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<TOTAL-ASSETS> 37,725,974
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41,963
<TOTAL-LIABILITIES> 41,963
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,469,490
<SHARES-COMMON-STOCK> 2,608,123
<SHARES-COMMON-PRIOR> 2,059,816
<ACCUMULATED-NII-CURRENT> 25,569
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 249,173
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,939,779
<NET-ASSETS> 37,684,011
<DIVIDEND-INCOME> 812,717
<INTEREST-INCOME> 94,579
<OTHER-INCOME> 0
<EXPENSES-NET> (311,027)
<NET-INVESTMENT-INCOME> 596,269
<REALIZED-GAINS-CURRENT> 1,806,668
<APPREC-INCREASE-CURRENT> 824,126
<NET-CHANGE-FROM-OPS> 3,227,063
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (581,224)
<DISTRIBUTIONS-OF-GAINS> (1,645,552)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 966,897
<NUMBER-OF-SHARES-REDEEMED> (512,039)
<SHARES-REINVESTED> 93,449
<NET-CHANGE-IN-ASSETS> 9,523,387
<ACCUMULATED-NII-PRIOR> 10,524
<ACCUMULATED-GAINS-PRIOR> 88,057
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 311,027
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 311,027
<AVERAGE-NET-ASSETS> 34,558,488
<PER-SHARE-NAV-BEGIN> 13.67
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> 1.46
<PER-SHARE-DIVIDEND> (.24)
<PER-SHARE-DISTRIBUTIONS> (.68)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.45
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 13,745,498
<INVESTMENTS-AT-VALUE> 14,050,587
<RECEIVABLES> 75,748
<ASSETS-OTHER> 127
<OTHER-ITEMS-ASSETS> 20,117
<TOTAL-ASSETS> 14,146,579
<PAYABLE-FOR-SECURITIES> 343,492
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,557
<TOTAL-LIABILITIES> 351,049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,568,502
<SHARES-COMMON-STOCK> 1,343,286
<SHARES-COMMON-PRIOR> 1,507,575
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,078,061)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 305,089
<NET-ASSETS> 13,795,530
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,024,680
<OTHER-INCOME> 0
<EXPENSES-NET> (67,721)
<NET-INVESTMENT-INCOME> 956,959
<REALIZED-GAINS-CURRENT> 22,412
<APPREC-INCREASE-CURRENT> 495,704
<NET-CHANGE-FROM-OPS> 1,475,075
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (956,959)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (246,872)
<SHARES-REINVESTED> 82,583
<NET-CHANGE-IN-ASSETS> (1,172,728)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,100,473)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67,721
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 67,721
<AVERAGE-NET-ASSETS> 15,030,239
<PER-SHARE-NAV-BEGIN> 9.93
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .34
<PER-SHARE-DIVIDEND> (.64)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.27
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Report of Independent Auditors on Internal Control
The Board of Directors and Shareholders
Principal Special Markets Fund, Inc.
In planning and performing our audit of the financial statements of Principal
Special Markets Fund, Inc. for the year ended December 31, 1997, we considered
its internal control, including control activities for safeguarding securities,
in order to determine our auditing procedures for the purpose of expressing our
opinion on the financial statements and to comply with the requirements of Form
N-SAR, not to provide assurance on internal control.
The management of Principal Special Markets Fund, Inc. is responsible for
establishing and maintaining internal control. In fulfilling this
responsibility, estimates and judgments by management are required to assess the
expected benefits and related costs. Generally, controls that are relevant to an
audit pertain to the entity's objective of preparing financial statements for
external purposes that are fairly presented in conformity with generally
accepted accounting principles. These controls include the safeguarding of
assets against unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or irregularities
may occur and not be detected. Also, projection of any evaluation of internal
control to future periods is subject to the risk that it may become inadequate
because of changes in conditions or that the effectiveness of the design and
operation may deteriorate.
Our consideration of internal control would not necessarily disclose all matters
in internal control that might be material weaknesses under standards
established by the American Institute of Certified Public Accountants. A
material weakness is a condition in which the design or operation of specific
internal control components does not reduce to a relatively low level the risk
that errors or irregularities in amounts that would be material in relation to
the financial statements being audited may occur and not be detected within a
timely period by employees in the normal course of performing their assigned
functions. However, we noted no matters involving internal control, including
control activities for safeguarding securities, that we consider to be material
weaknesses as defined above as of December 31, 1997.
This report is intended solely for the information and use of management and the
Board of Directors of Principal Special Markets Fund, Inc. and the Securities
and Exchange Commission.
/s/ Ernst & Young
Des Moines, Iowa
January 16, 1998
SPECIAL MEETING OF SHAREHOLDER
OF
INTERNATIONAL EMERGING MARKETS PORTFOLIO
AND
INTERNATIONAL SMALLCAP PORTFOLIO
OF THE
PRINCIPAL SPECIAL MARKETS FUND, INC.
801 Grand Avenue, Des Moines, Iowa November 24, 1997 3:00 p.m.
A special meeting of the shareholder of International Emerging Markets
Portfolio and International SmallCap Portfolio of the Principal Special Markets
Fund, Inc. was held at 801 Grand Avenue, Des Moines, Iowa at 3:00 p.m. on
November 24, 1997.
The meeting was called to order by Mr. S. L. Jones, who presided as
chairman of the meeting. Ms. K. L. McCartney acted as secretary of the meeting.
Also present was A. S. Filean.
The Secretary reported that the only shareholder of the International
Emerging Markets Portfolio and the International SmallCap Portfolio of the
Corporation was Principal Mutual Life Insurance Company, that all such shares
were represented by proxies held by Mr. Filean and that a quorum was present.
The Chairman directed that the proxies be appended to the minutes of this
meeting.
The Chairman stated that it would be in order to consider ratification and
approval of the Amendment to the Management Agreement between the Corporation
and Princor Management Corporation in the form approved by the Corporation's
Board of Directors. A copy of said amendment was presented at the meeting.
Thereupon, the following resolution was duly adopted by the vote of all the
outstanding shares of Common Stock of the International Emerging Markets
Portfolio and International SmallCap Portfolio of the Corporation:
"BE IT RESOLVED, That the First Amendment to the Principal Special
Markets Fund, Inc. Management Agreement between the Corporation and
Princor Management Corporation, which was approved by the Board of
Directors, including a majority of the non-interested directors
thereof, be, and it hereby is, ratified and approved."
The Chairman then stated that it would be appropriate to consider
ratification and approval of the Amendment to the Sub-Advisory Agreement between
Princor Management Corporation and Invista Capital Management, Inc. in the form
approved by the Corporation's Board of Directors. A copy of such amendment was
presented at the meeting. Thereupon, the following resolution was duly adopted
by the vote of all the outstanding shares of Common Stock of the International
Emerging Markets Portfolio and International SmallCap Portfolio of the
Corporation:
"BE IT RESOLVED, That the First Amendment to the Principal Special
Markets Fund, Inc. Sub- Advisory Agreement between Princor Management
Corporation and Invista Capital Management, Inc., which was approved by
the Board of Directors, including a majority of the non-interested
directors thereof, be, and it hereby is, ratified and approved."
The Chairman then stated that it would be appropriate to consider the
ratification and approval of the Amendment to the Investment Service Agreement
among the Corporation, Princor Management Corporation and Principal Mutual Life
Insurance Company, which was approved by the Board of Directors. A copy of such
amendment was presented at the meeting. Thereupon, the following resolution was
duly adopted by the vote of all the outstanding shares of Common Stock of the
International Emerging Markets Portfolio and International SmallCap Portfolio of
the Corporation:
"BE IT RESOLVED, That the First Amendment to the Principal Special
Markets Fund, Inc. Investment Service Agreement among the Corporation,
Princor Management Corporation and Principal Mutual Life Insurance
Company, which was approved by the Board of Directors, including a
majority of the non-interested directors thereof, be and it hereby is,
ratified and approved."
The Chairman then stated it was necessary to consider ratification and
approval of the Amendment to the Distribution Agreement in the form adopted by
the Corporation's Board of Directors. A copy of such amendment was presented at
the meeting. Thereupon, the following resolution was duly adopted by the vote of
all the outstanding shares of Common Stock of the International Emerging Markets
Portfolio and the International SmallCap Portfolio of the Corporation:
"BE IT RESOLVED, That the Distribution Agreement, which was adopted by
the Board of Directors, including a majority of the non-interested
directors thereof, be, and it hereby is, ratified and approved."
There being no further business, the meeting was adjourned.
/s/ K. L. McCartney
---------------------------------
Secretary
