the Management Agreement for each Fund, is
entitled to receive a fee computed and accrued daily and payable monthly, at the
following annual rates:

<TABLE>
<CAPTION>
Net Asset Value of Fund

First Next Next Next
$250,000,000 $250,000,000 $250,000,000 $250,000,000 Thereafter

<S> <C> <C> <C> <C> <C>
Blue Chip, Capital Value and Growth Funds .60% .55% .50% .45% .40%
Partners Aggressive Growth Fund .75 .70 .65 .60 .55
International Fund .85 .80 .75 .70 .65
</TABLE>

<TABLE>
<CAPTION>
Net Asset Value of Fund

First Next Next Next Over
$100,000,000 $100,000,000 $100,000,000 $100,000,000 $400,000,000

<S> <C> <C> <C> <C> <C>
Balanced, High Yield, and Utilities Funds .60% .55% .50% .45% .40%
International Emerging Markets Fund 1.25 1.20 1.15 1.10 1.05
International SmallCap Fund 1.20 1.15 1.10 1.05 1.00
MidCap Fund .65 .60 .55 .50 .45
Real Estate Fund .90 .85 .80 .75 .70
SmallCap Fund .85 .80 .75 .70 .65
All Other Funds .50 .45 .40 .35 .30
</TABLE>

Overall Fee

LargeCap Stock Index Fund .35%
Partners LargeCap Growth Fund .90%
Partners MidCap Growth Fund .90%

There is no assurance that any of the Funds' net assets will reach sufficient
amounts to be able to take advantage of the rate decreases. The net assets of
each Fund on October 31, 1999 and the rate of the fee for each Fund for
investment management services as provided in the Management Agreement for the
fiscal year then ended were as follows:
Management Fee
Net Assets as of or Fiscal Year Ended
Fund October 31, 1999 October 31, 1999

Balanced Fund $160,113,402 0.58%
Blue Chip Fund 291,707,955 0.46
Bond Fund 187,792,641 0.48
Capital Value Fund 670,726,648 0.37
Cash Management Fund 374,707,858 0.44
Government Securities Income Fund 279,432,929 0.45
Growth Fund 636,878,130 0.38
High Yield Fund 40,312,045 0.60
International Emerging Markets Fund 22,166,474 0.68
International Fund 408,882,643 1.25
International SmallCap Fund 40,867,074 1.20
Limited Term Bond Fund 33,418,483 0.50*
MidCap Fund 407,721,977 0.56
Real Estate Fund 13,009,308 0.90
SmallCap Fund 66,121,454 0.85
Tax-Exempt Bond Fund 198,589,990 0.46
Utilities Fund 126,445,559 0.59

* Before waiver.

The Manager pays for office space, facilities and simple business equipment and
the costs of keeping the books of the Fund. The Manager also compensates all
personnel who are officers and directors, if such officers and directors are
also affiliated with the Manager.

Each Fund pays all its other corporate expenses incurred in the operation of the
Fund and the continuous public offering of its shares, but not selling expenses.
Among other expenses, the Fund pays its taxes (if any), brokerage commissions on
portfolio transactions, interest, the cost of stock issue and transfer and
dividend disbursement, administration of shareholder accounts, custodial fees,
expenses of registering and qualifying shares for sale after the initial
registration, auditing and legal expenses, fees and expenses of unaffiliated
directors, and costs of shareholder meetings. The Manager pays most of these
expenses in the first instance, and is reimbursed for them by the Fund as
provided in the Management Agreement. The Manager also is responsible for the
performance of certain of the functions described above, such as transfer and
dividend disbursement and administration of shareholder accounts, the cost of
which the Manager is reimbursed by the Fund.

Fees paid for investment management services during the periods indicated were
as follows:

<TABLE>
<CAPTION>
Management Fees For Fiscal Years Ended October 31,

Fund 1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 914,378 $ 750,616 $ 556,009
Blue Chip Fund 1,142,839 764,784 417,958
Bond Fund 909,902 782,241(1) 636,217(1)
Capital Value Fund 2,570,792 2,349,118 2,031,143
Cash Management Fund 1,526,404 2,127,595(1) 2,864,916(1)
Government Securities Income Fund 1,283,959 1,239,644 1,227,604
Growth Fund 2,283,089 1,863,070 1,443,120
High Yield Fund 259,764 287,858 230,667
International Emerging Markets Fund 216,500 157,324 28,487(2)
International Fund 2,673,903 2,492,037 1,882,664
International SmallCap Fund 358,891 242,403 30,283(2)
Limited Term Bond Fund 160,694(1) 133,825(1) 97,039(1)
MidCap Fund 2,461,880 2,548,924 2,004,305
Real Estate Fund 114,693 87,653(3) N/A
SmallCap Fund 412,361 147,083(3) N/A
Tax-Exempt Bond Fund 972,600 974,740 941,387
Utilities Fund 685,175 531,644(1) 436,296(1)

<FN>
(1) Before waiver.
(2) Period from August 14, 1997 (Date Operations Commenced) through
October 31, 1997.
(3) Period from December 11, 1997 (Date Operations Commenced) through
October 31, 1998.
</FN>
</TABLE>

The Manager waived $66,728, $100,270 and $59,630 of its fee for the Limited Term
Bond Fund for the years ended October 31, 1999, 1998 and 1997, respectively. The
Manager waived $172,366 and $60,665 of its fee for the Bond Fund for the years
ended October 31, 1998 and 1997, respectively. The Manager also waived $1,343
and $7,933 of its fee for the Cash Management Fund for the years ended October
31, 1998 and 1997, respectively. The Manager also waived $82,515 and $79,048 of
its fee for the Utilities Fund for the years ended October 31, 1998 and 1997,
respectively.

Costs reimbursed to the Manager during the periods indicated for providing other
services pursuant to the Management Agreement were as follows:
<TABLE>
<CAPTION>
Reimbursement by Fund
of Certain Costs For
Fund Fiscal Years Ended October 31,

1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 664,179 $ 521,852 $ 364,442
Blue Chip Fund 1,336,983 832,394 402,003
Bond Fund 534,104 482,817 278,385
Capital Value Fund 1,415,788 1,247,865 837,825
Cash Management Fund 788,303 854,575 1,833,423
Government Securities Income Fund 544,396 499,207 407,146
Growth Fund 1,613,707 1,421,948 1,121,832
High Yield Fund 170,349 217,020 98,481
International Emerging Markets Fund 148,065 119,948 4,116(1)
International Fund 1,111,335 1,168,106 906,359
International SmallCap Fund 168,397 153,320 4,283(1)
Limited Term Bond Fund 123,038 90,187 44,634
MidCap Fund 1,733,436 1,840,474 1,308,608
Real Estate Fund 93,688 76,546(2) N/A
SmallCap Fund 348,721 199,807(2) N/A
Tax-Exempt Bond Fund 165,845 199,780 135,553
Utilities Fund 390,699 304,813 230,151

<FN>
(1) Period from August 14, 1997 (Date Operations Commenced) through
October 31, 1997.
(2) Period from December 11, 1997 (Date Operations Commenced)
through October 31, 1998.
</FN>
</TABLE>

NOTE: The Manager voluntarily waived a portion of its fee for the Limited
Term Bond Fund from the date operations commenced and intends to
continue such waiver and, if necessary, pay expenses normally payable
by the Limited Term Bond Fund through the period ending October 31,
1999 in an amount that will maintain a total level of operating
expenses, which as a percent of average net assets attributable to a
class on an annualized basis will not exceed 1.00% for the Class A
shares, 1.35% for the Class B shares, 1.35% for the Class C shares and
1.60% for the Class R shares. The effect of the waiver was and will be
to reduce the Fund's annual operating expenses and increase the Fund's
yield and effective yield.

The Manager has agreed to waive a portion of its fee for the Blue Chip
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Blue Chip Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed 1.20% for Class A Shares, 1.95% for Class B Shares, 1.95% for
Class C Shares and 1.70% for Class R Shares. The effect of the waiver
is to reduce the Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the Real
Estate Fund from November 1, 1999. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Real
Estate Fund through the period ending October 31, 2000. The waiver will
maintain a total level of operating expenses (expressed as a percent of
average net assets attributable to a Class on an annualized basis) not
to exceed 1.90% for Class A Shares, 2.65% for Class B Shares, 2.65% for
Class C Shares and 2.40% for Class R Shares. The effect of the waiver
is to reduce the Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the SmallCap
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the SmallCap Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed 1.80% for Class A Shares, 2.55% for Class B Shares, 2.55% for
Class C Shares and 2.30% for Class R Shares. The effect of the waiver
is to reduce the Fund's annual operating expenses

The Manager has agreed to waive a portion of its fee for the
International Emerging Markets Fund from November 1, 1999. The Manager
intends to continue the waiver and, if necessary, pay expenses normally
payable by the International Emerging Markets Fund through the period
ending October 31, 2000. The waiver will maintain a total level of
operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed 2.50% for
Class A Shares, 3.25% for Class B Shares, 3.25% for Class C Shares and
3.00% for Class R Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the LargeCap
Stock Index Fund from March 1, 2000. The Manager intends to continue
the waiver and, if necessary, pay expenses normally payable by the
LargeCap Stock Index Fund through the period ending October 31, 2000.
The waiver will maintain a total level of operating expenses (expressed
as a percent of average net assets attributable to a Class on an
annualized basis) not to exceed 0.80% for Class A Shares, _____% for
Class B Shares, _____% for Class C Shares and _____% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.

The Manager has agreed to waive a portion of its fee for the Partners
Aggressive Growth Fund from November 1, 1999. The Manager intends to
continue the waiver and, if necessary, pay expenses normally payable by
the Partners Aggressive Growth Fund through the period ending October
31, 2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.60% for Class A Shares, 2.35%
for Class B Shares, 2.35% for Class C Shares and 2.10% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.

The Manager has agreed to waive a portion of its fee for the Partners
LargeCap Growth Fund from March 1, 2000. The Manager intends to
continue the waiver and, if necessary, pay expenses normally payable by
the Partners LargeCap Growth Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.80% for Class A Shares, _____%
for Class B Shares, _____% for Class C Shares and _____% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.

The Manager has agreed to waive a portion of its fee for the Partners
MidCap Growth Fund from March 1, 2000. The Manager intends to continue
the waiver and, if necessary, pay expenses normally payable by the
Partners MidCap Growth Fund through the period ending October 31, 2000.
The waiver will maintain a total level of operating expenses (expressed
as a percent of average net assets attributable to a Class on an
annualized basis) not to exceed 1.80% for Class A Shares, _____% for
Class B Shares, _____% for Class C Shares and _____% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.

Each Fund has entered into certain agreements that provide for continuation in
effect from year to year only so long as such continuation is specifically
approved at least annually either by the Board of Directors of the Fund or by
vote of a majority of the outstanding voting securities of the applicable Fund,
provided that in either event such continuation shall be approved by vote of a
majority of the Directors who are not "interested persons" (as defined in the
Investment Company Act of 1940) of the Manager, Principal Life Insurance Company
or its subsidiaries or the Fund, cast in person at a meeting called for the
purpose of voting on such approval. The Agreements may be terminated at any time
on 60 days written notice to the Manager by the Board of Directors of the
applicable Fund or by a vote of a majority of the outstanding securities of the
Fund and by the Manager, the respective sub-advisor, if any, or Principal Life
Insurance Company, as the case may be, on 60 days written notice to the Fund.
The Agreements will automatically terminate in the event of their assignment.

The Management Agreement for each Fund (except Growth, LargeCap Stock Index,
MidCap, Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap
Growth) was last approved by shareholders of the applicable Fund on November 2,
1999. Shareholders approved the Management Agreement for the other Funds as
follows: Growth - November 9, 1999; LargeCap Stock Index - _____________, 2000;
MidCap - December 10, 1999; Partners Aggressive Growth - November 1, 1999;
Partners LargeCap Growth - ____________, 2000; and Partners MidCap Growth-
_____________, 2000.

The agreements for each Fund were last approved by the Board of Directors for
that Fund as follows:

<TABLE>
<CAPTION>
Investment Services Management Sub-Advisory
Fund Agreement Agreement Agreement

<S> <C> <C> <C>
Balanced 9/13/99 9/13/99 9/13/99
Blue Chip 9/13/99 9/13/99 9/13/99
Bond 9/13/99 9/13/99 9/13/99
Capital Value 9/13/99 9/13/99 9/13/99
Cash Management 9/13/99 9/13/99 9/13/99
Government Securities Income 9/13/99 9/13/99 9/13/99
Growth 9/13/99 9/13/99 9/13/99
High Yield 9/13/99 9/13/99 9/13/99
International 9/13/99 9/13/99 9/13/99
International Emerging Markets 9/13/99 9/13/99 9/13/99
International SmallCap 9/13/99 9/13/99 9/13/99
LargeCap Stock Index 12/13/99 12/13/99 12/13/99
Limited Term Bond 9/13/99 9/13/99 9/13/99
MidCap 9/13/99 9/13/99 9/13/99
Partners Aggressive Growth N/A 9/13/99 9/13/99
Partners LargeCap Growth N/A 12/13/99 12/13/99
Partners MidCap Growth N/A 12/13/99 12/13/99
Real Estate 9/13/99 9/13/99 9/13/99
SmallCap 9/13/99 9/13/99 9/13/99
Tax-Exempt Bond 9/13/99 9/13/99 9/13/99
Utilities 9/13/99 9/13/99 9/13/99
</TABLE>

BROKERAGE ON PURCHASES AND SALES OF SECURITIES

In distributing brokerage business arising out of the placement of orders for
the purchase and sale of securities for any Fund, the objective of the Fund's
Manager or Sub-Advisor is to obtain the best overall terms. In pursuing this
objective, the Manager or Sub-Advisor considers all matters it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and executing capability of the broker or dealer and the
reasonableness of the commission, if any (for the specific transaction and on a
continuing basis). This may mean in some instances that the Manager or
Sub-Advisor will pay a broker commissions that are in excess of the amount of
commissions another broker might have charged for executing the same transaction
when the Manager or Sub-Advisor believes that such commissions are reasonable in
light of (a) the size and difficulty of the transaction (b) the quality of the
execution provided and (c) the level of commissions paid relative to commissions
paid by other institutional investors. (Such factors are viewed both in terms of
that particular transaction and in terms of all transactions that broker
executes for accounts over which the Manager or Sub-Advisor exercises investment
discretion. The Manager or Sub-Advisor may purchase securities in the
over-the-counter market, utilizing the services of principal market makers
unless better terms can be obtained by purchases through brokers or dealers, and
may purchase securities listed on the New York Stock Exchange from non-Exchange
members in transactions off the Exchange.)

The Manager or Sub-Advisor gives consideration in the allocation of business to
services performed by a broker (e.g., the furnishing of statistical data and
research generally consisting of, but not limited to, information of the
following types: analyses and reports concerning issuers, industries, economic
factors and trends, portfolio strategy and performance of client accounts). If
any such allocation is made, the primary criteria used will be to obtain the
best overall terms for such transactions. The Manager or Sub-Advisor may pay
additional commission amounts for research services. Such statistical data and
research information received from brokers or dealers may be useful in varying
degrees and the Manager or Sub-Advisor may use it in servicing some or all of
the accounts it manages. Some statistical data and research information may not
be useful to the Manager or Sub-Advisor in managing the client account,
brokerage for which resulted in the Manager's or Sub-Advisor's receipt of the
statistical data and research information. However, in the Manager's or
Sub-Advisor's opinion, the value thereof is not determinable and it is not
expected that the Manager's or Sub-Advisor's expenses will be significantly
reduced since the receipt of such statistical data and research information is
only supplementary to the Manager's or Sub-Advisor's own research efforts. The
Manager or Sub-Advisor allocated portfolio transactions for the Funds indicated
in the following table to certain brokers during the fiscal year ended October
31, 1999 due to research services provided by such brokers. The table also
indicates the commissions paid to such brokers as a result of these portfolio
transactions.

Fund Commissions Paid

Balanced $
Blue Chip
Capital Value
Growth
International Emerging Markets
International
International SmallCap
MidCap
Real Estate
SmallCap
Utilities

Purchases and sales of debt securities and money market instruments usually are
principal transactions; portfolio securities are normally purchased directly
from the issuer or from an underwriter or marketmaker for the securities. Such
transactions are usually conducted on a net basis with the Fund paying no
brokerage commissions. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers include the spread between the bid and asked prices.

The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Fund went to
broker-dealers which provided research, statistical or other factual
information.

Total Brokerage Commissions Paid

Fund 1999 1998 1997

Balanced Fund $ 50,867 $ 70,261 $ 47,096
Blue Chip Fund 149,945 41,024 113,923
Capital Value Fund 695,270 331,316 339,994
Growth Fund 438,476 276,004 43,018
International Emerging Markets Fund 125,801 51,821 45,140*
International Fund 1,201,021 758,808 708,333
International SmallCap Fund 306,636 101,485 46,970*
MidCap Fund 517,173 242,311 98,217
Real Estate Fund 36,634 40,791** N/A
SmallCap Fund 154,031 46,957** N/A
Utilities Fund 95,017 39,470 58,450

* Period from August 14, 1997 (date operations commenced) through
October 31, 1997.
**Period from December 11, 1997 (date operations commenced) through
October 31, 1998.

Brokerage commissions paid to affiliates during the fiscal year ending October
31 were as follows:

<TABLE>
<CAPTION>
Commissions Paid to Goldman Sachs Co.
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 1,725 3.39% 1.94%
1998 2,950 4.20% 1.87%
Blue Chip Fund
1999 7,735 5.16% 5.25%
Capital Value Fund
1999 87,440 12.58% 10.41%
Growth Fund
1999 10,650 2.43% 3.63%
1998 5,000 1.81% 1.87%
International Emerging Markets Fund
1999 6,756 5.37% 5.97%
1998 662 1.28% 1.54%
International Fund
1999 90,123 7.50% 5.97%
1998 41,600 5.48% 5.79%
International SmallCap Fund
1999 26,377 8.60% 9.72%
1998 2,326 2.29% 2.96%
MidCap Fund
1999 21,673 4.19% 3.49%
Real Estate Fund
1999 135 0.37% 0.47%
SmallCap Fund
1999 2,370 1.54% 2.95%
1998 210 0.45% 0.61%
Utilities Fund
1999 3,160 3.33% 3.83%
1998 1,500 3.80% 3.71%
</TABLE>

<TABLE>
<CAPTION>
Commissions Paid to J.P. Morgan Securities
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 6,841 13.45% 15.18%
1998 500 0.71% 1.03%
Blue Chip Fund
1999 8,485 5.66% 5.82%
1998 1,950 4.75% 5.35%
Capital Value Fund
1999 9,470 1.36% 1.83%
1998 18,935 5.72% 6.27%
Growth Fund
1999 23,170 5.28% 5.47%
1998 1,250 0.45% 0.39%
International Emerging Markets Fund
1999 4,492 3.57% 4.82%
1998 2,570 4.96% 6.77%
International Fund
1999 13,911 1.16% 1.22%
1998 17,961 2.37% 1.80%
MidCap Fund
1999 10,715 2.07% 1.87%
Real Estate Fund
1999 8,845 24.14% 23.03%
1998 3,205 7.86% 7.67%
SmallCap Fund
1999 3,065 1.99% 2.68%
Utilities Fund
1999 3,935 4.14% 4.98%
</TABLE>

<TABLE>
<CAPTION>
Commissions Paid to Morgan Stanley& Co. Incorporated
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 2,300 4.52% 4.33%
1998 2,630 3.74% 2.27%
1997 45 - 0.1%
Blue Chip Fund
1999 13,950 9.30% 11.72%
1998 365 0.89% 0.99%
1997 4,602 4.0% 2.4%
Capital Value Fund
1999 12,575 1.81% 2.48%
1998 13,740 4.15% 3.78%
1997 9,900 2.9% 2.4%
Growth Fund
1999 12,338 2.81% 3.90%
1998 12,500 4.53% 4.92%
1997 3,250 7.6% 8.5%
International Emerging Markets Fund
1999 2,570 2.04% 2.76%
1998 1,499 2.89% 3.64%
1997 1,586 3.5% 9.3%
International Fund
1999 128,900 10.73% 11.76%
1998 78,938 10.40% 10.03%
1997 20,595 2.9% 2.7%
International SmallCap Fund
1999 18,755 6.12% 8.26%
1998 4,284 4.22% 7.42%
1997 1,502 3.2% 4.2%
MidCap Fund
1999 21,551 4.17% 5.00%
1998 7,716 3.18% 4.19%
1997 3,750 3.8% 2.8%
Real Estate Fund
1999 1,600 4.37% 4.10%
1998 11,540 28.29% 28.36%
SmallCap Fund
1999 795 0.52% 0.81%
1998 840 1.79% 1.65%
Utilities Fund
1999 340 0.36% 0.49%
1998 1,735 4.40% 5.95%
</TABLE>

Morgan Stanley & Co. Incorporated is affiliated with Morgan Stanley, which acts
as sub-advisor to the Partners Aggressive Growth Fund and two Accounts included
in the Fund complex.

The Manager acts as investment advisor for each of the funds sponsored by
Principal Life Insurance Company. The Manager or Sub-Advisor, if any, places
orders to trade portfolio securities for each of these Funds. If, in carrying
out the investment objectives of the Funds, occasions arise when purchases or
sales of the same equity securities are to be made for two or more of the Funds
at the same time (or, in the case of accounts managed by a Sub-Advisor, for two
or more Funds and any other accounts managed by the Sub-Advisor), the Manager or
Sub-Advisor may submit the orders to purchase or, whenever possible, to sell, to
a broker/dealer for execution on an aggregate or "bunched" basis. The Manager
(or, in the case of accounts managed by a Sub-Advisor, the Sub-Advisor) may
create several aggregate or "bunched" orders relating to a single security at
different times during the same day. On such occasions, the Manager (or, in the
case of accounts managed by a Sub-Advisor, the Sub-Advisor) will randomly order
the accounts whose individual orders for purchase or sale make up each aggregate
or "bunched" order. Securities purchased or proceeds of sales received on each
trading day with respect to each such aggregate or "bunched" order shall be
allocated to the various Funds (or, in the case of a Sub-Advisor, the various
Funds and other client accounts) whose individual orders for purchase or sale
make up the aggregate or "bunched" order by filling each Fund's (or, in the case
of a Sub-Advisor, each Fund's or other client account's) order in the sequence
arrived at by the random ordering. Securities purchased for funds (or, in the
case of a Sub-Advisor, Funds and other client accounts) participating in an
aggregate or "bunched" order will be placed into those Funds and, where
applicable, other client accounts at a price equal to the average of the prices
achieved in the course of filling that aggregate or "bunched" order.

If purchases or sales of the same debt securities are to be made for two or more
of the Funds at the same time, the securities will be purchased or sold
proportionately in accordance with the amount of such security sought to be
purchased or sold at that time for each Fund.

HOW TO PURCHASE SHARES

Each Fund, except the Tax-Exempt Bond Fund, offers investors four classes of
shares which bear sales charges in different forms and amounts: Class A, Class
B, Class C and Class R shares. The Tax-Exempt Bond Fund offers only Class A,
Class B and Class C shares.

Purchases are generally made by completing an Account Application or a Principal
Mutual Fund IRA Application and mailing it to Princor. Shares are issued at the
offering price next computed after the application is received at Princor's main
office and Princor receives the amount to be invested. Generally, the initial
amount to be invested in a Principal Mutual Fund IRA is directly transferred to
Princor from the Administered Employee Benefit Plans ("AEBP"). However, in some
cases the investor purchases shares by check. If investing by check, shares are
issued at the offering price next computed after the completed application and
check are received at Princor's main office. Subsequent purchases are executed
at the price next computed after receipt of the investor's check at Princor's
main office. All orders are subject to acceptance by the Fund or Funds and
Princor. Orders from individuals for Class R shares that equal or exceed
$500,000 are treated as orders for Class A shares, unless accompanied by a
written acknowledgment that the order should be treated as an order for Class R
shares.

Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to 8 business days or
more. Investors considering redeeming or exchanging shares shortly after
purchase should pay for those shares with a certified check, bank cashier's
check or money order to avoid any delay in redemption, exchange or transfer.

Class A Shares. An investor who purchases less than $1 million of Class A shares
(except Class A shares of the Cash Management Fund) pays a sales charge at the
time of purchase. As a result, such shares are not subject to any charges when
they are redeemed. An investor who purchases $1 million or more of Class A
shares does not pay a sales charge at the time of purchase. However, a
redemption of such shares occurring within 18 months from the date of purchase
will be subject to a contingent deferred sales charge ("CDSC") at the rate of
.75% (.25% for the LargeCap Stock Index and Limited Term Bond Funds) the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal Mutual Fund will continue to
be subject to the CDSC until the original 18 month period expires. However no
CDSC is payable with respect to redemption of Class A shares used to fund a
Principal Mutual Fund 401(a) or Principal Mutual Fund 401(k) retirement plan,
except redemptions resulting from the termination of the plan or transfer of
plan assets. In addition, the CDSC will be waived in connection with 1)
redemption of shares from retirement plans to satisfy minimum distribution rules
under the Code or 2) shares redeemed through a systematic withdrawal plan that
permits up to 10% of the value of a shareholder's Class A shares of a particular
Fund on the last business day of December of each year to be withdrawn
automatically in equal monthly installments throughout the year. Certain
purchases of Class A shares qualify for reduced sales charges. Class A shares
for each Fund, except the Cash Management Fund, currently bear a 12b-1 fee at
the annual rate of up to 0.25% (0.15% for the LargeCap Stock Index and Limited
Term Bond Funds) of the Fund's average net assets attributable to Class A
shares. See "Distribution Plan."

Class B Shares. Class B shares are purchased without an initial sales charge,
but are subject to a declining CDSC of up to 4% (1.25% for the LargeCap Stock
Index and Limited Term Bond Funds) if redeemed within six years. Class B shares
purchased under certain sponsored Principal Mutual Fund plans established after
February 1, 1998, are subject to a CDSC of up to 3% if redeemed within five
years of purchase. (See "Plans Other than Administered Employee Benefit Plans"
("AEBP") for discussion of sponsored Principal Mutual Fund plans.) See "Offering
Price of Funds' Shares." Class B shares bear a higher 12b-1 fee than Class A
shares, currently at the annual rate of up to 1.00% (.50% for the LargeCap Stock
Index and Limited Term Bond Funds) of the Fund's average net assets attributable
to Class B shares. See "Distribution Plan." Class B shares provide an investor
the benefit of putting all of the investor's dollars to work from the time the
investment is made, but (until conversion to Class A shares) have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class B shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge), seven years after the
purchase date. Class B shares acquired by exchange from Class B shares of
another Principal Mutual Fund convert into Class A shares based on the time of
the initial purchase. At the same time, a pro rata portion of all shares
purchased through reinvestment of dividends and distributions convert into Class
A shares, with that portion determined by the ratio that the shareholder's Class
B shares converting into Class A shares bears to the shareholder's total Class B
shares that were not acquired through dividends and distributions. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.

Class C Shares. Class C shares are sold without the imposition of an initial
sales charge; however, Class C shares redeemed within one year of purchase are
subject to a CDSC of 1% (.5% for LargeCap Stock Index and Limited Term Bond
Funds). The charge is assessed on the amount equal to the lesser of the current
market value or the original purchase cost of the shares being redeemed. No CDSC
is imposed on increases in account value above the initial purchase price,
including shares derived from the reinvestment of dividends or capital gains
distributions. Class C shares do not convert to any other class of Fund shares.

Class C shares bear a higher 12b-1 fee than other Class shares. Currently Class
C share 12b-1 fees are set at the annual rate of up to 1.00% (.50% for the
LargeCap Stock Index and Limited Term Bond Funds) of the Fund's average net
assets. See "Distribution Plan." Class C shares provide an investor the benefit
of putting all of the investor's dollars to work from the time the investment is
made, but have a higher expense ratio and pay lower dividends than other Class
shares due to the higher 12b-1 fee. Class C shares do not convert into other
Class shares. Class C shares are subject to higher expenses than other Class
shares for an indefinite period.

Which arrangement between Class A, Class B and Class C Shares is better for an
investor? The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than seven years might consider Class B shares. Orders from individuals for
Class B shares for $250,000 or more will be treated as orders for Class A shares
unless the shareholder provides written acknowledgment that the order should be
treated as an order for Class B shares. Sales personnel may receive different
compensation depending on which class of shares are purchased. If you prefer not
to pay an initial sales charge and you plan to hold your investment for greater
than one but less than seven years, you may prefer Class C shares.

Class R Shares. Class R shares are purchased without an initial sales charge or
a contingent deferred sales charge ("CDSC"). Class R shares bear a higher 12b-1
fee than Class A shares, currently at the annual rate of up to .75% (.25% for
the LargeCap Stock Index and .35% for the Limited Term Bond Funds) of the Fund's
average net assets attributable to Class R shares. See "Distribution and
Shareholder Servicing Plans and Fees." Class R shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but (until conversion to Class A shares) have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class R shares automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 49th month after the purchase date. Class R shares acquired by exchange from
Class R shares of another Principal Mutual Fund convert into Class A shares
based on the time of the initial purchase. (See "How to Exchange Shares Among
Principal Mutual Funds" in the Prospectus.) At the same time, a pro rata portion
of all shares purchased through reinvestment of dividends and distributions
convert into Class A shares, with that portion determined by the ratio that the
shareholder's Class R shares converting into Class A shares bears to the
shareholder's total Class R shares that were not acquired through dividends and
distributions. The conversion of Class R shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute taxable events for
Federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class R shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class R shares
would continue to be subject to higher expenses that Class A shares for an
indefinite period.

Purchasing Class R Shares. Class R shares are offered only to individuals (and
his/her spouse, child, parent, grandchild and trusts primarily for their
benefit) who: receive lump sum distributions from retirement plans serviced by
Principal Life Insurance Company; or are participants in retirement plans
serviced by Principal Life Insurance Company; or own individual life or
disability insurance policies issued by Principal Life Insurance Company that do
not have an insurance agent licensed to sell such policies assigned to the
policies; or have mortgages which are serviced by Principal Life Insurance
Company; or have existing Principal Mutual Fund Class R Share accounts.
Generally, the initial amount to be invested in a Principal Mutual Fund IRA is
directly transferred to Princor from the Administered Employee Benefit Plans
("AEBP"). However, in some cases the investor purchases shares by check. If
investing by check, shares are issued at the offering price next computed after
the completed application and check are received at Princor's main office.
Orders from individuals for Class R shares that equal or exceed $500,000 are
treated as orders for Class A shares, unless accompanied by a written
acknowledgment that the order should be treated as an order for Class R shares.

OFFERING PRICE OF FUNDS' SHARES

The Funds offer their respective shares continuously through Princor, which is
the principal underwriter for the Funds and sells shares as agent on behalf of
the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.

Class A shares
Class A shares of the Cash Management Fund is sold to the public at net asset
value; no sales charge applies to purchases of the Cash Management Fund. Class A
shares of the Growth-Oriented and Income-Oriented Funds, except the LargeCap
Stock Index and Limited Term Bond Funds, are sold to the public at the net asset
value plus a sales charge which ranges from a high 4.75% to a low of 0% of the
offering price (equivalent to a range of 4.99% to 0% of the net amount invested)
according to the schedule below. Class A shares of the LargeCap Stock Index and
Limited Term Bond Funds are sold to the public at the net asset value plus a
sales charge which ranges from a high of 1.50% to a low of 0% of the offering
price according to the schedule below. Selected dealers are allowed a concession
as shown. At Princor's discretion, the entire sales charge may at times be
reallowed to dealers. In some situations, depending on the services provided by
the dealer, the concession may be less. Any dealer allowance on purchases not
involving a sales charge is determined by Princor. Upon notice to all
broker-dealers with whom it has a selling agreement, Princor may allow to
broker-dealers electing to participate up to the full applicable sales charge,
as shown in the table below, during periods and for transactions specified in
such notice, and such reallowances may be based in whole or in part upon
attainment of minimum sales levels. Certain commercial banks may make shares of
the Funds available to their customers on an agency basis. Pursuant to the
agreements between Princor and such banks all or a portion of the sales charge
paid by a bank customer in connection with a purchase of Fund shares may be
retained by or remitted to the bank.

<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
LargeCap Stock Index and LargeCap Stock Index and Dealer Allowance as
Limited Term Bond Funds Limited Term Bond Funds % of Offering Price
All Funds LargeCap
Except LargeCap Stock Index
Sales Charge as % of: Sales Charge as % of: Stock Index and Limited
Offering Amount Offering Amount and Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Funds Bond Funds
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25 4.44 1.25 1.27 3.75 1.00
$100,000 but less than $250,000 3.75 3.90 1.00 1.01 3.25 0.75
$250,000 but less than $500,000 2.50 2.56 0.75 0.76 2.00 0.50
$500,000 but less than $1,000,000 1.50 1.52 0.50 0.50 1.25 0.25
$1,000,000 or more No Sales Charge 0.00 No Sales Charge 0.00 0.75 0.25
</TABLE>

Rights of Accumulation. The applicable sales charge is determined by adding the
current net asset value of any Class A shares, Class B shares and Class C shares
already owned by the investor to the amount of the new purchase. The
corresponding percentage factor in the schedule is then applied to the entire
amount of the new purchase. For example, if an investor currently owns Class A,
Class B or Class C shares with a value of $5,000 and makes an additional
investment of $45,000 in Class A shares of a Growth-Oriented Fund (the total of
which equals $50,000), the charge applicable to the $45,000 investment would be
4.25% of the offering price. If the investor purchases shares of more than one
Principal Mutual Fund at the same time, those purchases are aggregated and added
to the net asset value of the shares of Principal Mutual Funds already owned by
the investor to determine the sales charge for the new purchase. Class A shares
of the Cash Management Fund are not counted in determining either the amount of
a new purchase or the current net asset value of shares already owned, unless
the shares of the Cash Management Fund were acquired in exchange for shares of
other Principal Mutual Funds. If the investor purchases shares from a
broker/dealer other than Princor, the dealer should be advised of any shares
already owned.

Investments made by an individual, or by an individual's spouse and dependent
children purchasing shares for their own account or by a trust primarily for the
benefit of such persons, or by a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension,
profit-sharing, or other employee-benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) will be treated as
investments made by a single investor in calculating the sales charge. In
addition, investments made through an employer by or on behalf of an employee
(including independent contractors) by means of payroll deductions or otherwise,
are also considered investments by a single investor in calculating the sales
charge. Other groups (as allowed by rules of the Securities and Exchange
Commission) may be considered for a reduced sales charge. An investor whose new
account qualifies for a reduced charge on the basis of other accounts owned by
the individual, spouse or children, should be certain to identify those accounts
at the time of the new application.

Statement of Intention (SOI). Another method is available by which a purchaser
may qualify for a reduced sales charge on the purchase of Class A shares of the
Funds. A purchaser may execute an SOI indicating the total amount (excluding
reinvested dividends and capital gains distributions) intended to be invested
(including all investments for the account of the spouse and dependent children
or trusts for the benefit of such persons) in Class A shares (except Class A
shares of the Cash Management Fund), Class B shares and Class C shares of the
Funds within a thirteen-month period (two-year period if the intended investment
is made by a trustee of a Section 401(a) plan or is equal to or greater than $1
million). The SOI may be submitted by a shareholder other than a trustee of a
Principal Mutual Fund 401(a) plan, within 90 days after the date of the first
purchase to be included within the SOI period. A trustee of a Principal Mutual
Fund 401(a) plan must submit the SOI at the time the first plan purchase is
made; the SOI may not be submitted after the initial plan purchase and the 90
day backdating is not available. The SOI period begins on the date of the first
purchase included for purposes of satisfying the statement. When an existing
shareholder submits an SOI, the net asset value of all Class A shares (except
Class A shares of the Cash Management Fund), Class B shares and Class C shares
in that shareholder's account or accounts combined for rights of accumulation
purposes, is added to the amount that has been indicated will be invested during
the applicable period, and the sales charge applicable to all purchases of Class
A shares made under the SOI is the sales charge which applies to a single
purchase of this total amount.

An SOI may be entered into for any amount provided such amount, when added to
the net asset value of any shares already held, equals or is in excess of the
amount needed to qualify for a reduced sales charge. In the event a shareholder
invests an amount in excess of the indicated amount, such excess is allowed any
further reduced sales charge for which it qualifies.

The SOI provides for a price adjustment if the amount actually invested is less
than the amount specified therein. Sufficient Class A shares belonging to the
shareholder, other than a shareholder that is 401(a) qualified plan trustee, are
held in escrow in the shareholder's account by Princor to make up any difference
in sales charges based on the amount actually purchased. If the intended
investment is completed within the thirteen-month period (or two-year period),
such shares are released to the shareholder. If the total intended investment is
not completed within that period shares are, to the extent necessary, redeemed
and the proceeds used to pay the additional sales charge due. A shareholder that
is 401(a) qualified plan trustee is billed by Princor Financial Services
Corporation for any additional sales charge due at the end of the two-year
period. In any event, the sales charge applicable to these purchases is no more
than the applicable sales charge had the shareholder made all of such purchases
at one time. The SOI does not constitute an obligation on the shareholder to
purchase, nor the Funds to sell, the amount indicated.

Purchases at Net Asset Value.
A Fund's Class A shares may be purchased without a sales charge:
o by its Directors, Principal Life and its subsidiaries and their employees,
officers, directors (active or retired), brokers or agents. This also
includes their immediate family members and trusts for the benefit of these
individuals;
o by the Principal Employees' Credit Union;
o by non-ERISA clients of Invista and Principal Capital Management LLC;
o by any employee or Registered Representative (and their employees) of an
authorized broker-dealer;
o through broker-dealers, investment advisors and other financial
institutions that have entered into an agreement with Princor which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or similar program under which clients
pay a fee to the broker-dealer, investment advisor or financial
institution;
o by unit investment trusts sponsored by Principal Life and/or its
subsidiaries or affiliates;
o by certain employee welfare benefit plan customers of Principal Life with
Plan Deposit Accounts;
o by participants who receive distributions from certain annuity contracts
offered by Principal Life (except for shares of Tax-Exempt Bond Fund);
o to the extent the investment represents the proceeds of a total surrender
of certain Principal Life issued unregistered group annuity contracts if
Principal Life waives any applicable CDSC or other contract surrender
charge;
o by using cash payments received from Principal Bank under its awards
program;
o to the extent the investment represents redemption proceeds from certain
unregistered group annuity contracts issued by Principal Life to fund an
employer's 401(a) plan where such proceeds are used to fund the employer's
401(a) plan; and
o to the extent the purchase proceeds represent a distribution from a
terminating 401(a) plan if the employer or plan trustee has entered into a
written agreement with Princor permitting the group solicitation of
employees/participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above.

Class A shares may also be purchased without a sales charge if your Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met;
o your purchase of Class A shares must take place within the first 180 days
of your Registered Representative's affiliation with the authorized
broker-dealer;
o your investment must represent the sales proceeds from other mutual fund
shares (you must have paid a front-end sales charge or a CDSC) and the sale
must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you are
eligible for waiver of the front-end sales charge.
o you must send us either:
o the check for the sales proceeds (endorsed to Principal Mutual Funds)
or
o a copy of the confirmation statement from the other mutual fund showing
the sale transaction. If you place your order to buy Principal Mutual
Fund shares on the telephone, you must send us a copy of the
confirmation within 21 days of placing the order. If we do not receive
the confirmation within 21 days, we will sell enough of your Class A
shares to pay the sales charge that otherwise would have been charged.

Each of the Funds, except Principal Tax-Exempt Bond Fund, have obtained an
exemptive order from the Securities and Exchange Commission ("SEC") to permit
each Fund to offer its shares at net asset value to participants of certain
annuity contracts issued by Principal Life Insurance Company. In addition, each
of these Funds are available at net asset value to the extent the investment
represents the proceeds from a total surrender of certain unregistered annuity
contracts issued by Principal Life Insurance Company and for which Principal
Life Insurance Company waives any applicable contingent deferred sales charges
or other contract surrender charges.

During the period beginning December 1, 2000 and ending January 31, 2001,
investors may purchase Class A shares of the Funds at net asset value to the
extent that this investment represents the proceeds of a redemption, within the
preceding 60 days, of shares (the purchase price of which shares included a
front-end sales charge on the redemption of which was subject to a contingent
deferred sales charge) of another investment company. This provision does not
apply to purchase of Class A shares used to fund a defined contribution plan.
When making a purchase at net asset value pursuant to this provision, the
investor must indicate on the account application that the purchase qualifies
for a net asset value purchase and must forward to Princor either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor Financial Services Corporation, or (ii) a copy of the
confirmation from the other investment company showing the redemption
transactions. In the case of a wire purchase pursuant to this provision, a copy
of the confirmation from the other investment company showing the redemption
must be forwarded to and received by Princor within 21 days following the date
of purchase. If the confirmation is not provided within the 21-day period, a
sufficient number of shares will be redeemed from the shareholder's account to
pay the otherwise applicable sales charge.

Purchases at a Reduced Sales Charge. A reduced sales charge is also available
for purchases of Class A shares of the Funds, except the LargeCap Stock Index
and Limited Term Bond Funds, to the extent that the investment represents the
death benefit proceeds of one or more life insurance policies or annuity
contracts (other than an annuity contract issued to fund an employer-sponsored
retirement plan that is not an SEP, salary deferral 403(b) plan or HR-10 plan)
of which the shareholder is a beneficiary if one or more of such policies or
contracts is issued by Principal Life Insurance Company, or any directly or
indirectly owned subsidiary of Principal Life Insurance Company, and such
investment is made in any Principal Mutual Fund within one year after the date
of death of the insured. (Shareholders should seek advice from their tax
advisors regarding the tax consequences of distributions from annuity
contracts.) Such shares may be purchased at net asset value plus a sales charge
which ranges from a high of 2.50% to a low of 0% of the offering price
(equivalent to a range of 2.56% to 0% of the net amount invested) according to
the schedule below:

<TABLE>
<CAPTION>
Sales Charge as a % of:

Net Dealer Allowance as %
Offering Amount of Offering
Amount of Purchase Price Invested Price

<S> <C> <C> <C>
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 or more No Sales Charge 0.00 0.75
</TABLE>

Sales Charges for Employer-Sponsored Plans

Administered Employee Benefit Plans. Class A shares of the Growth-Oriented
Funds, except LargeCap Stock Index Fund, and Income-Oriented Funds, except
Limited Term Bond Fund and, in certain circumstances, Tax-Exempt Bond Fund which
is not available for certain retirement plans, are sold at net asset value to
stock bonus, pension or profit sharing plans that meet the requirements for
qualification under Section 401 of the Internal Revenue Code of 1986, as
amended, certain Section 403(b) Plans, Section 457 Plans and other Non-qualified
Plans administered by Principal Life Insurance Company pursuant to a written
service agreement ("Administered Employee Benefit Plans"). The service agreement
between Principal Life Insurance Company and the employer relating to the
administration of the plan includes a charge payable by the employer for any
commissions which Princor is authorized to pay in connection with such sales.
Principal Life Insurance Company in turn pays the amount of these charges to
Princor. The commission payable by Princor in connection with any such sale will
be determined in accordance with one of the following schedules:

<TABLE>
<CAPTION>
Schedule 1
Amount Payable by Employer as a Percent
Amount of Plan Contributions* in Each Year of Plan Contributions

<S> <C> <C> <C>
The first $5,000 4.50%
The next $5,000 3.00
The next $5,000 1.70
The next $35,000 1.40
The next $50,000 0.90
The next $400,000 0.60
Excess over $500,000 0.25

Schedule 2
The first $50,000 3.00%
The next $50,000 2.00
The next $400,000 1.00
The next $2,500,000 0.50
Excess over $3,000,000 0.25

<FN>
* Plan contributions directed to an annuity contract issued by Principal
Life Insurance Company to fund the plan are combined with contributions
directed to the Funds to determine the applicable commission charge.
</FN>
</TABLE>

Generally, the commission level described in Schedule 2 apply for salary
deferral Plans and the commission level described in Schedule 1 apply to other
plans. No commission will be payable by the employer if shares of the Funds used
to fund an Administered Employee Benefit Plan are purchased through a registered
representative of Princor Financial Services Corporation who is also a Group
Insurance Representative employee of Principal Life Insurance Company.

Plans Other Than Administered Employee Benefit Plans. Shares of the Funds are
offered to fund certain sponsored Princor plans. These plans can be divided into
three categories: Retirement plans meeting the requirements of Section 401 of
the Internal Revenue Code (e.g. 401(k) Plans, Profit Sharing Plans and Money
Purchase Pension Plans); Group Solicited Plan Terminations; and other
employer-sponsored retirement plans (SIMPLE IRA Plans, Simplified Employee
Pension Plans, Salary Reduction Simplified Employee Pension Plans, Non-Qualified
Deferred Compensation Plans, Payroll Deduction Plans ("PDP") and certain
Association Plan.

Princor 401 Plans
When establishing a Princor Section 401 Plan, the employer chooses whether
to fund the plan with either Class A shares, Class B shares or Class C
shares. If Class A shares are used to fund the plan, all plan investments
are treated as made by a single investor to determine whether a reduced
sales charge is available. The regular sales charge table for Class A
shares applies to purchases $250,000 or more. If Class B shares are used to
fund the plan, contributions into the plan after the plan assets amount to
$250,000 or more, are used to purchase Class A shares unless the plan
trustee directs otherwise. Plan assets are not combined with investments
made outside of the plan to determine the sales charge applicable to such
investments. Investments made by plan participants outside of the plan are
not included with plan assets to determine the sales charge applicable to
the plan.

Group Solicited Plan Terminations
Occasionally, an employer terminates a Section 401 Plan. If the employer or
plan trustee enters into a written agreement with Princor permitting the
group solicitation of the employees/plan participants, the proceeds of
distributions from such plans are eligible to purchase shares of the funds
at net asset value. A redemption of such shares within 18 months after
purchase are subject to a contingent deferred sales charge ("CDSC") at the
rate of .75% (.25% for the LargeCap Stock Index and Limited Term Bond
Funds) of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the total cost of
such shares. The CDSC is waived in connection with (1) redemption of shares
to satisfy IRS minimum distribution rules or (2) shares redeemed through a
systematic withdrawal plan that permits up to 10% of the value of the
shareholder's Class A shares of a Fund on the last business day of December
each year to be withdrawn automatically in equal monthly installments
throughout the year.

Other Employer Sponsored Princor Plans
When establishing an employer-sponsored Princor plan, the employer chooses
whether to fund the plan with either Class A shares, Class B shares or
Class C shares. If Class A shares are used to fund the plan, all plan
investments are treated as made by a single investor to determine whether a
reduced sales charge is available. The regular sales charge table for Class
A shares applies to purchases of $250,000 or more. If Class B shares are
used to fund the plan and a plan participant has $250,000 or more invested
in Class B shares, Class A shares are purchased with plan contributions
attributable to the plan participant, unless the plan participant elects
otherwise. Plan assets are not combined with investments made outside of
the plan to determine the sales charge applicable to such investments.
Investments made by plan participants outside of the plan are not included
with plan assets to determine the sales charge applicable to the plan.

Shares of the funds are also available to participants of Princor 403(b) plans
at the same sales charge levels available to other employer-sponsored Princor
plans described above. However, contributions by plan participants are not
combined to determine sales charges.

The Funds reserve the right to discontinue offering shares at net asset value
and/or at a reduced sales charge at any time for new accounts and upon 60-days
notice to shareholders of existing accounts. Other types of sponsored plans may
be added in the future.

Class B shares
Class B shares are sold without an initial sales charge, although a CDSC is
imposed if you redeem shares within six years of purchase. Class B shares
purchased under certain sponsored Princor plans established after February 1,
1998, are subject to a CDSC of up to 3% if redeemed within five years of
purchase. (See "Plans Other than Administered Employee Benefit Plans" above for
discussion of sponsored Princor plans.) The following types of shares may be
redeemed without charge at any time: (i) shares acquired by reinvestment of
distributions and (ii) shares otherwise exempt from the CDSC, as described
below. Subject to the foregoing exclusions, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. Therefore, when a share is redeemed, any increase
in its value above the initial purchase price is not subject to any CDSC. The
amount of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following table:

<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge

For Certain Sponsored Plans
Commenced After 2/1/98

All Funds All Funds
Years Since Purchase Except LargeCap LargeCap Stock Except LargeCap LargeCap Stock
Stock Index and Index and Stock Index and Index and
Limited Term Limited Term Limited Term Limited Term
Payments Made Bond Funds Bond Funds Bond Funds Bond Funds

In determining whether a CDSC is payable on any redemption, the Fund first
redeems shares not subject to any charge, and then shares held longest during
the six (five) year period. For information on how sales charges are calculated
if shares are exchanged, see "How To Exchange Shares Among Principal Mutual
Funds" in the Prospectus.

The CDSC is waived on redemptions of Class B shares in connection with the
following types of transactions:
a. Shares redeemed due to a shareholder's death;
b. Shares redeemed due to the shareholder's disability, as defined in the
Internal Revenue Code of 1986 (the "Code"), as amended;
c. Shares redeemed from retirement plans to satisfy minimum distribution rules
or to satisfy substantially equal periodic payment
calculation rules under the Code;
d. Shares redeemed to pay surrender charges;
e. Shares redeemed to pay retirement plan fees;
f. Shares redeemed involuntarily from small balance accounts (values of less
than $300);
g. Shares redeemed through a systematic withdrawal plan that permits up to 10%
of the value of a shareholder's Class B shares of a particular Fund on the
last business day of December of each year to be withdrawn automatically in
equal monthly installments throughout the year;
h. Shares redeemed from a retirement plan to assure the plan complies with
Sections 401(k), 401(m), 408(k) and 415 of the Code; or
i. Shares redeemed from retirement plans qualified under Section 401(a) of the
Code due to the plan participant's death, disability, retirement or
separation from service after attaining age 55.

As principal underwriter, Princor received underwriting fees from the sale of
shares for the periods indicated as follows:

<TABLE>
<CAPTION>
Underwriting Fees for
Fiscal Years Ended October 31,

Fund 1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 689,518 $ 716,315 $ 518,345
Blue Chip Fund 1,419,225 1,230, 098 816,203
Bond Fund 800,916 887,870 582,903
Capital Value Fund 1,647,688 1,769,043 1,383,995
Cash Management Fund 76,773 19,171 14,123
Government Securities Income Fund 940,825 846,821 737,229
Growth Fund 2,515,833 2,079,726 1,548,696
High Yield Fund 200,747 335,156 321,051
International Emerging Markets Fund 111,950 114,325 33,588(1)
International Fund 1,032,623 1,369,016 1,524,740
International SmallCap Fund 156,120 197,039 38,421(1)
Limited Term Bond Fund 89,515 77,191 50,773
MidCap Fund 1,677,041 2,447,638 2,152,664
Real Estate Fund 50,841 53,280(2) N/A
SmallCap Fund 453,831 398,391(2) N/A
Tax-Exempt Bond Fund 576,841 667,756 558,697
Utilities Fund 513,501 339,353 169,904

<FN>
(1) Period from August 14, 1997 (Date Operations Commenced) through October
31, 1997.
(2) Period from December 11, 1997 (Date Operations Commenced) through
October 31, 1998.
</FN>
</TABLE>

Class C Shares
Class C shares are sold without a sales charge; however, Class C shares redeemed
within one year of purchase are subject to a CDSC of 1% (.5% for LargeCap Stock
Index and Limited Term Bond Funds). The charge is assessed on the amount equal
to the lesser of the current market value or the original purchase cost of the
shares being redeemed. The amount of the CDSC, if any, is calculated as a
percentage of the amount being redeemed according to the following table.

<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge

For Certain Sponsored Plans
Commenced After 2/1/98

All Funds All Funds
Except LargeCap LargeCap Stock Except LargeCap LargeCap Stock
Stock Index and Index and Stock Index and Index and
Years Since Purchase Limited Term Limited Term Limited Term Limited Term
Payments Made Bond Funds Bond Funds Bond Funds Bond Funds

For the purpose of determining the holding period of Class C shares, all
payments during a month are aggregated and considered to have be made on the
first day of that month. In processing redemptions of Class C shares, the Fund
first redeems shares not subject to any CDSC, and then shares held for the
shortest period of time during the one-year period. As a result, you pay the
lowest possible CDSC.

The CDSC on Class C shares may be waived or reduced as follows:
o for automatic redemptions (Periodic Withdrawal Plans) (limited to 10%
of the value of the account);
o if the redemption results from the death or a total and permanent
disability (as defined in Section 72 of the Internal Revenue Code)
occurring after the purchase of the shares being redeemed of a
shareholder or participant in an employer-sponsored retirement plan;
o if the distribution is part of a series of substantially equal
payments made over the life expectancy of the participant or the joint
life expectancy of the participant and his or her beneficiary; or
o if the distribution is to a participant in an employer-sponsored
retirement plan and is
o a return of excess employee deferrals or contributions,
o a qualifying hardship distribution as defined by the Code,
o from a termination of employment,
o in the form of a loan to a participant in a plan which permits
loans, or
o from qualified defined contribution plan and represents a
participant's directed transfer (provided that this privilege has
been pre-authorized through a prior agreement with PFD regarding
participant directed transfers).

The CDSC may be waived or reduced for either non-retirement or retirement plan
accounts if the redemption is made pursuant to the Fund's right to liquidate or
involuntarily redeem shares in a shareholder's account. The CDSC is not
applicable if the selling broker-dealer elects, with Princor's approval, to
waive receipt of the commission normally paid at the time of the sale.

Class C shares of the Cash Management Fund may be purchased only by exchange
from other Class C share accounts. Class C shares do not convert into any other
Class shares. Class C shares provide you the benefit of putting all your dollars
to work from the time of investment, but have higher ongoing fees and lower
dividends than Class A shares.

DISTRIBUTION PLAN

Rule 12b-1 of the Investment Company Act of 1940 (the "Act"), as amended,
permits a mutual fund to finance distribution activities and bear expenses
associated with the distribution of its shares provided that any payments made
by the Fund are made pursuant to a written plan adopted in accordance with the
Rule. A majority of the Board of Directors of each Fund, including a majority of
the Directors who have no direct or indirect financial interest in the operation
of the Plan or any agreements related to the Plan and who are not "interested
persons" as defined in the Act, adopted the Distribution Plans as described
below. No such Plan was adopted for Class A shares of the Cash Management Fund.
Shareholders of each class of shares of each Fund approved the adoption of the
Plan for their respective class of shares.

Class A Distribution Plan. Each of the Funds, except the Cash Management Fund,
has adopted a distribution plan for the Class A shares. The Class A Plan
provides that the Fund makes payments from its assets to Princor pursuant to
this Plan to compensate Princor and other selling Dealers for providing
shareholder services to existing Fund shareholders and rendering assistance in
the distribution and promotion of the Fund Class A shares to the public. The
Fund pays Princor a fee after the end of each month at an annual rate no greater
than 0.25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds) of
the daily net asset value of the Fund. Princor retains such amounts as are
appropriate to compensate for actual expenses incurred in distributing and
promoting the sale of the Fund shares to the public but may remit on a
continuous basis up to .25% (.15% for the LargeCap Stock Index and Limited Term
Bond Funds) to Registered Representatives and other selected Dealers (including
for this purpose, certain financial institutions) as a trail fee in recognition
of their services and assistance.

Class B Distribution Plan. Each Class B Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap Stock Index
and Limited Term Bond Funds) of the Fund's average net asset attributable to
Class B shares. Princor also receives the proceeds of any CDSC imposed on
redemptions of such shares.

Although Class B shares are sold without an initial sales charge, Princor pays a
sales commission equal to 4.00% (3.00% for certain sponsored plans or 1.25% for
the LargeCap Stock Index and Limited Term Bond Funds) of the amount invested to
dealers who sell such shares. These commissions are not paid on exchanges from
other Principal Mutual Funds. In addition, Princor may remit on a continuous
basis up to .25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds)
to the Registered Representatives and other selected Dealers (including for this
purpose, certain financial institutions) as a trail fee in recognition of their
services and assistance.

Class C Distribution Plan. Each Class C Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap Stock Index
and Limited Term Bond Funds) of the Fund's average net asset attributable to
Class C shares. Princor also receives the proceeds of any CDSC imposed on
redemptions of such shares.

Class C shares are sold without an initial sales charge. Princor may remit on a
continuous basis up to 1.00% (.50% for the LargeCap Stock Index and Limited Term
Bond Funds) to the Registered Representatives and other selected Dealers
(including for this purpose, certain financial institutions) as a trail fee in
recognition of their services and assistance.

Class R Distribution Plan. Each of the Funds, except the Tax-Exempt Bond Fund,
has adopted a distribution plan for the Class R shares. Each Class R Plan
(except the LargeCap Stock Index Fund) provides for payments by the Fund to
Princor at the annual rate of up to .75% of the Fund's average net assets
attributable to Class R shares. The Class R Plan for the LargeCap Stock Index
Fund provides for payments from the Fund to Princor at the annual rate of up to
.65% of the Fund's average net assets attributable to Class R shares

Although Class R shares are sold without an initial sales charge, Princor incurs
certain distribution expenses. In addition, Princor may remit on a continuous
basis up to .25% to Registered Representatives and other selected Dealers
(including, for this purpose, certain financial institutions) as a trail fee in
recognition of their ongoing services and assistance.

General Information Regarding Distribution Plans. A representative of Princor
provides to each Fund's Board of Directors, and the Board reviews, at least
quarterly, a written report of the amounts expended pursuant to the Plans and
the purposes for which such expenditures were made.

If expenses under a Class A, Class B or Class R Plan exceed the compensation
limit for Princor described in the Plan in any one fiscal year, the Fund does
not carry over such expenses to the next fiscal year. The Funds have no legal
obligation to pay any amount pursuant to these Plans that exceeds the
compensation limit. The Funds do not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with these Plans. If
the aggregate payments received by Princor under these Plans in any fiscal year
exceed the expenditures made by Princor in that year pursuant to the Plan,
Princor promptly reimburses the Fund for the amount of the excess.

The Funds pay Princor the compensation described in the Class C Plan. The amount
of the payment and the distribution expenses are reviewed annually by the Board
of Directors of each Fund.

The amount received from each Fund and retained by Princor during the year ended
October 31, 1999 and the manner in which such amounts were spent pursuant to the
Class A Distribution Plan for the last fiscal period of each of the Funds were
as follows:
<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Expenditures

<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class B Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class C Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures

The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class R Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Representative Underwriter's
Amount Report Sales Sales Service Salaries and Total
Fund Retained Printing Brochures Materials Fees Overhead Expenditures

<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Utilities
</TABLE>

A Plan may be terminated at any time by vote of a majority of the Directors who
are not interested persons (as defined in the Act), or by vote of a majority of
the outstanding voting securities of the class of shares of a Fund to which the
Plan relates. Any change in a Plan that would materially increase the
distribution expenses of a class of shares of a Fund provided for in the Plan
requires approval of the shareholders of the class of shares to which such
increase would relate.

While a Distribution Plan is in effect for a Fund, the selection and nomination
of Directors who are not interested persons of that Fund is at the discretion of
the Directors who are not interested persons.

Each Plan continues in effect from year to year as long as its continuance is
specifically approved at least annually by a majority vote of the directors of
the Fund including a majority of the non-interested directors. The Plans for
Classes A, B, C and R shares were last approved by the Board of Directors of all
Funds, including a majority of the non-interested directors, on December 13,
1999.

DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES

Growth-Oriented and Income-Oriented Funds

The share price of each class of the Growth-Oriented and Income-Oriented Funds
is calculated each day that the New York Stock Exchange is open. The Funds treat
as customary national business holidays the days when the New York Stock
Exchange is closed (New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day).

The share price for each class of shares for each Fund is determined by dividing
the value of securities in the Fund's investment portfolio plus all other assets
attributable to that class, less all liabilities attributable to that class, by
the number of Fund shares of that class outstanding. Securities for which market
quotations are readily available, including options and futures traded on an
exchange, are valued at market value, which is for exchanged-listed securities,
the closing price; for United Kingdom-listed securities, the marketmaker
provided price; and for non-listed equity securities, the bid price. Non-listed
corporate debt securities, government securities and municipal securities are
usually valued using an evaluated bid price provided by a pricing service. If
closing prices are unavailable for exchange-listed securities, generally the bid
price, or in the case of debt securities an evaluated bid price, is used to
value such securities. When reliable market quotations are not considered to be
readily available, which may be the case, for example, with respect to certain
debt securities, preferred stocks, foreign securities and over-the-counter
options, the investments are valued by using market quotations considered
reliable, prices provided by market makers, which may include dealers with which
the Fund has executed transactions, or estimates of market values obtained from
yield data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith through procedures established by the Board of Directors of the Fund.

Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
foreign securities used to compute the share prices are usually determined when
the foreign market closes. Occasionally, events which affect the values of such
securities and foreign currency exchange rates occur between the times at which
the values are generally determined and the close of the New York Stock Exchange
and would therefore not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of securities occur during such
period, the securities are valued at their fair value as determined in good
faith by the Manager under procedures established and regularly reviewed by the
Board of Directors. To the extent a Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.

Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Emerging Markets Fund, International Fund and International SmallCap Fund to
value such securities at prices at which it is expected those shares may be
sold, and the Manager or any Sub-Advisor is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.

Money Market Fund

The share price of each class of shares of the Cash Management Fund is
determined at the same time and on the same days as the Growth-Oriented and
Income-Oriented Funds as described above. The share price for each class of
shares of the Fund is computed by dividing the total value of the Fund's
securities and other assets, less liabilities, by the number of Fund shares
outstanding.

All securities held by the Cash Management Fund are valued on an amortized cost
basis. Under this method of valuation, a security is initially valued at cost;
thereafter, the Fund assumes a constant proportionate amortization in value
until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price that
would be received upon sale of the security.

Use of the amortized cost valuation method by the Cash Management Fund requires
the Fund to maintain a dollar weighted average maturity of 90 days or less and
to purchase only obligations that have remaining maturities of 397 days or less
or have a variable or floating rate of interest. In addition, the Fund invests
only in obligations determined by its Board of Directors to be of high quality
with minimal credit risks.

The Board of Directors for the Cash Management Fund has established procedures
designed to stabilize, to the extent reasonably possible, the Fund's price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures include a directive to the Manager to test price the portfolio or
specific securities on a weekly basis using a mark-to-market method of valuation
to determine possible deviations in the net asset value from $1.00 per share. If
such deviation exceeds 1/2 of 1%, the Board promptly considers what action, if
any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
shareholders, the Board takes such corrective action as it regards as
appropriate, including: sale of portfolio instruments prior to maturity; the
withholding of dividends; redemptions of shares in kind; the establishment of a
net asset value per share based upon available market quotations; or splitting,
combining or otherwise recapitalizing outstanding shares. The Fund may also
reduce the number of shares outstanding by redeeming proportionately from
shareholders, without the payment of any monetary compensation, such number of
full and fractional shares as is necessary to maintain the net asset value at
$1.00 per share.

PERFORMANCE CALCULATION

The Principal Mutual Funds advertise their performance in terms of total return
or yield for each class of shares. The figures used for total return and yield
are based on the past performance of a Fund. They show the performance of a
hypothetical investment and are not intended to indicate future performance.
Total return and yield vary from time to time depending upon:
o market conditions
o the composition of a Fund's portfolio
o operating expenses

These factors and differences in the methods used in calculating performance
figures should be considered when comparing a Fund's performance to the
performance of other investments.

A Fund may include in its advertisements performance rankings and other
performance-related information published by independent statistical services or
publishers, such as
o Baron's, Changing Times
o Forbes
o Fortune
o Investment Advisor
o Lipper Analytical Services
o Money Magazine
o Stanger's Investment Advisor
o The Wall Street Journal
o USA Today
o U.S. News
o Weisenberger Investment Companies Services
o W. R. Kipplinger's Personal Finance

A Fund may also include in its advertisements comparisons of the performance of
the Fund to that of various market indices, such as:
o Bond Buyer Municipal Index
o Dow Jones Industrials Index
o Dow Jones Utility Index with Income
o Lehman Brothers BAA Corporate Index
o Lehman Brothers GNMA Index
o Lehman Brothers High Yield Index
o Lehman Brothers Municipal Bond Index
o Lehman Brothers Revenue Bond Index
o Brothers Mutual Fund Short Government/Corporate Index
o Lehman Brothers Intermediate Government/Corporate Index
o Lehman Brothers Government/Corporate Bond Index
o Merrill Lynch Corporate Government Bond Index
o Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index
o Morgan Stanley Capital International EMF (Emerging Markets) Index
o Morgan Stanley REIT Index
o Salomon Brothers Investment Grade Bond Index
o S&P 400 Index
o S&P 500 Index
o S&P 600 Index
o Valueline
o World Index

Total Return

The Growth-Oriented and Income-Oriented Funds include its average annual total
return for the one-, five- and ten-year periods as of the last day of the most
recent calendar quarter when advertising total return figures. If the Fund or
class has been in existence for a shorter time period, it uses the time from the
beginning of the Fund (or class) to the end of the most recent calendar quarter.

Average annual total return is calculated by comparing an initial $1,000
investment to the redeemable value of the Fund at the end of 1, 5 or 10 years
(or from the Fund's inception date).

Initial Investment - $1,000 less maximum front-end sales charge (in the
case of Class A shares)
Ending redeemable value - assumes the reinvestment of all dividends and
capital gains at net asset value less the applicable contingent deferred
sales charge (in the case of Class B or Class C shares).

A Fund may also include in its advertising average annual total return for some
other period or cumulative total return for a specified period. These returns
may include reduced sales charges, reflect no sales charge or CDSC in order to
illustrate the change in a Fund's net asset value over time. Cumulative total
return is calculated:

(Ending redeemable value less the initial investment)
Initial investment

The following table shows as of October 31, 1999 average annual returns for
Class A shares for each of the Funds for the periods indicated:
Fund 1-Year 5-Year 10-Year

Balanced Fund (0.07)% 11.06% 9.80%
Blue Chip Fund 11.50 18.81 14.01(1)
Bond Fund (9.53) 6.83 7.22
Capital Value Fund (1.84) 16.22 12.42
Government Securities Income Fund (3.30) 7.16 7.13
Growth Fund 11.94 17.89 16.38
High Yield Fund (2.02) 5.90 6.36
International Emerging Markets Fund 24.74 (5.53)(3)
International Fund 10.72 10.21 11.04
International SmallCap Fund 47.25 19.94(3)
Limited Term Bond Fund 0.31 4.67(4)
MidCap Fund 0.60 11.98 13.15
Real Estate Fund (8.87) (13.27)
SmallCap Fund 28.20 4.16
Tax-Exempt Bond Fund (7.09) 5.82 6.07
Utilities Fund 9.35 17.29 12.02(2)

(1)Period beginning March 1, 1991 and ending October 31, 1999.
(2)Period beginning December 16, 1992 and ending October 31, 1999.
(3)Period beginning August 29, 1997 and ending October 31, 1999.
(4)Period beginning February 29, 1996 and ending October 31, 1999.
(5)Period beginning January 1, 1998 and ending October 31, 1999.

The following table shows as of October 31, 1999 average annual returns for
Class B shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year

Balanced Fund 0.06% 12.31(1)
Blue Chip Fund 12.09 20.30(1)
Bond Fund (6.36) 6.72(1)
Capital Value Fund (1.57) 18.12(1)
Government Securities Income Fund (3.17) 7.17(1)
Growth Fund 12.75 20.29(1)
High Yield Fund (1.76) 6.05(1)
International Emerging Markets Fund 25.91 (5.67)(2)
International Fund 11.27 12.45(1)
International SmallCap Fund 49.42 20.65(2)
Limited Term Bond Fund 0.08 4.49(3)
MidCap Fund 1.09 14.26(1)
Real Estate Fund (8.79) (13.20)(4)
SmallCap Fund 29.29 4.16(4)
Tax-Exempt Bond Fund (6.73) 6.48(1)
Utilities Fund 9.85 17.88(1)

(1)Period beginning December 9, 1994 and ending October 31, 1999.
(2)Period beginning August 29, 1997 and ending October 31, 1999.
(3)Period beginning February 29, 1996 and ending October 31, 1999.
(4)Period beginning January 1, 1998 and ending October 31, 1999.

The following table shows as of October 31, 1999 average annual returns for
Class C shares for each of the Funds for the period indicated:
Fund 1-Year(1)

Balanced Fund (5.67)%
Blue Chip Fund (2.29)
Bond Fund (1.40)
Capital Value Fund (8.42)
Government Securities Income Fund 0.11
Growth Fund (4.75)
High Yield Fund (1.99)
International Emerging Markets Fund (5.47)
International Fund 2.95
International SmallCap Fund 16.81
Limited Term Bond Fund 0.34
MidCap Fund (9.36)
Real Estate Fund (11.21)
SmallCap Fund 0.53
Tax-Exempt Bond Fund (3.59)
Utilities Fund (1.47)

(1)Period beginning June 30, 1999 and ending October 31, 1999.

The following table shows as of October 31, 1999 average annual returns for
Class R shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year

Balanced Fund 4.21% 10.14%(1)
Blue Chip Fund 16.31 17.46(1)
Bond Fund (2.45) (4.76)(1)
Capital Value Fund 2.35 14.57(1)
Government Securities Income Fund 0.78 5.25(1)
Growth Fund 16.78 16.29(1)
High Yield Fund 2.01 3.88(1)
International Emerging Markets Fund 30.93 (3.46)(2)
International Fund 15.27 12.18(1)
International SmallCap Fund 54.61 22.77(2)
Limited Term Bond Fund 1.13 4.48(1)
MidCap Fund 4.89 7.49(1)
Real Estate Fund (4.70) (11.07)(3)
SmallCap Fund 33.85 6.77(3)
Utilities Fund 13.97 15.54(1)

(1)Period beginning February 29, 1996 and ending October 31, 1999.
(2)Period beginning August 29, 1997 and ending October 31, 1999.
(3) Period beginning January 1, 1998 and ending October 31, 1999.

Yield

Income-Oriented Funds
Each Income-Oriented Fund computes a yield by:
1. calculating net investment income per share for a 30 day (or one month)
period
2. annualizing net investment income per share, assuming semi-annual
compounding
3. dividing the annualized net investment income by the maximum public
offering price for Class A shares or the net asset value for Class B, Class
C and Class R shares for the last day of the same period.
The following table shows as of October 31, 1999 the yield for each class of
shares for each of the Income-Oriented Funds:

<TABLE>
<CAPTION>
Yield as of October 31, 1999

Fund Class A Class B Class C Class R

<S> <C> <C> <C> <C>
Bond Fund 7.40% 6.63% 6.56% 6.79%
Government Securities Income Fund 6.34 5.48 5.50 5.76
High Yield Fund 9.69 8.74 8.87 8.56
Limited Term Bond Fund 6.23 5.83 5.83 5.58
Tax-Exempt Bond Fund 4.94 4.54 3.96 N/A
</TABLE>

The Tax-Exempt Bond Fund may advertise a tax-equivalent yield. Your
tax-equivalent yield would be calculated by:

[(Tax-exemptportion of the yield) divided by (1 minus your tax rate)] plus
[any portion of the yield which is not tax-exempt]

As of October 31, 1999 the Fund's tax-equivalent yields for Class A , Class B
and Class C shares were as follows:

Tax-Equivalent Yield Assumed
Class A Class B Class C Tax Rate

6.53% 6.31% 5.50% 28.0%
7.34 7.09 6.19 36.0
7.78 7.52 6.56 39.6

Money Market Fund

The Cash Management Fund advertises its yield and its effective yield.

Yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return
o multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest hundredth of one percent.

The following table shows as of October 31, 1999 the yield for each class of
shares for the Cash Management Fund:

Yield as of October 31, 1999

Fund Class A Class B Class C Class R

Cash Management Fund 5.17% 4.75% 4.65% 3.63%

There may be a difference in the net investment income per share used to
calculate yield and the net investment income per share used for dividend
purposes. This is because the calculation for yield purposes does not include
net short-term realized gains or losses on the Fund's investment, which are
included in the calculation for dividend purposes.

Effective yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return compounding the base period
return by adding 1, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result.
The resulting effective yield figure is carried to at least the nearest
hundredth of one percent.
The following table shows as of October 31, 1999 the effective yield for each
class of shares for the Cash Management Fund:

Effective Yield as of October 31, 1999

Fund Class A Class B Class C Class R

Cash Management Fund 5.30% 4.85% 3.69% 4.75%

The yield quoted at any time for the Cash Management Fund represents the amount
that has earned during a specific, recent seven-day period and is a function of:
o the quality of investments in the Fund's portfolio
o types of investments in the Fund's portfolio
o length of maturity of investments in the Fund's portfolio
o Fund's operating expenses.

The length of maturity for the portfolio is calculated using the average dollar
weighted maturity of all investments. This means that the portfolio has an
average maturity of a stated number of days for its investments. The calculation
is weighted by the relative value of each investment.

The yield for the Cash Management Fund will fluctuate daily as the income earned
on the investments of the Fund fluctuates. There is no assurance the yield
quoted on any given occasion will remain in effect for any period of time. It
should also be emphasized that the Funds are open-end investment companies.
There is no guarantee that the net asset value or any stated rate of return will
remain constant. A shareholder's investment in the Fund is not insured.
Investors comparing results of the Cash Management Fund with investment results
and yields from other sources such as banks or savings and loan associations
should understand these distinctions.
Historical and comparative yield information may be presented by the Funds.

A Fund may include in its advertisements the compounding effect of reinvested
dividends over an extended period of time as shown in the following
illustrations.

The Power of Compounding

Fund shareholders who reinvest their distributions get the advantage of
compounding. Here's what happens to a $10,000 investment with monthly income
reinvested at 6 percent, 8 percent and 10 percent over 20 years.

These figures assume no change in the value of principal. This chart is for
illustration purposes only and is not an indication of the results a shareholder
may receive as a shareholder of a specific Fund. The return and capital value of
an investment in a Fund vary so that the value, when redeemed, may be worth more
or less than the original cost.

(chart)
Year 6% 8% 10%
0 $10,000 $10,000 $10,000
20 $32,071 $46,610 $67,275

A Fund may also include in its advertisements an illustration of the impact of
income taxes and inflation on earnings from bank certificates of deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated period as reported in the Federal Reserve Bulletin. The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month period ended as of the most recent
month prior to the advertisement's publication. The illustrated income tax rate
may include any federal income tax rate that may apply to individuals at the
time the advertisement is published. Any such advertisement will indicate that,
unlike bank CD's, an investment in the Fund is not insured nor is there any
guarantee that the Fund's net asset value or any stated rate of return will
remain constant.

An example of a typical calculation included in such advertisements is as
follows: the after-tax and inflation-adjusted earnings on a bank CD, assuming a
$10,000 investment in a six-month bank CD with an annual interest rate of ____%
(monthly average six-month CD rate for the month of October, 1999, as reported
in the Federal Reserve Bulletin) and an inflation rate of ____% (rate of
inflation for the 12-month period ended October 31, 1999 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(105).

($10,000 x ___9%) / 2 = $___ Interest for six-month period
- __ Federal income taxes (28%)
- __5 Inflation's impact on invested principal
$(10,000 x ___%) / 2
($___) After-tax, inflation-adjusted earnings
A Fund may also include in its advertisements an illustration of tax-deferred
accumulation versus currently taxable accumulation in conjunction with the
Fund's use as a funding vehicle for 403(b) plans, IRAs or other retirement
plans. The illustration set forth below assumes a monthly investment of $200, an
annual return of 8% compounded monthly, and a 28% tax bracket.

The information is for illustrative purposes only and is not meant to represent
the performance of any of the Principal Mutual Funds. An investment in the
Principal Mutual Funds is not guaranteed; values and returns generally vary with
changes in market conditions.

Tax-deferred vs. taxable savings plan

_______________________________________ - $300,059

---------------------------------------

_______________________________________ --- $192,844

---------------------------------------

---------------------------------------
Years: 5 10 15 20 25 30

- With a tax-deferred savings plan
--- Without a tax-deferred savings plan

TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS

It is the policy of each Fund to distribute substantially all net investment
income and net realized gains. Through such distributions, and by satisfying
certain other requirements, each Fund intends to qualify for the tax treatment
accorded to regulated investment companies under the applicable provisions of
the Internal Revenue Code. This means that in each year in which a Fund
qualifies, it is exempt from federal income tax upon the amount distributed to
investors. The Tax Reform Act of 1986 imposed an excise tax on mutual funds
which fail to distribute net investment income and capital gains by the end of
the calendar year in accordance with the provisions of the Act. Each Fund
intends to comply with the Act's requirements and to avoid this excise tax.

Dividends from net investment income will be eligible for a 70% dividends
received deduction generally available to corporations to the extent of the
amount of qualifying dividends received by the Funds from domestic corporations
for the taxable year. Distributions from the Cash Management Fund and
Income-Oriented Funds are generally not eligible for the corporate dividend
received deduction.

All taxable dividends and capital gains are taxable in the year in which
distributed, whether received in cash or reinvested in additional shares.
Dividends declared with a record date in December and paid in January are deemed
to be distributed to shareholders in December. Each Fund informs its
shareholders of the amount and nature of their taxable income dividends and
capital gain distributions. Dividends from a Fund's net income and distributions
of capital gains, if any, may also be subject to state and local taxation.

The Fund is required in certain cases to withhold and remit to the U.S. Treasury
31% of ordinary income dividends and capital gain dividends, and the proceeds of
redemption of shares, paid to any shareholder (1) who has provided either an
incorrect tax identification number or no number at all, (2) who is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."

A shareholder recognizes gain or loss on the sale or redemption of shares of the
Fund in an amount equal to the difference between the proceeds of the sales or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of the Fund within 30 days before or after the sale or redemption.
In general, any gain or loss arising from (or treated as arising from) the sale
or redemption of shares of the Fund is considered capital gain or loss
(long-term capital gain or loss if the shares were held for longer than one
year). However, any capital loss arising from the sales or redemption of shares
held for six months or less is disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) is treated as a long-term capital loss to the extent of the amount
of capital gain dividends received on such shares. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

If a shareholder (i) incurs a sales load in acquiring shares of the Fund, (ii)
disposes of such shares less than 91 days after they are acquired and (iii)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.

Shareholders should consult their own tax advisors as to the federal, state and
local tax consequences of ownership of shares of the Funds in their particular
circumstances.

Special Tax Considerations

Tax-Exempt Bond Fund

The Tax-Exempt Bond Fund also intends to qualify to pay "exempt-interest
dividends" to its shareholders. An exempt-interest dividend is that part of
dividend distributions made by the Fund which consist of interest received
by that Fund on tax-exempt Municipal Obligations. Shareholders incur no
federal income taxes on exempt-interest dividends. However, these
exempt-interest dividends may be taxable under state or local law. Fund
shareholders that are corporations must include exempt-interest dividends
in determining whether they are subject to the corporate alternative
minimum tax. Exempt-interest dividends that derive from certain private
activity bonds must be included by individuals as a preference item in
determining whether they are subject to the alternative minimum tax. The
Fund may also pay ordinary income dividends and distribute capital gains
from time to time. Ordinary income dividends and distributions of capital
gains, if any, are taxable for federal purposes.

If a shareholder receives an exempt-interest dividend with respect to
shares of the Funds held for six months or less, then any loss on the sale
or exchange of such shares, to the extent of the amount of such dividend,
is disallowed. If a shareholder receives a capital gain dividend with
respect to shares held for six months or less, then any loss on the sale or
exchange of such shares is treated as a long term capital loss to the
extent the loss exceeds any exempt-interest dividend received with respect
to such shares, and is disallowed to the extent of such exempt-interest
dividend.

Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of this Fund is not deductible. Furthermore, entities or
persons who are "substantial users" (or related persons) under Section
147(a) of the Code of facilities financed by private activity bonds should
consult their tax advisors before purchasing shares of the Fund.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. If legislation is enacted that
eliminates or significantly reduces the availability of Municipal
Obligations, it could adversely affect the ability of the Fund to continue
to pursue its investment objectives and policies. In such event, the Fund
would reevaluate its investment objectives and policies.

International Emerging Markets, International and International SmallCap
Funds

In each fiscal year when, at the close of such year, more than 50% of the
value of the total assets of the International Emerging Market,
International or the International SmallCap Funds are invested in
securities of foreign corporations, the Fund may elect pursuant to Section
853 of the Code to permit shareholders to take a credit (or a deduction)
for foreign income taxes paid by the Fund. In that case, shareholders
should include in their report of gross income in their federal income tax
returns both cash dividends received from the Fund and the amount which the
Fund advises is their pro rata portion of foreign income taxes paid with
respect to, or withheld from, dividends and interest paid to the Fund from
its foreign investments. Shareholders are then entitled to subtract from
their federal income taxes the amount of such taxes withheld, or treat such
foreign taxes as a deduction from gross income, if that should be more
advantageous. As in the case of individuals receiving income directly from
foreign sources, the above-described tax credit or tax deduction is subject
to certain limitations. Shareholders or prospective shareholders should
consult their tax advisors on how these provisions apply to them.

Futures Contracts and Options

As previously discussed, some of the Principal Mutual Funds invest in
futures contracts or options thereon, index options or options traded on
qualified exchanges. For federal income tax purposes, capital gains and
losses on futures contracts or options thereon, index options or options
traded on qualified exchanges are generally treated as 60% long-term and
40% short-term. In addition, the Funds must recognize any unrealized gains
and losses on such positions held at the end of the fiscal year. A Fund may
elect out of such tax treatment, however, for a futures or options position
that is part of an "identified mixed straddle" such as a put option
purchased with respect to a portfolio security. Gains and losses on futures
and options included in an identified mixed straddle are considered 100%
short-term and unrealized gain or loss on such positions are not realized
at year end. The straddle provisions of the Code may require the deferral
of realized losses to the extent that a Fund has unrealized gains in
certain offsetting positions at the end of the fiscal year. The Code may
also require recharacterization of all or a part of losses on certain
offsetting positions from short-term to long-term, as well as adjustment of
the holding periods of straddle positions.

GENERAL INFORMATION AND HISTORY

The Funds were incorporated in Maryland on the following dates:

Balanced Fund November 26, 1986
Blue Chip Fund December 10, 1990
Bond Fund December 2, 1986
Capital Value Fund May 26, 1989
Cash Management Fund June 10, 1982
Government Securities Income Fund September 5, 1984
Growth Fund May 26, 1989
High Yield Fund November 26, 1986
International Emerging Markets Fund May 27, 1997
International Fund May 12, 1981
International SmallCap Fund May 27, 1997
LargeCap Stock Index Fund November 24, 1999
Limited Term Bond Fund August 9, 1995
MidCap Fund February 20, 1987
Partners Aggressive Growth Fund August 10, 1999
Partners LargeCap Growth Fund November 24, 1999
Partners MidCap Growth Fund November 24, 1999
Real Estate Fund May 27, 1997
SmallCap Fund August 13, 1997
Tax-Exempt Bond Fund June 7, 1985
Utilities Fund September 3, 1992

Effective January 1, 1998, the following changes were made to the names of the
Funds:

<TABLE>
<CAPTION>
Old Fund Name New Fund Name

<S> <C> <C>
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Government Securities Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
Princor World Fund, Inc. Principal International Fund, Inc.
</TABLE>

FINANCIAL STATEMENTS

The financial statements for each of the Principal Mutual Funds (except the
LargeCap Stock Index, Partners Aggressive Growth, Partners LargeCap Growth and
Partners MidCap Growth Funds) for the year ended October 31, 1999 are a part of
this Statement of Additional Information. The financial statements appear in the
Annual Reports to Shareholders. Reports on those statements from Ernst & Young
LLP, independent auditors, are included in the Annual Report and are also a part
of this Statement of Additional Information. The Annual Reports are furnished,
without charge, to investors who request copies of the Statement of Additional
Information.

The statements of net assets of the Principal Partners Aggressive Growth Fund as
of October 28, 1999, the LargeCap Stock Index, Partners LargeCap Growth and
Partners MidCap Growth Funds as of February 28, 2000 and the reports of Ernst &
Young LLP thereon are provided herein following the Appendix.

APPENDIX A

Description of Bond Ratings:

Moody's Investors Service, Inc. Bond Ratings

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.

A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

CONDITIONAL RATING: Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG 1,
MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong protection
from established cash flows"; MIG 2 denotes "high quality" with "ample margins
of protection"; MIG 3 notes are of "favorable quality...but lacking the
undeniable strength of the preceding grades"; MIG 4 notes are of "adequate
quality, carrying specific risk for having protection...and not distinctly or
predominantly speculative."

Description of Moody's Commercial Paper Ratings

Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

Description of Standard & Poor's Corporation's Debt Ratings:

A Standard & Poor's debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.

The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources Standard & Poor's considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.

AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.

A: Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.

BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.

BB, B, CCC, CC: Debt rated "BB", "B", "CCC" and "CC" is regarded, on
balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance
with the terms of the obligation. "BB" indicates the lowest
degree of speculation and "CC" the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.

C: The rating "C" is reserved for income bonds on which no interest is
being paid.

D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.

Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.

NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.

Standard & Poor's, Commercial Paper Ratings

A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:

A: Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Issues that possess
overwhelming safety characteristics will be given a "+" designation.

A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1".

A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the highest designations.

B: Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.

C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

D: This rating indicates that the issue is either in default or is
expected to be in default upon maturity.

The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.

Standard & Poor's rates notes with a maturity of less than three years as
follows:

SP-1: A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.

SP-2: A satisfactory capacity to pay principal and interest.

SP-3: A speculative capacity to pay principal and interest.

<PAGE>

PART C. OTHER INFORMATION

Item 23. Exhibits.
- -------- ---------

(a) (1) Articles Supplementary (filed 2/26/96)
(2) Articles of Amendment and Restatement (filed 12/30/98)
(3) Articles Supplementary*

(b) By-laws*

(d) (1) Management Agreement (filed 12/30/98)
(2) Sub-Advisory Agreement (filed 2/26/96)

(e) (1) Distribution Agreement (filed 2/26/1996)
(2) Selling Agreement*

(f) N/A

(g) Custodian Agreement (filed 2/26/96)

(h) (1) Transfer Agency & Shareholder Services Agreement*
(2) Investment Service Agreement (filed 2/26/96)

(i) Legal Opinion (filed 2/26/96)

(j) Consents of Auditors**

(k) Financial Statements included in this Registration
Statement:

(1) Part A:
Financial Highlights for each of the five
years in the period ended October 31, 1999.**
(2) Part B:
None

(l) Initial Capital Agreement (filed 2/26/96)

(m) Rule 12b-1 Plan

(1) A Share Plan (filed 12/14/95)
(2) B Share Plan (filed 12/14/95)
(3) C Share Plan*
(4) R Share Plan (filed 12/14/95)

(n) Financial Data Schedule

(1) Class A Shares*
(2) Class B Shares*
(3) Class C Shares*
(4) Class R Shares*

(o) Rule 18f-3 Plan*

* Filed herein.
** To be filed by amendment.

Item 24. Persons Controlled by or Under Common Control with Registrant

Principal Financial Services, Inc. (an Iowa corporation) an
intermediate holding company organized pursuant to Section 512A.14 of
the Iowa Code.

Subsidiaries wholly-owned by Principal Financial Services, Inc.

a. Principal Life Insurance Company (an Iowa corporation) a life
group, pension and individual insurance company.

b. Princor Financial Services Corporation (an Iowa Corporation) a
registered broker-dealer.

c. PFG Do Brasil LTDA (Brazil) a Brazilian holding company.

d. Principal Financial Services (Australia), Inc. (an Iowa holding
company) formed to facilitate the acquisition of the Australian
business of BT Australia.

e. Principal Financial Services (NZ), Inc. (an Iowa holding company)
formed to facilitate the acquisition of the New Zealand business
of BT Australia.

f. BT Funds Management (Singapore) Limited (a Singapore asset
management company).

g. Principal Capital Management (Europe) Limited a fund management
company.

h. Principal Capital Management (Ireland) Limited a fund management
company.

Subsidiary wholly-owned by Princor Financial Services Corporation:

a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.

Subsidiary wholly-owned by PFG Do Brasil LTDA

a. Brasilprev Previdencia Privada S.A.(Brazil) a pension
administration company.

Subsidiary wholly-owned by Principal Financial Services (Australia),
Inc.:

a. Principal Financial Group (Australia) Holdings Pty Ltd. an
Australian holding company organized in connection with the
contemplated acquisition of BT Australia Funds Management.

Subsidiary wholly-owned by Principal Financial Group (Australia)
Holdings Pty Ltd:

a. Principal Financial Group (Australia) Pty Ltd. an Australia
holding company organized on connection the contemplated
acquisition of BT Australia Funds Management.

Subsidiary wholly-owned by Principal Financial Group (Australia) Pty
Ltd:

a. BT International (Australia) Limited (an Australian holding
company).

Subsidiary wholly-owned by BT International (Australia) Limited:

a. Bankers Trust Australia Limited (an Australian holding company).

Subsidiary wholly-owned by Bankers Trust Australia Limited:

a. BT Australia Limited (an Australian holding company).

Subsidiaries wholly-owned by BT Australia Limited:

a. Bankers Trust Life Limited (an Australian financial services
company).

b. BT Funds Management Limited (an Australian financial services
company).

c. BT Funds Management (International) Limited (an Australian
financial services company).

d. BT Tactical Asset Management Limited (an Australian financial
services company).

e. BT Securities Limited (an Australian financial services
company).

f. BT (Queensland) Pty Limited (an Australian financial services
company).

g. BT Portfolio Services Limited (an Australian financial services
company).

h. BT Australia Corporate Services Pty Limited (an Australian
services company).

i. Oniston Pty Ltd (an Australian financial services company).

Subsidiaries wholly-owned by BT Portfolio Services Limited:

a. BT Custodial Services Pty Ltd (an Australian financial services
company).

b. BT Custodians Limited (an Australian financial services company).

c. National Registry Services Pty Ltd. (an Australian financial
services company).

d. National Registry Services (WA) Pty Limited (an Australian
financial services company).

e. BT Finance & Investments Pty Ltd (an Australian financial
services company).

Subsidiaries and wholly-owned by BT Australia Corporate Services Pty
Limited:

a. BT Finance Pty Ltd (an Australian financial services company).

b. Chifley Services Pty Limited (an Australian financial services
company).

c. BT Nominees Pty Limited (an Australian financial services
company).

Subsidiary organized and wholly-owned by Principal Financial Services
(NZ), Inc.

a. Principal Financial Group (NZ) Limited (a New Zealand holding
company).

Subsidiary organized and wholly-owned by Principal Financial Group
(NZ) Limited:

a. BT Portfolio Service (NZ) Limited (a New Zealand financial
services company).

b. BT New Zealand Nominees Limited (a New Zealand financial services
company).

c. BT Funds Management (NZ) Limited (a New Zealand financial
services company).

Principal Life Insurance Company sponsored the organization of the
following mutual funds, some of which it controls by virtue of owning
voting securities:

Principal Balanced Fund, Inc.(a Maryland Corporation) 0.14% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.

Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.78% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.

Principal Bond Fund, Inc.(a Maryland Corporation) 0.63% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on December 6, 1999.

Principal Capital Value Fund, Inc. (a Maryland Corporation)
23.63% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates)on December 6,
1999.

Principal Cash Management Fund, Inc. (a Maryland Corporation)
5.86% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.

Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.03% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999.

Principal Growth Fund, Inc. (a Maryland Corporation) 0.37% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.

Principal High Yield Fund, Inc. (a Maryland Corporation) 7.60%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.

Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 37.34% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999.

Principal International Fund, Inc. (a Maryland Corporation)
24.44% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.

Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 34.71% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999.

Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
20.71% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.

Principal MidCap Fund, Inc. (a Maryland Corporation) 0.73% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999

Principal Partners Aggressive Growth Fund, Inc.(a Maryland
Corporation) 42.96% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999

Principal Real Estate Fund, Inc. (a Maryland Corporation) 63.30%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999

Principal SmallCap Fund, Inc.(a Maryland Corporation) 15.15% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.

Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.30% of shares outstanding of the International Emerging
Markets Portfolio, 41.88% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on December 6, 1999

Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.

Principal Utilities Fund, Inc. (a Maryland Corporation) 0.26% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.

Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on
December 6, 1999: Aggressive Growth, Asset Allocation, Balanced,
Blue Chip, Bond, Capital Value, Government Securities, Growth,
High Yield, International, International SmallCap, LargeCap
Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money
Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
Stock Index 500, and Utilities.

Subsidiaries organized and wholly-owned by Principal Life Insurance
Company:

a. Principal Holding Company (an Iowa Corporation) a holding company
wholly-owned by Principal Life Insurance Company.

b. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
life insuranced corporation which offers group and individual
products.

c. Principal Development Investors, LLC (a Delaware Corporation) a
limited liability company engaged in acquiring and improving real
property through development and redevelopment.

d. Principal Capital Management, LLC (a Delaware Corporation) a
limited liability company that provides investment management
services.

e. Principal Net Lease Investors, LLC (a Delaware Corporation) a
limited liability company which operates as a buyer and seller of
net leased investments.

Subsidiaries wholly-owned by Principal Capital Management, LLC:

a. Principal Structured Investments, LLC (a Delaware Corporation) a
limited liability company that provides product development
administration, marketing and asset management services
associated with stable value products together with other related
institutional financial services including derivatives,
asset-liability management, fixed income investment management
and ancillary money management products.

b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential buildings.

c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a
limited liability company involved in purchasing, managing and
selling commercial real estate assets in the secondary market.

d. Principal Real Estate Investors, LLC (a Delaware Corporation) a
registered investment advisor.

e. Principal Commercial Funding, LLC (a Delaware Corporation) a
correspondent lender and service provider for loans.

f. Principal Real Estate Services, LLC (a Delaware Corporation) a
limited liability company which acts as a property manager and
real estate service provider.

Subsidiaries wholly-owned by Principal Holding Company:

a. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.

b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.

c. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.

d. Principal Development Associates, Inc. (a California Corporation)
a real estate development company.

e. Principal Spectrum Associates, Inc. (a California Corporation) a
real estate development company.

f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.

g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited liability
companies.

h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.

i. Invista Capital Management, LLC (an Iowa Corporation) a
registered investment adviser.

j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.

k. Principal Asset Markets, Inc. (an Iowa Corporation) a residential
mortgage loan broker.

l. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.

m. The Admar Group, Inc. (a Florida Corporation) a national managed
care service organization that develops and manages preferred
provider organizations.

n. The Principal Financial Group, Inc. (a Delaware corporation) a
general business corporation established in connection with the
new corporate identity. It is not currently active.

o. Principal Marketing Services, Inc. (a Delaware Corporation) a
corporation formed to serve as an interface between marketers and
manufacturers of financial services products.

p. Principal Health Care, Inc. (an Iowa Corporation) a developer and
administrator of managed care systems.

q. Dental-Net, Inc. (an Arizona Corporation) holding company of
Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.

r. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.

s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.

t. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration of
group insurance plans and serves as a record keeper and third
party administrator for various clients' defined contribution
plans.

u. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange Commission.
It is not currently active.

v. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.

Subsidiary wholly-owned by Petula Associates, Ltd.

a. Magnus Properties, Inc. (an Iowa Corporation) which owns real
estate.

Subsidiary wholly-owned by Invista Capital Management, LLC:

a. Principal Capital - Invista Trust. (a Delaware Corporation) a
business trust and private investment company offering
non-registered units, initially, to tax-exempt entities.

Subsidiary wholly-owned by Principal Residential Mortgage, Inc.:

a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.

Subsidiaries wholly-owned by The Admar Group, Inc.:

a. Admar Corporation (a California Corporation) a managed care
services organization.

Subsidiaries wholly-owned by Dental-Net, Inc.

a. Employers Dental Services, Inc. (an Arizona corporation) a
prepaid dental plan organization.

Subsidiaries wholly-owned by Professional Pensions, Inc.:

a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves
as a corporate trustee for retirement trusts.

b. PPI Employee Benefits Corporation (a Connecticut corporation) a
registered broker-dealer pursuant to Section 15(b) of the
Securities Exchange Act an a member of the National Association
of Securities Dealers (NASD), limited to the sale of open-end
mutual funds and variable insurance products.

c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection with
multiple-employer group life insurance trusts or arrangements,
and to generally participate in the administration of insurance
trusts.

Subsidiaries wholly-owned by Principal International, Inc.:

a. Principal International Espana, S.A. de Seguros de Vida (a Spain
Corporation) a life insurance company (individual group),
annuities and pension.

b. Zao Principal International (a Russia Corporation) inactive.

c. Principal International Argentina, S.A. (an Argentina services
corporation).

d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) a
corporation which manages pension funds.

e. Principal International Asia Limited (a Hong Kong Corporation) a
corporation operating as a regional headquarters for Asia.

f. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.

g. Principal Trust Company (Asia) Limited (an Asia trust company).

h. Principal International de Chile, S.A. (a Chile Corporation) a
holding company.

i. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and group),
personal accidents.

j. Principal Pensiones, S.A. de C.V. (a Mexico Corporation) a single
premium annuity.

k. Principal Afore, S.A. de C.V. (a Mexico Corporation), a pension
administration company.

l. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.

Subsidiary wholly-owned by Principal International Espana, S.A. de
Seguros de Vida:

a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.

Subsidiary wholly-owned by Principal International (Asia) Limited
(Hong Kong):

a. BT Funds Management (Asia) Limited (a Hong Kong Corporation) an
asset management company.

Subsidiaries wholly-owned by Principal International Argentina, S.A.:

a. Principal Retiro Compania de Seguros de Retiro, S.A. (an
Argentina Corporation) an individual annuity/employee benefit
company.

b. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.

Subsidiary wholly-owned by Principal International de Chile, S.A.:

a. Principal Compania de Seguros de Vida Chile S.A. (a Chile
Corporation) life insurance and annuity company.

Subsidiary wholly-owned by Principal Compania de Seguros de Vida Chile
S.A.:

a. Andueza & Principal Creditos Hipotecarios S.A. (a Chile
Corporation) a residential mortgage company.

Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:

a. Siefore Principal, S.A. de C.V. (a Mexico Corporation) an
investment fund company.

tem 25. Indemnification

Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:

(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and

1. Was committed in bad faith; or

2. Was the result of active and deliberate dishonesty; or

(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or

(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.

If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.

The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.

Item 26. Business or Other Connection of Investment Adviser

A complete list of the officers and directors of the investment adviser,
Principal Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.

John E. Aschenbrenner Principal Senior Vice President
Director Financial Group Principal Life Insurance
Company

Craig R. Barnes Same President & Chief Executive
Vice President Officer, Invista Capital
Management LLC

*Craig L. Bassett Same See Part B
Treasurer

*Michael J. Beer Same See Part B
Executive Vice President

David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Life
Insurance Company

*Ralph C. Eucher Same See Part B
President and Director

*Arthur S. Filean Same See Part B
Vice President

Dennis P. Francis Same Senior Vice President
Director Principal Life
Insurance Company

Paul N. Germain Same Vice President -
Vice President - Mutual Fund Operations
Mutual Fund Operations Princor Financial Services
Corporation

*Ernest H. Gillum Same See Part B
Vice President - Compliance
& Product Development

Thomas J. Graf Same Senior Vice President
Director Principal Life
Insurance Company

*J. Barry Griswell Same See Part B
Chairman of the Board
and Director

Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Life
Insurance Company

Ellen Z. Lamale Same Vice President & Chief Actuary
Director Principal Life Insurance
Company

Julia M. Lawler Same Second Vice President
Director Principal Life Insurance
Company

Gregg R. Narber Same Senior Vice President and
Director General Counsel
Principal Life
Insurance Company

Richard L. Prey Same Senior Vice President
Director Principal Life Insurance
Company

Layne A. Rasmussen Same Controller
Controller - Princor Financial Services
Mutual Funds Corporation

Elizabeth R. Ring Same Controller- Broker Dealer
Controller Operations
Princor Financial Services
Corporation

*Michael D. Roughton Same See Part B
Counsel

Jean B. Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation

Principal Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Balanced Fund, Inc., Principal Blue
Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc.,
Principal Cash Management Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc., Principal International SmallCap Fund, Inc., Principal LargeCap
Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc., Principal MidCap
Fund, Inc., Principal Partners Aggressive Growth Fund, Inc., Principal Partners
LargeCap Growth Fund, Inc., Principal Partners MidCap Growth Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal
Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc., Principal
Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. - funds sponsored
by Principal Life Insurance Company.

Item 27. Principal Underwriters

(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government
Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield
Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
LargeCap Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc.,
Principal MidCap Fund, Inc., Principal Partners Aggressive Growth Fund, Inc.,
Principal Partners LargeCap Growth Fund, Inc., Principal Partners MidCap Growth
Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc.,
Principal Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc.,
Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for
variable annuity contracts participating in Principal Life Insurance Company
Separate Account B, a registered unit investment trust for retirement plans
adopted by public school systems or certain tax-exempt organizations pursuant to
Section 403(b) of the Internal Revenue Code, Section 457 retirement plans,
Section 401(a) retirement plans, certain non- qualified deferred compensation
plans and Individual Retirement Annuity Plans adopted pursuant to Section 408 of
the Internal Revenue Code, and for variable life insurance contracts issued by
Principal Life Insurance Company Variable Life Separate Account, a registered
unit investment trust.

(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant

John E. Aschenbrenner Director Director
Principal
Financial Group
Des Moines, IA 50392

Robert W. Baehr Marketing Services None
Principal Officer
Financial Group
Des Moines, IA 50392

Craig L. Bassett Treasurer Treasurer
Principal
Financial Group
Des Moines, IA 50392

Michael J. Beer Executive Vice President Financial Officer
Principal
Financial Group
Des Moines, IA 50392

Jerald L. Bogart Insurance License Officer None
Principal
Financial Group
Des Moines, IA 50392

David J. Drury Director None
Principal
Financial Group
Des Moines, IA 50392

Ralph C. Eucher Director and President and
Principal President Director
Financial Group
Des Moines, IA 50392

Arthur S. Filean Vice President Vice President and
Principal Secretary
Financial Group
Des Moines, IA 50392

Dennis P. Francis Director None
Principal
Financial Group
Des Moines, IA 50392

Paul N. Germain Vice President- None
Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392

Ernest H. Gillum Vice President- Assistant Vice
Principal Compliance and Product President
Financial Group Development
Des Moines, IA 50392

Thomas J. Graf Director None
Principal
Financial Group
Des Moines, IA 50392

J. Barry Griswell Director and Director and
Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392

Susan R. Haupts Marketing Officer None
Principal
Financial Group
Des Moines, IA 50392

Joyce N. Hoffman Vice President and None
Principal Corporate Secretary
Financial Group
Des Moines, IA 50392

Kraig L. Kuhlers Marketing Officer None
Principal
Financial Group
Des Moines, IA 50392

Ellen Z. Lamale Director None
Principal
Financial Group
Des Moines, IA 50392

Julia M. Lawler Director None
Principal
Financial Group
Des Moines, IA 50392

John R. Lepley Senior Vice None
Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392

Gregg R. Narber Director None
Principal
Financial Group
Des Moines, IA 50392

Kelly A. Paul Systems & Technology None
Principal Officer
Financial Group
Des Moines, IA 50392

Elise M. Pilkington Assistant Director - None
Principal Retirement Consulting
Financial Group
Des Moines, IA 50392

Richard L. Prey Director None
Principal
Financial Group
Des Moines, IA 50392

Layne A. Rasmussen Controller-Mutual Funds None
Principal
Financial Group
Des Moines, IA 50392

Martin R. Richardson Operations Officer- None
Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392

Elizabeth R. Ring Controller None
Principal
Financial Group
Des Moines, IA 50392

Michael D. Roughton Counsel Counsel
Principal
Financial Group
Des Moines, IA 50392

Jean B. Schustek Product Compliance Officer- None
Principal Registered Products
Financial Group
Des Moines, IA 50392

Kyle R. Selberg Vice President- None
Principal Marketing
Financial Group
Des Moines, IA 50392

Minoo Spellerberg Compliance Officer None
Principal
Financial Group
Des Moines, IA 50392

Roger C. Stroud Assistant Director- None
Principal Marketing
Financial Group
Des Moines, IA 50392

Item 28. Location of Accounts and Records

All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Life
Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.

Item 29. Management Services

Inapplicable.

Item 30. Undertakings

Indemnification

Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.

Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue

Shareholder Communications

Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications

Delivery of Annual Report to Shareholders

The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Des Moines and State of Iowa, on the 29th day of
December, 1999.

Principal Utilities Fund, Inc.

(Registrant)

By /s/ R. C. Eucher
--------------------------------------
R. C. Eucher
President and Director

Attest:

/s/ A. S. Filean
- --------------------------------------
A. S. Filean
Vice President and Secretary

Pursuant to the requirement of the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date

/s/ R. C. Eucher
_____________________________ President and Director
R. C. Eucher (Principal Executive Officer) 12/29/1999

(J. B. Griswell)*
_____________________________ Director and
J. B. Griswell Chairman of the Board 12/29/1999

/s/ M. J. Beer
_____________________________ Financial Officer (Principal
M. J. Beer Financial and Accounting Officer) 12/29/1999

(J. E. Aschenbrenner)*
_____________________________ Director
J. E. Aschenbrenner 12/29/1999

(J. D. Davis)*
_____________________________ Director
J. D. Davis 12/29/1999

(P. A. Ferguson)*
_____________________________ Director
P. A. Ferguson 12/29/1999

(R. W. Gilbert)*
_____________________________ Director
R. W. Gilbert 12/29/1999

(W. C. Kimball)*
_____________________________ Director
W. C. Kimball 12/29/1999

(B. A. Lukavsky)*
_____________________________ Director
B. A. Lukavsky 12/29/1999

By /s/ R. C. Eucher
-------------------------------------
R. C. Eucher
President and Director

*Pursuant to Powers of Attorney
Previously Filed or Included

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open-end management investment companies currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance Company, and any and all amendments thereto and reports thereunder
with all exhibits and all instruments necessary or appropriate in connection
therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ John E. Aschenbrenner
____________________________
J. E. Aschenbrenner
<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ James D. Davis
____________________________
J. D. Davis

<PAGE>

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints J. B. Griswell, M. D. Roughton,
E. H. Gillum and A. S. Filean and each of them (with full power to each of them
to act alone), the undersigned's true and lawful attorney-in-fact and agent,
with full power of substitution to each, for and on behalf and in the name of
the undersigned, to execute and file any documents relating to registration
under the Securities Act of 1933 and the Investment Company Act of 1940 with
respect to open-end management investment companies currently organized or to be
organized in the future which are sponsored by Principal Life Insurance Company,
and any and all amendments thereto and reports thereunder with all exhibits and
all instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ Ralph C. Eucher
____________________________
R. C. Eucher

<PAGE>
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ P. A. Ferguson
____________________________
P. A. Ferguson

<PAGE>
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ Richard W. Gilbert
____________________________
R. W. Gilbert

<PAGE>
POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, M. D. Roughton, E.
H. Gillum and A. S. Filean and each of them (with full power to each of them to
act alone), the undersigned's true and lawful attorney-in-fact and agent, with
full power of substitution to each, for and on behalf and in the name of the
undersigned, to execute and file any documents relating to registration under
the Securities Act of 1933 and the Investment Company Act of 1940 with respect
to open-end management investment companies currently organized or to be
organized in the future which are sponsored by Principal Life Insurance Company,
and any and all amendments thereto and reports thereunder with all exhibits and
all instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ J. Barry Griswell
____________________________
J. B. Griswell

<PAGE>
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ W. C. Kimball
____________________________
W. C. Kimball
<PAGE>

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of
December, 1999.

/s/ B. A. Lukavsky
____________________________
B. A. Lukavsky

ARTICLES SUPPLEMENTARY
OF
PRINCIPAL UTILITIES FUND, INC.

Principal Utilities Fund, Inc., and Maryland Corporation having its principal
office on this state in Baltimore City, Maryland (hereinafter called the
Corporation), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:

FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.

SECOND: The Board of Directors of the Corporation have classified
authorized but unissued stock of the Corporation under authority
contained in the charter of the Corporation.

THIRD: A description of the stock as set by the Board of Directors and
as provided in Article V of the corporate charter as
supplemented by these Articles Supplementary is as follows:

ARTICLE V
Capital Stock

Section 1. Authorized Shares: The total number of shares of stock which the
Corporation shall have authority to issue is one hundred million (100,000,000)
shares, of the par value of one cent ($.01) each and of the aggregate par value
of one million dollars ($1,000,000). The shares may be issued by the Board of
Directors in such separate distinct classes as the Board of Directors shall from
time to time create and establish. The Board of Directors shall have full power
and authority, in its sole discretion, to establish and designate classes, and
to classify or reclassify any unissued shares in separate classes having such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as shall be fixed and determined from time to time by the Board of
Directors. Expenses related to the distribution of, and other identified
expenses that should properly be allocated to, the shares of a particular class
may be charged to and borne solely by such class, and the bearing of expenses
solely by a class may be appropriately reflected (in a manner determined by the
Board of Directors) and cause differences in the net asset value attributable
to, and the dividend, redemption and liquidation rights of, the shares of each
class. Subject to the authority of the Board of Directors to increase and
decrease the number of, and to reclassify the, shares of any class, there are
hereby established two classes of common stock, each comprising the number of
shares and having the designation indicated:

Class Number of Shares
Class A 25,000,000
Class B 25,000,000
Class C 25,000,000
Class R 25,000,000

In addition, the Board of Directors is hereby expressly granted authority to
change the designation of any class, to increase or decrease the number of
shares of any class, provided that the number of shares of any class shall not
be decreased by the Board of Directors below the number of shares thereof then
outstanding, and to reclassify any unissued shares into one or more classes that
may be established and designated from time to time. Notwithstanding the
designations herein of classes, the Corporation may refer, in prospectuses and
other documents furnished to shareholders, filed with the Securities and
Exchange Commission or used for other purposes, to a class of shares as a
"series".

(a) The Corporation may issue shares of stock in fractional
denominations to the same extent as its whole shares, and shares
in fractional denominations shall be shares of stock having
proportionately, to the respective fractions represented thereby,
all the rights of whole shares, including without limitation, the
right to vote, the right to receive dividends and distributions
and the right to participate upon liquidation of the Corporation,
but excluding the right to receive a stock certificate
representing fractional shares.

(b) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and the fractional vote
for each fractional share of stock, irrespective of the class,
then standing in the holder's name on the books of the
Corporation. On any matter submitted to a vote of stockholders,
all shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by class
except that (1) when otherwise expressly required by the Maryland
General Corporation Law or the Investment Company Act of 1940, as
amended, shares shall be voted by individual class, and (2) if
the Board of Directors, in its discretion, determines that a
matter affects the interests of only one or more particular
classes then only the holders of shares of such affected class or
classes shall be entitled to vote thereon.

(c) Unless otherwise provided in the resolution of the Board of
Directors providing for the establishment and designation of any
new class or classes, each class of stock of the Corporation
shall have the following powers, preferences and rights, and
qualifications, restrictions and limitations thereof:

(1) Assets belonging to a class. All consideration received by
the Corporation for the issue or sale of shares of a
particular class, together with all assets in which such
consideration is invested or reinvested, all income,
earnings, profits and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may
be, shall irrevocably belong to that class for all purposes,
subject only to the rights of creditors, and shall be so
recorded upon the books and accounts of the corporation.
Such consideration, assets, income, earnings, profits and
proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds
or payments derived from any reinvestment of such proceeds,
in whatever form the same may be, together with any general
items allocated to that class as provided in the following
sentence, are hereinafter referred to as "assets belonging
to" that class. In the event that there are any assets,
income, earning, profits, proceeds thereof, funds or
payments which are not readily identifiable as belonging to
any particular class (collectively "general items"), such
general items shall be allocated by or under the supervision
of the Board of Directors to and among any one or more of
the classes established and designated from time to time in
such manner and on such basis as the Board of Directors, in
its sole discretion, deems fair and equitable, and any
general items so allocated to a particular class shall
belong to that class. Each such allocation by the Board of
Directors shall be conclusive and binding for all purposes.
Notwithstanding the foregoing, the assets belonging to the
Class A Shares and to the Class B Shares need not be
segregated or recorded separately on the books and records
of the Corporation, and reference herein to each of those
classes shall refer to the proportional interest of that
class in the aggregate assets belonging to both classes.

(2) Liabilities belonging to a class. The assets belonging to
each particular class shall be charged with the liabilities
of the Corporation in respect of that class and all
expenses, costs, charges, and reserves attributable to that
class, and any general liabilities, expenses, costs, charges
or reserves of the Corporation which are not readily
identifiable as belonging to any particular class shall be
allocated and charged by or under the supervision of the
Board of Directors to and among any one or more of the
classes established and designated from time to time in such
manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable. The liabilities,
expenses, costs, charges and reserves allocated and so
charged to a class are herein referred to a "liabilities
belonging to" that class. Each allocation of liabilities,
expenses, costs, charges and reserves by the Board of
Directors shall be conclusive and binding for all purposes.

(3) Dividends. The Board of Directors may from time to time
declare and pay dividends or distributions, in stock,
property or cash, on any or all classes of stock, the amount
of such dividends and property distributions and the payment
of them being wholly in the discretion of the Board of
Directors. Dividends may be declared daily or otherwise
pursuant to a standing resolution or resolutions adopted
only once or with such frequency as the Board of Directors
may determine, after providing for actual and accrued
liabilities belonging to that class. All dividends or
distributions on shares of a particular class shall be paid
only out of surplus or other lawfully available assets
determined by the Board of Directors as belonging to such
class. The Board of Directors shall have the power, in its
sole discretion, to distribute in any fiscal year as
dividends, including dividends designated in whole or in
part as capital gains distribution, amounts sufficient, in
the opinion of the Board of Directors, to enable the
Corporation, or where applicable each class of shares, to
qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended, or any successor or
comparable statute thereto, and regulations, promulgated
thereunder, and to avoid liability for the Corporation, or
each class of shares, for federal income and excise taxes in
respect of that or any other year.

(4) Liquidation. In the event of the liquidation of the
Corporation or of the assets attributable to a particular
class, the shareholders of each class that has been
established and designated and is being liquidated shall be
entitled to receive, as a class, when and as declared by the
Board of Directors, the excess of the assets belonging to
that class over the liabilities belonging to that class. The
holders of shares of any class shall not be entitled thereby
to any distribution upon liquidation of any other class. The
assets so distributable to the shareholder of any particular
class shall be distributed among such shareholders according
to their respective rights taking into account the proper
allocation of expenses being borne by that class. The
liquidation of assets attributable to any particular class
in which there are shares then outstanding may be authorized
by vote of a majority of the Board of Directors then in
office, subject to the approval of a majority of the
outstanding voting securities of that class, as defined in
the Investment Company Act of 1940, as amended. In the event
that there are any general assets not belonging to any
particular class of stock and available for distribution,
such distribution shall be made to the holder of stock of
various classes in such proportion as the Board of Directors
shall be conclusive and binding for all purposes.

(5) Redemption. All shares of stock of the Corporation shall
have the redemption rights provided for in Article V,
Section 5.

(d) The Corporation's shares of stock are issued and sole, and all
persons who shall acquire stock of the Corporation shall acquire
the same, subject to the condition and understanding that the
provisions of the Corporation's Articles of Incorporation, as
from time to time amended, shall be binding upon them.

Section 2. Quorum requirements and voting rights: Except as otherwise
expressly provided by the Maryland General Corporation Law, the presence in
person or by proxy of the holders of one-third of the shares of capital stock of
quorum at any meeting of the stockholders, except that where the holders of any
class are required or permitted to vote as a class, one-third of the aggregate
number of shares of that class outstanding and entitled to vote shall constitute
a quorum.

Notwithstanding any provision of Maryland General Corporation Law requiring
a greater proportion than a majority of the votes of all classes or of any
classes of the Corporation's stock entitled to be cast in order to take or
authorize any action, any such action may be taken or authorized upon the
concurrence of a majority of the aggregate number of votes entitled to be cast
thereon subject to the applicable laws and regulations as from time to time in
effect or rules or orders of the Securities and Exchange Commission or any
successor thereto. All shares of stock of this Corporation shall have the voting
rights provided for in Article V, Section 1, paragraph (b).

Section 3. No preemptive rights: No holder of shares of capital stock of
the Corporation shall, as such holder, have any right to purchase or subscribe
for any shares of capital stock of the Corporation which the Corporation may
issue or sell (whether consisting of shares of capital stock authorized by these
Articles of Incorporation, or shares of capital stock of the Corporation
acquired by it after the issue thereof, or other shares) other than any right
which the Board of Directors of the Corporation, in its discretion, may
determine.

Section 4. Determination of net asset value: The net asset value of each
shares of the Corporation, or of each class, shall be the quotient obtained by
dividing the value of the net assets of the Corporation, or if applicable of the
class (being the value of the assets of the Corporation or of the particular
class less its actual and accrued liabilities exclusive of capital stock and
surplus), by the total number of outstanding shares of the Corporation or the
class, as applicable. Such determination may be made on a class-by-class basis
and shall include any expenses allocated to a specific class thereof. The Board
of Directors may adopt procedures for determination of net asset value
consistent with the requirements of applicable statutes and regulations and, so
far as accounting matters are concerned, with generally accepted accounting
principles. The procedures may include, without limitation, procedures for
valuation of the Corporation's portfolio securities and other assets, for
accrual of expenses or creation of reserves and for the determination of the
number of shares issued and outstanding at any given time.

Section 5. Redemption and repurchase of shares of capital stock: Any
shareholder may redeem shares of the Corporation for the net asset value of each
class or series thereof by presentation of an appropriate request, together with
the certificates, if any, for such shares, duly endorsed, at the office or
agency designated by the Corporation. Redemptions as aforesaid, or purchases by
the Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.

Section 6. Purchase of shares: The Corporation shall be entitled to
purchase shares of any class of its capital stock, to the extent that the
Corporation may lawfully effect such purchase under Maryland General Corporation
Law, upon such terms and conditions and for such consideration as the Board of
Directors shall deem advisable, by agreement with the stockholder at a price not
exceeding the net asset value per share computed in accordance with Section 4 of
this Article.

Section 7. Redemption of minimum amounts:

(a) If after giving effect to a request for redemption by a
stockholder the aggregate net asset value of his remaining shares
of any class will be less than the minimum amount then in effect,
the Corporation shall be entitled to require the redemption of the
remaining shares of such class owned by such stockholder, upon
notice given in accordance with paragraph (c) of this section, to
the extent that the Corporation may lawfully effect such
redemptions under Maryland General Corporation Law.

(b) The term "Minimum Amount" when used herein shall mean Three
Hundred Dollars ($300) unless otherwise fixed by the Board of
Directors from time to time, provided that the minimum amount may
not in any event exceed Five Thousand Dollars ($5,000).

(c) If any redemption under paragraph (a) of this section is upon
notice, the notice shall be in writing personally delivered or
deposited in the mail, at least thirty days prior to such
redemption. If mailed, the notice shall be addressed to the
stockholder at his post office address as shown on the books of
the Corporation, and sent by certified or registered mail, postage
prepaid. The price for shares redeemed by the Corporation pursuant
to paragraph (a) of this section shall be paid in cash in an
amount equal to the net asset value of such shares, computed in
accordance with Section 4 of this article.

Section 8. Mode of payment: Payment by the Corporation for shares of any
class of the capital stock of the Corporation surrendered to it for redemption
shall be made by the Corporation within seven business days of such surrender
out of the funds legally available, therefor, provided that the Corporation may
suspend the right of the holders of capital stock of the Corporation to redeem
shares of capital stock and may postpone the right of such holders to receive
payment for any shares when permitted or required to do so by law. Payment of
the redemption or purchase price may be made in cash or, at the option of the
Corporation, wholly or partly in such portfolio securities of the Corporation as
the Corporation may select.

Section 9. Rights of holders of shares purchased or redeemed: The right of
any holder of any class of capital stock of the Corporation purchased or
redeemed by the Corporation as provided in this article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate on all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares id determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.

Section 10. Status of shares purchased or redeemed: In the absence of any
specification as to the purchase for which such shares of any class of capital
stock of the Corporation are redeemed or purchased by it, all shares so redeemed
or purchased shall be deemed to re retired in the sense contemplated by the laws
of the State of Maryland and may be reissued. The number of authorized shares of
capital stock of the Corporation shall not be reduced by the number of any
shares redeemed or purchased by it.

Section 11. Additional limitations and powers: The following provisions are
inserted for the purpose of defining limiting and regulating the powers of the
Corporation and of the Board of Directors and stockholders:

(a) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted
accounting principles by or pursuant to the direction of the
Board of Directors, as to the amount of the assets, debts,
obligations or liabilities of the Corporation, as to the amount
of any reserves or charges set up and the propriety thereof, as
to the time of or purpose for creating such reserves or charges,
as to the use, alteration or cancellation of any reserves or
charges (whether or not any debt, obligation or liability for
which such reserves or charges shall have been created shall have
been paid or discharged or shall be then or thereafter required
to be paid or discharged), as to the establishment or designation
of procedures or methods to be employed for valuing any
investment or other assets as to the allocation of any asset of
the Corporation to a particular class or classes of the
Corporation's stock, as to the funds available for the
declaration of dividends and as to the declaration of dividends,
as to the charging of any liability of the Corporation to a
particular class or classes of the Corporation's stock, as to the
number of shares of any class or classes of the Corporation's
outstanding stock, as to the estimated expense to the Corporation
in connection with purchases or redemptions of its shares, as to
the ability to liquidate investments in orderly fashion, or as to
any other matters relating to the issue, sale, purchase or
redemption or other acquisition or disposition of investments or
shares of the Corporation, or in the determination of the net
asset value per share of shares of any class of the Corporation's
stock shall be conclusive and binding for all purposes.

(b) Except to the extend prohibited by the Investment Company Act of
1940, as amended, or rules, regulations or orders thereunder
promulgated by the Securities and Exchange Commission or any
successor thereto or by the bylaws of the Corporation, a
director, officer or employee of the Corporation shall not be
disqualified by his position from dealing or contracting with the
Corporation, nor shall any transaction or contract of the
Corporation be void or voidable by reason of the fact that any
director, officer or employee or any firm of which any director,
officer or employee is a member, of any corporation of which any
director, officer or employee is a stockholder, officer or
director, is in any way interested in such transaction or
contract; provided that in case a director, or a firm or
corporation of which a director is a member, stockholder, officer
or director is so interested, such fact shall be disclosed to or
shall have been known by the Board of Directors or a majority
thereof. Nor shall any director or officer of the Corporation by
liable to the Corporation or to any stockholder or creditor
thereof or to any person for any loss incurred by it or him or
for any profit realized by such director or officer under or by
reason of such contract or transaction; provided that nothing
herein shall protect any director or officer of the Corporation
against any liability to the Corporation or to its security
holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
and provided always that such contract or transaction shall have
been on terms that were not unfair to the Corporation at the time
at which it was entered into. Any director of the Corporation who
is so interested, or who is a member, stockholder, officer or
director of such firm or corporation, may be counted in
determining the existence of a quorum at any meeting of the Board
of Directors of the Corporation which shall authorize any such
transaction or contract, with like force and effect as if he were
not such director, or member, stockholder, officer or director of
such firm or corporation.

(c) Specifically and without limitation of the foregoing paragraph
(b) but subject to the exception therein prescribed, the
Corporation may enter into management or advisory, underwriting,
distribution and administration contracts, custodian contracts
and such other contracts as may be appropriate.

I, Arthur S. Filean, Vice President and Secretary, hereby acknowledge on
behalf of Principal Utilities Fund, Inc., that the foregoing Articles
Supplementary are the corporate act of said Corporation under the penalties of
perjury.

By /s/Arthur S. Filean
Arthur S. Filean, Vice President and Secretary
Principal Utilities Fund, Inc.

ATTEST:

By /s/Ernest H. Gillum
Ernest H. Gillum
Assistant Secretary

BYLAWS

PRINCIPAL UTILITIES FUND, INC.

ARTICLE 1

Name, Fiscal Year

1.01 The name of this corporation shall be Principal Utilities Fund,
Inc., Inc. Except as otherwise from time to time provided by the board of
directors, the fiscal year of the corporation shall begin November 1 and end
October 31.

ARTICLE 2

Stockholders' Meetings

2.01 Place of Meetings. All meetings of the stockholders shall be held
at such place within or without the State of Maryland, as is stated in the
notice of meeting.

2.02 Annual Meetings. The Board of Directors of the Fund shall
determine whether or not an annual meeting of stockholders shall be held. In the
event that an annual meeting of stockholders is held, such meeting shall be held
on the first Tuesday after the first Monday of February in each year or on such
other day during the 31-day period following the first Tuesday after the first
Monday of February as the directors may determine.

2.03 Special Meetings. Special meetings of the stockholders shall be
held whenever called by the chairman of the board, the president or the board of
directors, or when requested in writing by 10% of the Fund's outstanding shares.

2.04 Notice of Stockholders' Meetings. Notice of each stockholders'
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given by mailing such notice
to each stockholder of record at his address as it appears on the records of the
corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.

2.05 Quorum. Except as otherwise expressly required by law, these
bylaws or the Articles of Incorporation, as from time to time amended, at any
meeting of the stockholders the presence in person or by proxy of the holders of
one-third of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote, shall constitute a quorum, but a lesser
interest may adjourn any meeting from time to time and the meeting may be held
as adjourned without further notice.

2.06 Proxies and Voting Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held."

2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.

ARTICLE 3

Board of Directors

3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than three and no more than fifteen members. The number
of Directors to constitute the whole board within the limits above-stated shall
be fixed by the Board of Directors. The Directors may be chosen (i) by
stockholders at any annual meeting of stockholders held for the purpose of
electing directors or at any meeting held in lieu thereof, or at any special
meeting called for such purpose, or (ii) by the Directors at any regular or
special meeting of the Board to fill a vacancy on the Board as provided in these
bylaws and Maryland General Corporation Law. Each director should serve until
the next annual meeting of shareholders and until a successor is duly qualified
and elected, unless sooner displaced.

3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.

3.03 Executive Committee and Other Committees. The board of directors
may elect from its members an executive committee of not less than three which
may exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.

The board of directors may elect from its members such other
committees from time to time as it may desire. The number composing such
committees and the powers conferred upon them shall be determined by the board
of directors at its own discretion.

3.04 Meetings. Regular meetings of the board of directors may be held
in such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.

3.05 Quorum. A majority of the members of the board of directors from
time to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.

A lesser number may adjourn a meeting from time to time and
the meeting may be held without further notice. When a quorum is present at any
meeting a majority of the members present thereat shall decide any question
brought before such meeting except as otherwise expressly required by law, the
Articles of Incorporation or these bylaws.

3.06 Action by Directors Other than at a Meeting. Any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.

3.07 Holding of Meetings by Conference Telephone Call. At any regular
or special meeting, members of the Board of Directors or any committee thereof
may participate by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.

ARTICLE 4

Officers

4.01 Selection. The officers of the corporation shall be a president,
one or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.

4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the corporation. Other officers need not be directors.

4.03 Additional Officers and Agents. The board of directors may appoint
one or more assistant treasurers, one or more assistant secretaries and such
other officers or agents as it may deem advisable, and may prescribe the duties
thereof.

4.04 Chairman of the Board of Directors. The chairman of the board, if
any, shall preside at all meetings of the board of directors at which he is
present. He shall have such other authority and duties as the board of directors
shall from time to time determine.

4.05 The President. The president shall be the chief executive officer
of the corporation; he shall have general and active management of the business,
affairs and property of the corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.

4.06 The Vice Presidents. The vice presidents shall respectively have
such powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.

4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.

4.08 The Treasurer. The treasurer shall, subject to the order of the
board of directors and in accordance with any arrangements for performance of
services as custodian, transfer agent or disbursing agent approved by the board,
have the care and custody of the money, funds, securities, valuable papers and
documents of the corporation, and shall have and exercise under the supervision
of the board of directors all powers and duties commonly incident to his office
and as provided by law. He shall keep or cause to be kept accurate books of
account of the corporation's transactions which shall be subject at all times to
the inspection and control of the board of directors. He shall deposit all funds
of the corporation in such bank or banks, trust company or trust companies or
such firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.

ARTICLE 5

Vacancies

5.01 Removals. The stockholders may at any meeting called for the
purpose, by vote of the holders of a majority of the capital stock issued and
outstanding and entitled to vote, remove from office any director and, unless
the number of directors constituting the whole board is accordingly decreased,
elect a successor. To the extent consistent with the Investment Company Act of
1940, the board of directors may by vote of not less than a majority of the
directors then in office remove from office any director, officer or agent
elected or appointed by them and may for misconduct remove any thereof elected
by the stockholders.

5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.

ARTICLE 6

Certificates of Stock

6.01 Certificates. The board of directors may adopt a policy of not
issuing certificates except in extraordinary situations as may be authorized
from time to time by an officer of the Corporation. If such a policy is adopted,
a stockholder may obtain a certificate or certificates of the capital stock of
the Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.

6.02 Replacement of Certificates. The board of directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost or destroyed.

6.03 Stockholder Open Accounts. The corporation may maintain or cause
to be maintained for each stockholder a stockholder open account in which shall
be recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.

6.04 Transfers. Transfers of stock for which certificates have been
issued will be made only upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, whereupon
the Corporation will issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction on its books. Transfers of
stock evidenced by open account authorized by Section 6.03 will be made upon
delivery to the Corporation or the transfer agent of the Corporation of
instructions for transfer or evidence of assignment or succession, in each case
executed in such manner and with such supporting evidence as the Corporation or
transfer agent may reasonably require.

6.05 Closing Transfer Books. The transfer books of the stock of the
corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.

6.06 Record Dates. The board of directors may fix in advance a date,
not exceeding ninety days preceding the date of any meeting of stockholders, or
the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
shall go into effect, or a date in connection with obtaining any consent or for
any other lawful purpose, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such meeting, and any
adjournment thereof, or entitled to receive payment of any such dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock, or to give such consent, and in
such case such stockholders and only such stockholders as shall be stockholders
of record on the date as fixed shall be entitled to such notice of, and to vote
at, such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.

6.07 Registered Ownership. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner and shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.

ARTICLE 7

Notices

7.01 Manner of Giving. Whenever under the provisions of the statutes or
of the Articles of Incorporation or of these bylaws notice is required to be
given to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.

7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.

ARTICLE 8

General Provisions

8.01 Disbursement of Funds. All checks, drafts, orders or instructions
for the payment of money and all notes of the corporation shall be signed by
such officer or officers or such other person or persons as the board of
directors may from time to time designate.

8.02 Voting of Stock in Other Corporations. Unless otherwise ordered by
the board of directors, any officer or, at the direction of any such officer,
any Manager shall have full power and authority to attend and act and vote at
any meeting of stockholders of any corporation in which this Corporation may
hold stock, at of any such meeting may exercise any and all the rights and
powers incident to the ownership of such stock. Any officer of this corporation
or, at the direction of any such officer, any Manager may execute proxies to
vote shares of stock of other corporations standing in the name of this
Corporation."

8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall he affixed by
the secretary or an assistant secretary.

8.04 Seal. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.

ARTICLE 9

Regulations

9.01 Investment and Related Matters. The Corporation shall not purchase
or hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.

9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.

(a) Limitation of Holdings by this Corporation of Certain
Securities and of Dealings with Officers or Directors. This Corporation shall
not purchase or retain securities of any issuer if those officers and directors
of the Fund or its Manager owning beneficially more than one-half of one per
cent (0.5%) of the shares or securities of such issuer together own beneficially
more than five per cent (5%) of such shares or securities; and each officer and
director of this Corporation shall keep the treasurer of this Corporation
informed of the names of all issuers (securities of which are held in the
portfolio of this Corporation) in which such officer or director owns as much as
one-half of one percent (1/2 of 1%) of the outstanding shares or securities and
(except in the case of a holding by the treasurer) this Corporation shall not be
charged with knowledge of any such security holding in the absence of notice
given if as aforesaid if this Corporation has requested such information not
less often than quarterly. The Corporation will not lend any of its assets to
the Sponsor or Manager or to any officer or director of the Sponsor or Manager
or of this Corporation and shall not permit any officer or director, and any
officer or director of the Sponsor or Manager, to deal for or on behalf of the
Corporation with himself as principal agent, or with any partnership,
association or corporation in which he has a financial interest. Nothing
contained herein shall prevent (1) officers and directors of the Corporation
from buying, holding or selling shares in the Corporation, or from being
partners, officers or directors of or otherwise financially interested in the
Sponsor or the Manager or any company controlling the Sponsor or the Manager;
(2) employment of legal counsel, registrar, transfer agent, dividend disbursing
agent or custodian who is, or has a partner shareholder, officer or director who
is, an officer or director of the Corporation, if only customary fees are
charged for services to the Corporation; (3) sharing statistical and research
expenses and office hire and expenses with any other investment company in which
an officer or director of the Corporation is an officer or director or otherwise
financially interested.

(b) Limitation Concerning Participating by Interested Persons in
Investment Decisions. In any case where an officer or director of the
Corporation or of the Manager, or a member of an advisory committee or portfolio
committee of the Corporation, is also an officer or a director of another
corporation, and the purchase or sale of shares issued by that other corporation
is under consideration, the officer or director or committee member concerned
will abstain from participating in any decision made on behalf of the
Corporation to purchase or sell any securities issued by such other corporation.

(c) Limitation on Dealing in Securities of this Corporation by
certain Officers, Directors, Sponsor or Manager. Neither the Sponsor nor
Manager, nor any officer or director of this Corporation or of the Sponsor or
Manager shall take long or short positions in securities issued by this
Corporation, provided, however, that:

(1) The Sponsor may purchase from this Corporation shares
issued by this Corporation if the orders to purchase from this Corporation are
entered with this Corporation by the Sponsor upon receipt by the Sponsor of
purchase orders for shares of this Corporation and such purchases are not in
excess of purchase orders received by the Sponsor.

(2) The Sponsor may in the capacity of agent for this
Corporation buy securities issued by this Corporation offered for sale by other
persons.

(3) Any officer or director of this Corporation or of the
Sponsor or Manager or any Company controlling the Sponsor or Manager may at any
time, or from time to time, purchase from this Corporation or from the Sponsor
shares issued by this Corporation at a price not lower than the net asset value
of the shares, no such purchase to be in contravention of any applicable state
or federal requirement.

(d) Securities and Cash of this Corporation to be held by
Custodian subject to certain Terms and Conditions.

(1) All securities and cash owned by this Corporation shall as
hereinafter provided, be held by or deposited with a bank or trust company
having (according to its last published report) not less than two million
dollars ($2,000,000) aggregate capital, surplus and undivided profits (which
bank or trust company is hereby designated as "Custodian"), provided such a
Custodian can be found ready and willing to act.

(2) This Corporation shall enter into a written contract with
the Custodian regarding the powers, duties and compensation of the Custodian
with respect to the cash and securities of this Corporation held by the
Custodian. Said contract and all amendments thereto shall be approved by the
board of directors of this Corporation.

(3) This Corporation shall upon the resignation or inability
to serve of its Custodian or upon change of the Custodian:

(aa) in case of such resignation or inability to serve,
use its best efforts to obtain a successor Custodian;

(bb) require that the cash and securities owned by this
Corporation be delivered directly to the successor Custodian; and

(cc) In the event that no successor Custodian can be
found, submit to the stockholders, before permitting delivery of the cash and
securities owned by this Corporation otherwise than to a successor Custodian,
the question whether or not this Corporation shall be liquidated or shall
function without a Custodian.

(e) Amendment of Investment Advisory Contract. Any investment
advisory contract entered into by this Corporation shall not be subject to
amendment except by (1) affirmative vote at a shareholders meeting, of the
holders of a majority of the outstanding stock of this Corporation, or (2) a
majority of such Directors who are not interested persons (as the term is
defined in the Investment Company Act of 1940) of the Parties to such
agreements, cast in person at a board meeting called for the purpose of voting
on such amendment.

(f) Reports relating to Certain Dividends. Dividends paid from net
profits from the sale of securities shall be clearly revealed by this
Corporation to its shareholders and the basis of calculation shall be set forth.

(g) Maximum Sales Commission. The Corporation shall, in any
distribution contract with respect to its shares of common stock entered into by
it, provide that the maximum sales commission to be charged upon any sales of
such shares shall not be more than nine per cent (9%) of the offering price to
the public of such shares. As used herein, "offering price to the public" shall
mean net asset value per share plus the commission charged adjusted to the
nearest cent.

ARTICLE 10

Purchases and Redemption of Shares:
Suspension of Sales

10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.

10.02 Redemption. The Corporation shall redeem such shares as are
offered by any stockholder for redemption upon the presentation of a written
request therefor, duly executed by the record owner, to the office or agency
designated by the corporation. If the shareholder has received stock
certificates, the request must be accompanied by the certificates, duly endorsed
for transfer, in acceptable form; and the Corporation will pay therefor the net
asset value of the shares next effective following the time at which the
request, in acceptable form, is so presented. Payment for said shares shall
ordinarily be made by the Corporation to the stockholder within seven days after
the date on which the shares are presented.

10.03 Suspension of Redemption. The obligations set out in Section
10.02 may be suspended (i) for any period during which the New York Stock
Exchange, Inc. is closed other than customary week-end and holiday closings, or
during which trading on the New York Stock Exchange, Inc. is restricted, as
determined by the rules and regulations of the Securities and Exchange
Commission or any successor thereto; (ii) for any period during which an
emergency, as determined by the rules and regulations of the Securities and
Exchange Commission or any successor thereto, exists as a result of which
disposal by the Corporation of securities owned by it is not reasonably
practicable or as a result of which it is not reasonably practicable for the
Corporation to fairly determine the value of its net assets; or (iii) for such
other periods as the Securities and Exchange Commission or any successor thereto
may by order permit for the protection of security holders of the Corporation.
Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.

10.04 Suspension of Sales. The Corporation reserves the right to
suspend sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.

ARTICLE 11

Fractional Shares

11.01 The board of directors may authorize the issue from time to time
of shares of the capital stock of the corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.

ARTICLE 12

Indemnification

12.01 (a) Every person who is or was a director, officer or employee of
this Corporation or of any other corporation which he served at the request of
this Corporation and in which this Corporation owns or owned shares of capital
stock or of which it is or was a creditor shall have a right to be indemnified
by this Corporation against all liability and reasonable expenses incurred by
him in connection with or resulting from a claim, action, suit or proceeding in
which he may become involved as a party or otherwise by reason of his being or
having been a director, officer or employee of this Corporation or such other
corporation, provided (1) said claim, action, suit or proceeding shall be
prosecuted to a final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him on the merits,
the board of directors shall determine that he acted in good faith and in a
manner he reasonably believed to be in the best interest of the Corporation in
the case of conduct in the director's official capacity with the Corporation and
in all other cases, that the conduct was at least not opposed to the best
interest of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; said
determination to be made by the board of directors acting through a quorum of
disinterested directors, or in its absence on the opinion of counsel.

(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include hut not be limited to reasonable counsel fees
and disbursements, amounts of any judgment, fine or penalty, and reasonable
amounts paid in settlement; (2) "claim, action, suit or proceeding" shall
include every such claim, action, suit or proceeding, whether civil or criminal,
derivative or otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or threat of
such a claim, action, suit or proceeding; (3) the termination of any proceeding
by judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent creates a rebuttable presumption that the director did not meet
the standard of conduct set forth in subsection (a)(2), supra.

(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1) no
indemnification shall be made in respect of claim, issue or matter as to which
the person seeking indemnification shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Maryland or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper; and (2) indemnification shall extend only to reasonable
expenses, including reasonable counsel's fees and disbursements.

(d) The right of indemnification shall extend to any person
otherwise entitled to it under this bylaw whether or not that person continues
to be a director, officer or employee of this Corporation or such other
corporation at the time such liability or expense shall be incurred. The right
of indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the requirements
of this bylaw with respect to some matters in a claim, action suit, or
proceeding, but not with respect to others, he shall be entitled to
indemnification as to the former. Advances against liability and expenses may be
made by the Corporation on terms fixed by the board of directors subject to an
obligation to repay if indemnification proves unwarranted.

(e) This bylaw shall not exclude any other rights of
indemnification or other rights to which any director, officer or employee may
be entitled to by contract, vote of the stockholders or as a matter of law.

If any clause, provision or application of this section shall be
determined to be invalid, the other clauses, provisions or applications of this
section shall not be affected but shall remain in full force and effect. The
provisions of this bylaw shall be applicable to claims, actions, suits or
proceedings made or commenced after the adoption hereof, whether arising from
acts or omissions to act occurring before or after the adoption hereof.

(f) Nothing contained in this bylaw shall be construed to protect
any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.

ARTICLE 13

Amendments

13.01 These bylaws may be amended or added to, altered or repealed at
any annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.

PRINCOR FINANCIAL SERVICES CORPORATION
The Principal Financial Group
Des Moines, Iowa 50392-0200
(515) 247-5711

PRINCIPAL MUTUAL FUNDS
SELECTED DEALER SELLING AGREEMENT

Dealer Selling Agreement between Princor Financial Services Corporation
("Princor", "We" or "Us") and _________________________________________
("Dealer" or "You") dated as of __________________________.

As Distributor and Principal Underwriter for the Principal Funds (hereinafter
collectively referred to as the "Funds" and individually as a "Fund"), each an
open-end investment company of which we are, or may become, Distributor and
whose shares are offered to the public at an offering price which may or may not
include a sales charge, we invite you to become a Selected Dealer to distribute
shares of the Funds.

1. Each Fund offers three classes of shares - one class which bears a
front-end load (the "Class A Shares") and two classes which bear a deferred
load (the "Class B Shares" and "Class C Shares"). (The Class A Shares,
Class B Shares and the Class C Shares are collectively referred to as the
"Shares"). Class A Shares of the Money Market Fund are offered at net asset
value, without any sales charge.

2. Orders for shares received from you and accepted by us will be at the
current public offering price applicable to each order as established by
the then current prospectus of each Fund. The procedure relating to the
handling of orders shall be subject to instructions which we shall forward
to all Selected Dealers. Each Fund reserves the right to withdraw shares
from sale temporarily or permanently. All orders are subject to acceptance
or rejection by us and the Fund, each in its sole discretion.

3. The sales charge applicable to any sale of Class A Shares by you and the
dealer discount applicable to any order from you for the purchase of Class
A Shares accepted by us shall be that percentage of the applicable public
offering price determined as set forth in the Funds' then current
prospectus and/or statement of additional information.

The rates of any sales charge and/or dealer discount for Class A Shares are
subject to change by us, and any orders placed after the effective date of
such change will be subject to the rate(s) in effect at the time of receipt
of the payment by us.

Any such sales charges and discounts to selected dealers are subject to
reductions under a variety of circumstances as may be described in the
Funds' then current prospectus and/or statement of additional information.
To obtain any such reductions, we must be notified when a sale takes place
which would qualify for the reduced charge. There is currently no sales
charge, selling concession or discount on purchases of shares by the
reinvestment of dividends or capital gains distributions, or when there is
a transfer from one Fund to another Fund or from one account to another
account.

4. If you sell Class B Shares and/or Class C Shares, we will pay you a sales
commission equal to the percentage of the aggregate net asset value of such
classes of shares sold as set forth in the Funds' then current prospectus
and/or statement of additional information.

The rates of any sales charge and/or dealer discount for Class B Shares and
Class C Shares are subject to change by us, and any orders placed after the
effective date of such change will be subject to the rate(s) in effect at
the time of receipt of the payment by us.

We shall be entitled to any contingent deferred sales charges ("CDSC") on
any shares sold. If, with respect to any Class B or Class C Shares sold by
you, any CDSC is waived as provided in the Funds' then current prospectus
and/or statement of additional information, then in any such case you shall
remit to us promptly upon notice an amount equal to the commissions or a
portion of the commission paid on such shares.

5. Redemption of shares will be made at the net asset value of such shares in
accordance with the Funds' then current prospectus and statement of
additional information less, in the case of Class B and Class C Shares, any
applicable CDSC payable to us.

6. All of the Funds (the "Plan Funds") have adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "1940 Act"). No such Agreement has been adopted by Principal Cash
Management Fund Class A shares. Each Agreement defines service to be
provided by Selected Dealers for which they will be compensated pursuant to
the Plan.

(a) As a Selected Dealer, you agree to provide distribution assistance and
administrative support services in connection with the distribution of
shares of the Plan Funds to customers who may from time to time
directly or beneficially own shares, including but not limited to
distributing sales literature, answering routine customer inquiries
regarding the Plan Funds, assisting in the establishment and
maintenance of accounts in the Plan Funds and in the processing of
purchases and redemptions of Shares, making the Plan Funds' investment
plans and dividend options available, and providing such other
information and services in connection with the distribution of Plan
Funds Shares as may be reasonably requested from time to time.

(b) For such services, you will be compensated in accordance with the then
current prospectus of the Plan Funds.

(c) The Plan may be terminated at any time without payment of any penalty
by any Fund in accordance with the rules governing such plans
promulgated by the Securities and Exchange Commission.

(d) The provisions of the Plan are incorporated herein and made a part
hereof by reference, and will continue in full force and effect so
long as its continuance is approved at least annually pursuant to Rule
12b-1.

7. Each party to this Agreement represents that it currently is and, while
this Agreement is in effect, will continue to be a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD") and agrees
to abide by all Rules and Regulations of that Association, including the
NASD Rules of Fair Practice. If you are a foreign dealer, not eligible for
membership in the NASD, you still agree to abide by the Rules and
Regulations of the NASD. We both agree to comply with all applicable state
and federal laws, rules and regulations of the Securities and Exchange
Commission and other authorized United States or foreign regulatory
agencies. You further agree that you will not sell, offer for sale, or
solicit shares of the Funds in any state where they have not been qualified
for sale. You will solicit applications and sell shares only in accordance
with the terms and on the basis of the representations contained in the
appropriate prospectus and any supplemental literature furnished by us.

8. You must represent that you are currently a member of SIPC and, while this
Agreement is in effect, will continue to be a member of SIPC. You agree to
notify us immediately if your SIPC membership status changes.

9. IT IS AGREED

(a) That neither of us shall withhold placing customers' orders for shares
so as to profit as a result of such withholding.

(b) We shall not purchase shares from the Funds except for the purpose of
covering purchase orders already received, and you shall not purchase
shares of the Funds except for the purpose of covering purchase orders
already received by you or for your own bona fide investment purposes,
provided, however, any shares purchased for your own bona fide
investment purposes will not be resold except through redemption of
the Funds. Delivery of certificates, if any, for shares purchased
shall be made by a Fund only against receipt of the purchase price. If
payment for the shares purchased and all necessary applications and
documents required by the Funds or us are not received within five
business days or such shorter time as may be required by law, the sale
may be cancelled forthwith without any responsibility or liability on
our part or on the part of the Funds (in which case you will be
responsible for any loss, including loss of profit, suffered by a Fund
resulting from your failure to make payments or provide documents as
aforesaid), or, at our option, we may cause the shares ordered to be
redeemed by the relevant Fund (in which case we may hold you
responsible for any loss).

(c) We shall accept only unconditional orders. Any right granted to you to
sell shares on behalf of the Funds will not apply to shares issued in
connection with the merger or consolidation of any other investment
company with a Fund or its acquisition, purchase or otherwise, of all
or substantially all the assets of any investment company or
substantially all the outstanding shares of any such company. Also,
any such right shall not apply to shares issued, sold, or transferred,
whether Treasury or newly issued shares, that may be offered by a Fund
to its shareholders as stock dividends or splits for not less than
"net asset value."

(d) We reserve the right to reject any order or application for shares or
to withdraw the offering of shares entirely, and to change any sales
charge and dealer concession, provided that no such change shall
affect concessions on orders accepted by us prior to notice of such
change, unless such change results from a reduction in sales charges
because of legal requirements.

(e) You shall not purchase shares of a Fund from a shareholder at a price
per share which is lower than the current net asset value per share
which is next computed after the receipt of the tender of such shares
by the shareholder.

(f) If shares of the Fund are tendered for redemption within seven
business days after confirmation by us of your original purchase order
for such shares, (i) you shall immediately refund to us the full
concession allowed to you on the original sale, and (ii) we shall pay
to the Fund our share of the "sales charge" on the original sale by
us, and shall also pay to the Fund the refund which we received under
(i) above. You shall be notified by us of such redemption within ten
days of the date on which proper request for redemption is delivered
to us or the Fund. Termination or cancellation of this Agreement shall
not relieve you or us from requirements of this subparagraph (f).

(g) This Agreement may not be assigned or transferred in any manner
including by operation of law.

10. We will furnish you, without charge, reasonable quantities of prospectuses
and sales material or supplemental literature relating to the sale of
shares of the Funds.

11. In all sales of shares, you act as principal and are not employed by us as
broker-agent or employee. You are not authorized to act for us nor to make
any representations in our behalf. In purchasing or selling shares
hereunder you are entitled to rely only upon the current prospectus and
supplemental literature approved in writing by us. In the offer and sale of
shares of the Funds, you shall not use any prospectus or supplemental
literature not approved in writing by us. No person is authorized to make
any representations concerning shares of the Funds except those contained
in a current prospectus and supplemental literature approved in writing by
us. You will use your best efforts in the promotion of sales of shares and
will be responsible for the proper instruction and training of all sales
personnel employed by you. In making sales of shares, you and your
personnel will conform to the compliance standards set forth in Appendix A
hereto.

12. You will indemnify, defend, and hold harmless our firm and all of its
affiliates, and their officers, directors, employees, agents, and assignees
against all losses, claims, demands, liabilities, and expenses, including
reasonable legal and other expenses incurred in defending such claims or
liabilities, whether or not resulting in any liability to any of them, or
which they or any of them may incur, including but not limited to alleged
violations of the Securities Act of 1933, as amended and/or to the
Securities Exchange Act of 1934, as amended, arising out of the offer or
sale of any securities pursuant to this Agreement, or arising out of the
breach of any of the terms and conditions of this Agreement, other than any
claim, demand, or liability arising from any untrue statement or alleged
untrue statement of a material fact contained in a prospectus for the
Funds, as filed and in effect with the SEC, or any amendment or supplement
thereto, or in any application prepared or approved in writing by our
counsel and filed with any state regulatory agency in order to register or
qualify under the securities laws thereof (the "blue sky applications"), or
which shall arise out of or be based upon any omission or alleged omission
to state therein a material fact required to be stated in the prospectus or
any of the blue sky applications or which is necessary to make the
statements or a part thereof not misleading, which indemnity provision
shall survive the termination of this Agreement.

13. No obligation not expressly assumed by us in this Agreement shall be
implied.

14. Either party to this Agreement may terminate this Agreement by written
notice to the other party. We may modify this Agreement at any time by
written notice to you. Any notice shall be deemed to have been given on the
date upon which it was either delivered personally or by fax transmission
to the other party or to any office or member thereof, or was mailed
post-paid or delivered to a telegraph office for transmission at his or its
address as shown herein.

15. All communications to us should be sent to the above address. Any notice to
you shall be duly given if mailed or telegraphed to you at the address
specified by you herein.

16. This Agreement shall be construed in accordance with the laws of the State
of Iowa and shall be binding upon both parties hereto when signed by both
of us in the spaces provided below. This Agreement shall not be applicable
to shares of the Funds in any state in which those shares are not qualified
for sale.

17. This Agreement shall be binding upon both parties hereto when executed by
both parties and supersedes any prior agreement or understanding between us
and you with respect to the sale of the shares and any of the Funds.

18. This Agreement is in all respects subject to Section 26 of the Rules of
Fair Practice of the NASD which shall control any provisions to the
contrary in this Agreement.

19. If the foregoing represents your understanding, please so indicate by
signing in the proper space below.

PRINCOR FINANCIAL SERVICES CORPORATION

By:

Title:

We accept the offer set forth above, which constitutes a Selling Agreement with
us.

BY:
Signature

Please type or print name

TITLE:

DEALER:

ADDRESS:

DATE:

APPENDIX A

Compliance Standards

Princor Financial Services Corporation ("Princor"), as distributor for the
Principal Funds which offers their shares on both a front-end load and deferred
load basis, has established compliance standards setting forth the basis upon
which shares of the Principal Funds may be sold. These standards are designed
for each broker/dealer ("dealer") which distributes shares of the Principal
Funds and for such dealer's financial advisers.

As Principal Funds are offered with two different arrangements of sales and
distribution fees, it is important for an investor not only to choose a fund
that best suits his or her investment objectives, but also to choose the sales
financing method which best suits the investor's particular situation. To assist
clients of those firms which distribute shares of the Principal Funds in these
decisions and to ensure proper supervision of Principal Fund purchase
recommendations, Princor requires that such dealers adhere to the following
compliance standards when selling Principal Funds:

1. Any purchase that results in a shareholder having less than $250,000
invested in Principal Fund accounts that are aggregated for rights of
accumulation purposes may be either front-end load (Class A) or subject to
a contingent deferred sales charge (Class B).

The dealer's branch office manager (or other appropriate reviewing officer)
must review for suitability the purchase order ticket for shares subject to
either a front-end or a contingent deferred sales charge, given the
relevant facts and circumstances, including but not limited to:

(a) the specific purchase order dollar amount;

(b) the length of time the investor expects to hold the shares purchased;
and

(c) any other relevant circumstances, such as the availability of
purchases under letters of intent or pursuant to rights of
accumulation.

2. Any mutual fund purchase order that results in a shareholder having
$250,000 or more invested in Principal Fund accounts that are aggregated
for rights of accumulation purposes should be for shares which are subject
to a front-end sales load (Class A shares) because there are few
circumstances under which it is advantageous for an investor to place such
an order for Class B shares. Such an order placed for shares subject to a
contingent deferred sales charge must be approved by the dealer's regional
director (or a person of comparable status) and confirmed in writing by the
investor.

General Guidelines

There are instances where one financing method may be more advantageous to an
investor than the other. For example, investors who qualify for a significant
discount on a front-end sales load may determine that a front-end load purchase
is preferable to payment of the higher SEC Rule 12b-1 distribution fee and the
contingent deferred sales charge imposed upon Class B shares.

On the other hand, an investor whose order would not qualify for a discount may
wish to defer the sales load and have all funds invested in shares initially.

Responsibility of Branch Office Manager
(or other appropriate reviewing officer)

The dealer's branch office manager or other appropriate reviewing officer (the
"Reviewing Officer") must ensure that the registered representative has advised
the client of the available financing methods offered by the Principal Funds,
and the impact of choosing one method over another. In certain instances, it may
be appropriate for the branch office manager to discuss the purchase directly
with the client.

Effectiveness

These compliance guidelines are effective immediately upon execution of a dealer
agreement with Princor with respect to any order for shares of any Principal
Fund for which Princor acts as distributor.

Questions relating to these compliance guidelines should be directed by the
dealer to its national mutual fund sales and marketing group or its Legal
Department or Compliance Director. Princor will advise dealers of any changes in
these guidelines in the future.

TRANSFER AGENCY AGREEMENT AND
SHAREHOLDER SERVICES AGREEMENT

AGREEMENT to be effective January 1, 2000, by and between PRINCIPAL
UTILITIES FUND, INC., a Maryland corporation (hereinafter called the "Fund") and
PRINCIPAL MANAGEMENT CORPORATION, an Iowa corporation (hereinafter called "the
Manager").

W I T N E S S E T H:

WHEREAS, The Fund has furnished the Manager with copies properly certified
or authenticated of each of the following:

(a) Certificate of Incorporation of the Fund;

(b) Bylaws of the Fund as adopted by the Board of Directors;

(c) Resolutions of the Board of Directors of the Fund selecting the Manager
as transfer and shareholder servicing agent and approving the form of
this Agreement.

WHEREAS, the Manager is registered as a transfer agent under Section 17A of
the Securities Exchange Act of 1934, as amended (the "1934 Act");

NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as transfer and
shareholder servicing agent of the Fund, and the Manager agrees to act, perform
or assume the responsibility therefor in the manner and subject to the
conditions hereinafter set forth. The Fund will furnish the Manager from time to
time with copies, properly certified or authenticated, of all amendments of or
supplements to the foregoing, if any.

1. SERVICES FURNISHED BY THE MANAGER

The Manager will act as, and provide all services customarily performed by,
the transfer and paying agent of the Fund including, without limitation, the
following:

(a) preparation and distribution to shareholders of reports, tax
information, notices, proxy statements and proxies;

(b) preparation and distribution of dividend and capital gain payments to
shareholders;

(d) delivery, redemption and repurchase of shares, and remittances to
shareholders; and

(e) communication with shareholders concerning items (a), (b), (c) and (d)
above.

In the carrying out of this function, the Manager may contract with others
for data systems, processing services and other administrative services.
The Manager may at any time or times in its discretion appoint (and may at
any time remove) other parties as its agent to carry out such provisions of
the Agreement as the Manager may from time to time direct; provided,
however, that the appointment of any such agent shall not relieve the
Manager of any of its responsibilities or liabilities hereunder.

The Manager will maintain records in reasonable detail that will support
the amount it charges the Fund for performance of the services set forth in this
Section 1. At the end of each calendar month the Fund will pay the Manager for
its performance of these services.

2. LIMITATION OF LIABILITY OF THE MANAGER

The Manager shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Manager's part in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
Agreement.

3. DURATION AND TERMINATION OF THIS AGREEMENT

This Agreement may, on sixty days written notice, be terminated at any time
without the payment of any penalty, by the Board of Directors of the Fund, by
vote of a majority of the outstanding voting securities of the Fund, or by the
Manager.

4. AMENDMENT OF THIS AGREEMENT

No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.

5. ADDRESS FOR PURPOSE OF NOTICE

Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of the Fund and that of the
Manager for this purpose shall be the Principal Financial Group, Des Moines,
Iowa 50392.

6. MISCELLANEOUS

The captions in this Agreement are included for convenience of reference
only, and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.

Principal Utilities Fund, Inc.

By /s/Arthur S. Filean
Arthur S. Filean, Vice President

Principal Management Corporation

By /s/Ralph C. Eucher
Ralph C. Eucher, President

PRINCIPAL UTILITIES FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS C SHARES

PLAN AND AGREEMENT made as of the 9th of March, 1999, by and between
PRINCIPAL UTILITIES FUNDS, INC., a Maryland corporation (the "Fund"), and
PRINCOR FINANCIAL SERVICES CORPORATION, an Iowa corporation (the "Underwriter").

WHEREAS, Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides that a registered open-end management investment company may
participate in financing the distribution of securities of which it is the
issuer; and

WHEREAS, any payments made by the Fund in accordance with Rule 12b-1 must
be made pursuant to a written plan describing all material aspects of the
proposed financing of distribution; and

WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers (the "Dealers"), including the Underwriter, sell shares of the
Fund and provide services to existing shareholders; and

WHEREAS, the Board of Directors of the Fund has determined that the Fund
should make direct payments to the Underwriter for transmission to Dealers
(including the Underwriter) in connection with selling Class C shares of the
Fund and the rendering of services to Class C shareholders and that such payment
should be separate from the investment advisory and management fee paid to
Principal Management Corporation; and

WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable likelihood that the adoption of the Plan will benefit the Fund and
its Class C shareholders;

NOW, THEREFORE, the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class C
shares.

Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of its assets attributable to its Class C shares
for the purpose of paying the Underwriter for its activities in connection with
sales of the Class C shares and to compensate the Underwriter and other selling
Dealers for (i) providing shareholder services to existing Class C shareholders,
including without limitation, furnishing information as to the status of
shareholder accounts, requests, responding to telephone and written inquiries,
and assisting shareholders with tax information and (ii) rendering assistance in
the distribution and promotion of the sale of Class C shares to the public.

(a) Service Fee. The Fund will pay a service fee (the "Service Fee") as
defined in Section 26 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (or any successor provision
thereto) as in effect from time to time (the "NASD Rule") at an annual
rate not to exceed 0.25% of the fund's average daily net assets
attributable to the Class C shares. The Service Fee shall be accrued
daily and paid monthly or at such other intervals as the directors
shall determine. The Underwriter may pay all or any portion of the
Service Fee to securities dealers or other organizations (including,
but not limited to, any affiliate of the Underwriters) as service fees
pursuant to agreements with such organizations for providing personal
services to investors in Class C shares of the Fund and/or the
maintenance of shareholder accounts, and may retain all or any portion
of the Service Fee as compensation for providing personal services to
investors in Class C shares of the Fund and/or the maintenance of
shareholder accounts. All payments under this Section 1(a) are
intended to qualify as "service fees" as defined in the NASD Rule.

(b) Distribution Fees. In addition to the Service Fee, the Fund will pay
to the Underwriter a fee (the "Distribution Fee") at an annual rate of
0.75% (unless reduced as contemplated by and permitted pursuant to the
next sentence hereof) of the Fund's average daily net assets
attributable to the Class C shares in consideration of the services
rendered in connection with the sale of such shares by the
Underwriter. The Fund will not terminate the Distribution Fee in
respect of Fund assets attributable to Class C shares, or pay such fee
at an annual rate of less than 0.75% of the Fund's average daily net
assets attributable to the Class C shares, unless it has ceased, and
not resumed, paying the Service Fee to the Underwriter. The
Distribution Fee shall be accrued daily and paid monthly or at such
other intervals as the Directors shall determine.

The obligation of the Fund to pay the Distribution Fee shall terminate
upon the termination of this Plan or the relevant distribution
agreement between the Distributor and the Fund in accordance with the
terms hereof or thereof, but until any such termination shall not be
subject to any dispute, offset, counterclaim or defense whatsoever (it
being understood that nothing in this sentence shall be deemed a
waiver by the Fund of its right separately to pursue any claims it may
have against the Distributor and enforce such claims against any
assets of the Distributor (other than its right to be paid the
Distribution Fee and to be paid contingent deferred sales charges)).

The Underwriter may pay all or any portion of the Distribution Fee to
securities dealers or other organizations (including, but not limited
to, any affiliate of the Underwriter as commissions, asset-based sales
charges or other compensation with respect to the sale of Class C
shares of the Fund may retain all or any portion of the Distribution
Fee as compensation for the Underwriter's services as principal
underwriter of the Class C shares of the Fund. All payments under this
Section 1(b) are intended to qualify as "asset-based sales charges" as
defined in the NASD Rule.

Section 2. This Plan shall not take effect until it has been approved (a)
by a vote of at least a majority (as defined in the Act) of the outstanding
Class C shares of the Fund and (b) by votes of the majority of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to this Plan
(the "Disinterested Directors"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.

Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve months from the date it takes effect
and thereafter shall continue in effect so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Section 2(b).

Section 4. A representative of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.

Section 5. This Plan may be terminated at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding Class C shares.

Section 6. Any agreement of the Fund related to this Plan shall be in
writing and shall provide:

A. That such agreement may be terminated at any time, without payment of
any penalty, by vote of a majority of the members of the Board of
Directors of the Fund who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to the Plan or by a vote of a
majority (as defined in the Investment Company Act of 1940) of the
Fund's outstanding Class C shares on not more than ninety (90) days'
written notice to any other party to the agreement); and

B. That such agreement shall terminate automatically in the event of its
assignment.

Section 7. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Fund
shall be committed to the discretion of the Directors who are not interested
persons.

Section 8. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.

Section 9. This Plan may not be amended to increase materially the amount
of Service Fees or Distribution Fees provided for in Section 1(a) and (b) hereof
unless such amendment is approved in the manner provided for initial approval in
Section 2 hereof and no other material amendment to this Plan shall be made
unless approved in the manner provided for initial approval in Section 2(b)
hereof.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Plan as of the first date written above.

Principal Utilities Fund, Inc.

By: /s/A. S. Filean
A. S. Filean, Vice President and Secretary

PRINCOR FINANCIAL SERVICES CORPORATION

By: /s/M. J. Beer
M. J. Beer, Executive Vice President

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Utilities Fund Class A

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<INVESTMENTS-AT-COST> 91,257,260
<INVESTMENTS-AT-VALUE> 126,175,184
<RECEIVABLES> 401,215
<ASSETS-OTHER> 489
<OTHER-ITEMS-ASSETS> 42,671
<TOTAL-ASSETS> 126,619,559
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,000
<TOTAL-LIABILITIES> 174,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,273,469
<SHARES-COMMON-STOCK> 5,591,326
<SHARES-COMMON-PRIOR> 5,183,590
<ACCUMULATED-NII-CURRENT> 198,077
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,056,089
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,917,924
<NET-ASSETS> 126,445,559
<DIVIDEND-INCOME> 3,459,473
<INTEREST-INCOME> 177,575
<OTHER-INCOME> 0
<EXPENSES-NET> (1,548,627)
<NET-INVESTMENT-INCOME> 2,088,421
<REALIZED-GAINS-CURRENT> 8,056,360
<APPREC-INCREASE-CURRENT> 4,964,248
<NET-CHANGE-FROM-OPS> 15,109,029
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,891,969)
<DISTRIBUTIONS-OF-GAINS> (1,242,661)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,320,329
<NUMBER-OF-SHARES-REDEEMED> (1,083,938)
<SHARES-REINVESTED> 171,345
<NET-CHANGE-IN-ASSETS> 27,516,764
<ACCUMULATED-NII-PRIOR> 280,319
<ACCUMULATED-GAINS-PRIOR> 1,475,420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 685,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,548,627
<AVERAGE-NET-ASSETS> 115,652,395
<PER-SHARE-NAV-BEGIN> 16.11
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> 2.00
<PER-SHARE-DIVIDEND> (.34)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.86
<EXPENSE-RATIO> 1.20

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Utilities Fund Class B

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<INVESTMENTS-AT-COST> 91,257,260
<INVESTMENTS-AT-VALUE> 126,175,184
<RECEIVABLES> 401,215
<ASSETS-OTHER> 489
<OTHER-ITEMS-ASSETS> 42,671
<TOTAL-ASSETS> 126,619,559
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,000
<TOTAL-LIABILITIES> 174,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,273,469
<SHARES-COMMON-STOCK> 1,025,089
<SHARES-COMMON-PRIOR> 707,750
<ACCUMULATED-NII-CURRENT> 198,077
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,056,089
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,917,924
<NET-ASSETS> 126,445,559
<DIVIDEND-INCOME> 3,459,473
<INTEREST-INCOME> 177,575
<OTHER-INCOME> 0
<EXPENSES-NET> (1,548,627)
<NET-INVESTMENT-INCOME> 2,088,421
<REALIZED-GAINS-CURRENT> 8,056,360
<APPREC-INCREASE-CURRENT> 4,964,248
<NET-CHANGE-FROM-OPS> 15,109,029
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (191,707)
<DISTRIBUTIONS-OF-GAINS> (171,044)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 507,818
<NUMBER-OF-SHARES-REDEEMED> (210,456)
<SHARES-REINVESTED> 19,977
<NET-CHANGE-IN-ASSETS> 27,516,764
<ACCUMULATED-NII-PRIOR> 280,319
<ACCUMULATED-GAINS-PRIOR> 1,475,420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 685,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,548,627
<AVERAGE-NET-ASSETS> 115,652,395
<PER-SHARE-NAV-BEGIN> 16.09
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> 1.98
<PER-SHARE-DIVIDEND> (.22)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.83
<EXPENSE-RATIO> 1.95

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Utilities Fund Class C

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<INVESTMENTS-AT-COST> 91,257,260
<INVESTMENTS-AT-VALUE> 126,175,184
<RECEIVABLES> 401,215
<ASSETS-OTHER> 489
<OTHER-ITEMS-ASSETS> 42,671
<TOTAL-ASSETS> 126,619,559
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,000
<TOTAL-LIABILITIES> 174,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,273,469
<SHARES-COMMON-STOCK> 12,632
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 198,077
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,056,089
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,917,924
<NET-ASSETS> 126,445,559
<DIVIDEND-INCOME> 3,459,473
<INTEREST-INCOME> 177,575
<OTHER-INCOME> 0
<EXPENSES-NET> (1,548,627)
<NET-INVESTMENT-INCOME> 2,088,421
<REALIZED-GAINS-CURRENT> 8,056,360
<APPREC-INCREASE-CURRENT> 4,964,248
<NET-CHANGE-FROM-OPS> 15,109,029
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (465)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,620
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 12
<NET-CHANGE-IN-ASSETS> 27,516,764
<ACCUMULATED-NII-PRIOR> 280,319
<ACCUMULATED-GAINS-PRIOR> 1,475,420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 685,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,548,627
<AVERAGE-NET-ASSETS> 115,652,395
<PER-SHARE-NAV-BEGIN> 17.97
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> (.14)
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.84
<EXPENSE-RATIO> 2.05

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> Utilities Fund Class R

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<INVESTMENTS-AT-COST> 91,257,260
<INVESTMENTS-AT-VALUE> 126,175,184
<RECEIVABLES> 401,215
<ASSETS-OTHER> 489
<OTHER-ITEMS-ASSETS> 42,671
<TOTAL-ASSETS> 126,619,559
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,000
<TOTAL-LIABILITIES> 174,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,273,469
<SHARES-COMMON-STOCK> 453,587
<SHARES-COMMON-PRIOR> 249,210
<ACCUMULATED-NII-CURRENT> 198,077
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,056,089
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,917,924
<NET-ASSETS> 126,445,559
<DIVIDEND-INCOME> 3,459,473
<INTEREST-INCOME> 177,575
<OTHER-INCOME> 0
<EXPENSES-NET> (1,548,627)
<NET-INVESTMENT-INCOME> 2,088,421
<REALIZED-GAINS-CURRENT> 8,056,360
<APPREC-INCREASE-CURRENT> 4,964,248
<NET-CHANGE-FROM-OPS> 15,109,029
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (80,547)
<DISTRIBUTIONS-OF-GAINS> (61,770)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 304,565
<NUMBER-OF-SHARES-REDEEMED> (108,625)
<SHARES-REINVESTED> 8,437
<NET-CHANGE-IN-ASSETS> 27,516,764
<ACCUMULATED-NII-PRIOR> 280,319
<ACCUMULATED-GAINS-PRIOR> 1,475,420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 685,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,548,627
<AVERAGE-NET-ASSETS> 115,652,395
<PER-SHARE-NAV-BEGIN> 16.07
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 2.00
<PER-SHARE-DIVIDEND> (.22)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.82
<EXPENSE-RATIO> 1.87

</TABLE>

PRINCIPAL FAMILY OF MUTUAL FUNDS
MULTIPLE CLASS DISTRIBUTION PLAN

Princor Financial Services Corporation ("The Distributor"), Principal Management
Corporation ("Adviser") and each of the funds listed on Exhibit 1 (the "Fund or
Funds") seek to allow each of the Funds to issue multiple separate classes of
shares under this Multiple Class Distribution Plan (the "Plan") in reliance upon
Rule 18f-3 of the Investment Company Act of 1940.

This Plan enables each Fund to offer certain investors the option of purchasing
shares subject to: (i) a conventional front-end sales charge ("Class A shares")
or (ii) a contingent deferred sales charge ("Class B shares"/"Class C Shares").
The Plan also permits each Fund, except Principal Tax Exempt Cash Management
Fund, Inc., to offer distributees of retirement plans administered by Principal
Mutual Life Insurance Company, and other classes of customers identified from
time-to-time by the Funds' management, a class of shares that is not subject to
either a front-end or contingent deferred sales charge ("Class R shares"). Each
Class represents an interest in the same portfolio of investments of a Fund.

SALES CHARGES

Class A shares

Class A shares of the Money Market Funds are sold to the public at net asset
value; no sales charge applies to purchases of the Money Market Funds. Class A
shares of the Growth-Oriented and Income-Oriented Funds, except the Limited Term
Bond Fund, are sold to the public at the net asset value plus a sales charge
which ranges from a high 4.75% to a low of 0% of the offering price (equivalent
to a range of 4.99% to 0% of the net amount invested) according to the schedule
below. Class A shares of the Limited Term Bond Fund are sold to the public at
the net asset value plus a sales charge which ranges from a high of 1.50% to a
low of 0% of the offering price according to the schedule below. An investor who
purchases $1 million or more of Class A shares does not pay a sales charge at
the time of purchase. However, a redemption of such shares occurring within 18
months from the date of purchase will be subject to a contingent deferred sales
charge ("CDSC") at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal Fund will continue to be
subject to the CDSC until the original 18 month period expires. However, no CDSC
is payable with respect to the redemptions of Class A shares to fund a Princor
401(a) or Princor 401(k) retirement plan, except redemptions resulting from the
termination of the plan or transfer of plan assets. Certain purchases of Class A
shares qualify for reduced sales charges.

Sales Charge for
All Funds Except
Limited Term Bond Fund
------------------------
Sales Charge as % of:
------------------------
Offering Amount
Amount of Purchase Price Invested
------------------ ----- --------
Less than $50,000 4.75% 4.99%
$50,000 but less than $100,000 4.25% 4.44%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more No Sales Charge 0.00%

Sales Charge for
Limited Term Bond Fund
------------------------
Sales Charge as % of:
-------------------------
Offering Amount
Amount of Purchase Price Invested
------------------ ----- --------
Less than $50,000 1.50% 1.52%
$50,000 but less than $100,000 1.25% 1.27%
$100,000 but less than $250,000 1.00% 1.01%
$250,000 but less than $500,000 0.75% 0.76%
$500,000 but less than $1,000,000 0.50% 0.50%
$1,000,000 or more No Sales Charge 0.00%

Dealer Allowance
as % of Offering
--------------------------------
All Funds
Except Limited Limited Term
Amount of Purchase Term Bond Fund Bond Fund
------------------ -------------- ---------
Less than $50,000 4.00% 1.25%
$50,000 but less than $100,000 3.75% 1.00%
$100,000 but less than $250,000 3.25% 0.75%
$250,000 but less than $500,000 2.00% 0.50%
$500,000 but less than $1,000,000 1.25% 0.25%
$1,000,000 or more 0.75% 0.25%

Class B shares

Class B shares are sold without an initial sales charge, although a CDSC will be
imposed on shares redeemed within six years of purchase. The following types of
shares may be redeemed without charge at any time: (i) shares acquired by
reinvestment of distributions and (ii) shares otherwise exempt from the CDSC, as
described below. Subject to the foregoing exclusions, the amount of the charge
is determined as a percentage of the lesser of the current market value or the
cost of the shares being redeemed. Therefore, when a share is redeemed, any
increase in its value above the initial purchase price is not subject to any
CDSC. The amount of the CDSC will depend on the number of years shares have been
owned and the dollar amount being redeemed, according to the following table:

================================================================================
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
================================================================================
All Funds
Years Since Purchase Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund
-------------------- ------------------- ------------
2 years or less 4.0% 1.25%
more than 2 years, up to 4 years 3.0% 0.75%
more than 4 years, up to 5 years 2.0% 0.50%
more than 5 years, up to 6 years 1.0% 0.25%
more than 6 years None None
================================================================================

=========================================
For Certain Sponsored Plans
Commenced After 2/1/1998
=========================================
All Funds
Years Since Purchase Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund
-------------------- ------------------- ------------
2 years or less 3.00% 0.75%
more than 2 years, up to 4 years 2.00% 0.50%
more than 4 years, up to 5 years 1.00% 0.25%
more than 5 years, up to 6 years None None
more than 6 years None None
================================================================================

In determining whether a CDSC is payable on any redemption, the Fund will first
redeem shares not subject to any charge, and then shares held longest during the
six-year period. The CDSC will be waived on redemptions of Class B shares in
connection with the following types of transactions:

a. Shares redeemed due to a shareholder's death;

b. Shares redeemed due to the shareholder's disability, as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended;

c. Shares redeemed from retirement plans to satisfy minimum
distribution rules under the Code;

d. Shares redeemed to pay surrender charges;

e. Shares redeemed to pay retirement plan fees;

f. Shares redeemed involuntarily from small balance accounts (values
of less than $300);

g. Shares redeemed through a systematic withdrawal plan that permits
up to 10% of the value of a shareholder's Class B shares of a
particular Fund on the last business day of December of each year
to be withdrawn automatically in equal monthly installments
throughout the year;

h. Shares redeemed from a retirement plan to assure the plan
complies with Sections 401(k), 401(m), 408(k) and 415 of the
Code; or

i. Shares redeemed from retirement plans qualified under Section
401(a) of the Code due to the plan participant's death,
disability, retirement or separation from service after attaining
age 55.

Class C shares

Class C shares do not have a sales charge at time of purchase. However, a CDSC
is imposed at a rate of 1% for redemptions within 1st year (0.50% for Limited
Term Bond). No CDSC is imposed on redemptions after the first year.

Class R shares

Class R shares are purchased without an initial sales charge or a contingent
deferred sales charge.

EXPENSE ALLOCATION

The Fund will pay to the distributor a distribution fee pursuant to the Fund's
Rule 12b-1 distribution plan at an annual rate of (i) up to .25% (.15% for
Principal Limited Term Bond Fund, Inc.) of the average daily net asset value of
the Class A shares; (ii) up to 1.00% (.50% for Principal Limited Term Bond Fund,
Inc.) of the average daily net asset value of the Class B shares; (iii) up to
1.00 % of daily net asset value (0.50% for Limited Term Bond) Class C shares;
and (iv) up to .75% of the average daily net asset value of Class R shares. For
accounting purposes, the classes of a Fund are identical except that the net
asset value and expenses each class will reflect the Distribution Plan expenses
(if any) and any Class Expenses, as defined below, attributable to the class.
"Class Expenses" are limited to: (i) transfer agency fees, as identified by the
Funds' transfer agent as being attributable to a specific class; (ii) blue sky
registration fees incurred with respect to a class of shares; (iii) state
registration fees incurred with respect to a class of shares; (iv) the expenses
of administrative personnel and services as required to provide services to the
shareholders of a specific class (depending on the type of service provided
administrative expenses are allocated to specific classes based on the relative
percentage of shareholder transactions and net asset values compared to the
total of both share classes); (v) litigation or other legal expenses or audit or
other accounting expenses relating solely to one class of shares (vi) Directors'
fees incurred as a result of issues relating to one class of shares; and (vii)
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current shareholders of
a given class.

Any additional incremental expenses not specifically identified above that are
subsequently identified and determined to be properly allocated to one class of
shares will not be so allocated unless and until approved by the Funds'
directors. Certain expenses may be allocated differently if their method of
imposition changes; thus, if a Class Expense of a Fund can no longer be
attributed to a class it will be allocated to the Fund as a whole.

The net asset value of all outstanding shares of each class is determined by
dividing the ending total net assets applicable to a specific class by the
number of shares outstanding relating to the class. Expenses are attributable to
each class of shares depending on the nature of the expenditure and are accrued
on a daily basis. These fall into two categories: (1) fund level expenses that
are attributable to each class that are allocated based on net assets at the
beginning of the day (i.e., legal, audit, etc.) and (2) certain class level
expenses that may have a different cost for one class versus the other (i.e.,
12b-1 fees). Because of the additional expenses that will be borne by the Class
B shares, Class C shares and Class R shares, the net income attributable to and
the dividends payable on Class B shares, Class C shares and Class R shares will
be lower than the net income attributable to and the dividends payable on Class
A shares.

CONVERSION FEATURES

Class A shares. Class A shares do not convert into any other class of shares at
any time.

Class B shares. Class B shares will automatically convert to Class A shares,
based on relative net asset value on the first business day of the 85th month
(61st month for certain sponsored plans) after the purchase date. Class B shares
acquired by exchange from Class B shares of another Principal fund will convert
into Class A shares based on the time of the initial purchase. At the same time,
a pro rata portion of all shares purchased through reinvestment of dividends and
distributions would convert into Class A shares, with that portion determined by
the ratio that the shareholder's Class B shares converting into Class A shares
bears to the shareholder's total Class B shares that were not acquired through
dividends and distributions. The conversion of Class B to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversions will not constitute
taxable events for Federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.

Class C shares. Class C shares do not automatically convert nor will they be
manually converted to any other class shares.

Class R shares. Class R shares will automatically convert to Class A shares,
based on relative net asset value, on the first business day of the 49th month
after the purchase date. Class R shares acquired by exchange from Class R shares
of another Principal fund will convert into Class A shares based on the time of
the initial purchase. At the same time, a pro rata portion of all shares
purchased through reinvestment of dividends and distributions would convert into
Class A shares, with that portion determined by the ratio that the shareholder's
Class R shares converting into Class A shares bears to the shareholder's total
Class R shares that were not acquired through dividends and distributions. The
conversion of Class R shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion is not
available. In such event, Class R shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.

EXCHANGE FEATURES

Class A shares. Class A shares of any Fund (except the Money Market Funds and
the Limited Term Bond Fund) may be exchanged at the net asset value for Class A
shares of any other Principal Fund at any time.

Class A shares of the Limited Term Bond Fund may be exchanged at net asset value
for Class A shares of any Fund at any time three months after the purchase of
such shares.

The CDSC that might apply to certain Class A shares upon redemption will not
apply if these shares are exchanged for shares of another Fund. However, for
purposes of computing the CDSC on the shares acquired through this exchange, the
length of time the acquired shares have been owned by a shareholder will be
measured from the date the exchanged shares were purchased. The amount of the
CDSC will be determined by reference to the CDSC table to which the exchanged
shares were subject.

Class A shares of Principal Cash Management Fund or Principal Tax-Exempt Cash
Management Fund acquired by direct purchase may not be exchanged for other Class
A shares. However, Class A shares of these two Funds acquired by exchange of any
other Principal Fund shares, or by conversion of Class B or Class R shares, and
additional shares which have been purchased by reinvesting dividends earned on
such shares, may be exchanged for other Class A shares without a sales charge.
In addition, Class A shares of the Money Market Funds acquired by direct
purchase or reinvestment of dividends on such shares may be exchanged for Class
B shares of any Growth-Oriented or Income-Oriented Fund.

Class B shares. Class B shares for all Funds may be exchanged at net asset value
at any time for Class B shares of any Fund.

The CDSC that might apply to Class B shares upon redemption will not apply if
these shares are exchanged for shares of another Fund. However, for purposes of
computing the CDSC on the shares acquired through this exchange, the length of
time the acquired shares have been owned by a shareholder will be measured from
the date the exchanged shares were purchased. The amount of the CDSC will be
determined by reference to the CDSC table to which the exchanged shares were
subject.

Class C shares. Class C shares for all Funds may be exchanged at net asset value
at any time for Class C shares of any Fund.

The CDSC that might apply to Class C shares upon redemption will not apply if
these shares are exchanged for shares of another Fund. However, for purposes of
computing the CDSC on the shares acquired through this exchange, the length of
time the acquired shares have been owned by a shareholder will be measured from
the date the exchanged shares were purchased. The amount of the CDSC will be
determined by reference to the CDSC table to which the exchanged shares were
subject.

Class R shares. Class R shares for all Funds may be exchanged at net asset value
at any time for Class R shares of any Fund. For purposes of computing the length
of time Class R shares acquired by the exchange are held prior to conversion to
Class A shares, the length of time the acquired shares have been owned by a
shareholder will be measured from the date the exchanged shares were purchased.

Exhibit 1

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal International Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.