midcapgro-n14.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

N-14 1 midcapgro-n14.htm N-14 FOR MERGER OF MIDCAPGROWTH FUND I INTO MIDCAP GROWTH FUND III midcapgro-n14.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

As filed with the Securities and Exchange Commission on August 27, 2008.

Registration No. 333-____________

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-14

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

[ ] Pre-Effective Amendment No.

[ ] Post-Effective Amendment No.

PRINCIPAL FUNDS, INC.

f/k/a Principal Investors Fund, Inc.

(Exact name of Registrant as specified in charter)

680 8th Street, Des Moines, Iowa 50392-2080

(Address of Registrant's Principal Executive Offices)

515-248-3842

(Registrant's Telephone Number, Including Area Code)

Michael D. Roughton
Counsel, Principal Funds, Inc.
711 High Street, Suite 405 West
Des Moines, Iowa 50392-2080
(Name and Address of Agent for Service)

Copies of all communications to:
John W. Blouch
Dykema Gossett PLLC
1300 I Street, N.W.
Washington, D.C. 20005-3353
202-906-8714; 202-906-8669 (Fax)

Approximate date of proposed public offering: As soon as practicable after this Registration Statement becomes effective.

Title of Securities Being Registered: Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class Shares common stock, par value $.01 per share.

No filing fee is due because an indefinite number of shares have been registered in reliance on Section 24(f) under the Investment Company Act of 1940, as amended.

It is proposed that this filing will become effective on September 26, 2008, pursuant to Rule 488.

PRINCIPAL FUNDS, INC.

680 8th Street

Des Moines, Iowa 50392-2080

October ___, 2008

Dear Shareholder:

The Board of Directors of Principal Funds, Inc. (“PFI”) has approved a Plan of Acquisition (the “Plan”) providing for the combination of the MidCap Growth Fund I (formerly, the Partners MidCap Growth Fund I) (the “Acquired Fund”) into the MidCap Growth Fund III (formerly, the Partners MidCap Growth Fund) (the “Acquiring Fund”). Each of these Funds is a separate series or fund of PFI.

Under the Plan: (i) the Acquiring Fund will acquire all the assets, subject to all the liabilities, of the Acquired Fund in exchange for shares of the Acquiring Fund; (ii) the Acquiring Fund shares will be distributed to the shareholders of the Acquired Fund; and (iii) the Acquired Fund will liquidate and terminate (the “Reorganization”). As a result of the Reorganization, each shareholder of the Acquired Fund will become a shareholder of the Acquiring Fund. The total value of all shares of the Acquiring Fund issued in the Reorganization will equal the total value of the net assets of the Acquired Fund. The number of full and fractional shares of the Acquiring Fund received by a shareholder of the Acquired Fund will be equal in value to the value of that shareholder’s shares of the Acquired Fund as of the close of regularly scheduled trading on the New York Stock Exchange (“NYSE”) on the closing date of the Reorganization. Holders of Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class shares of the Acquired Fund will receive, respectively, Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class shares of the Acquiring Fund. The Reorganization is expected to occur as of the close of regularly scheduled trading on the NYSE on November 21, 2008.

The Board of Directors believes that the Reorganization, which will permit PFI to reduce duplication in its fund offerings by combining two, comparable mid-cap equity funds, will serve the best interests of shareholders of both Funds. Although the Acquired and Acquiring Funds have identical investment objectives – seeking long-term growth of capital -- and substantially the same principal investment strategies and risks, the Acquiring Fund has a lower advisory fee rate and lower overall expense ratios than the Acquired Fund and has also outperformed the Acquired Fund for each of the one- and three-year periods ended April 30, 2008. Moreover, because the Acquiring Fund is much larger than the Acquired Fund, the Reorganization may be expected to afford shareholders of the Acquired Fund on an ongoing basis greater prospects for growth and efficient management. Combining the Funds will not result in any dilution of the interests of existing shareholders of the Funds.

The value of your investment will not be affected by the Reorganization. Furthermore, in the opinion of legal counsel, no gain or loss will be recognized by any shareholder for federal income tax purposes as a result of the Reorganization. The expenses of the Reorganization will be borne by the Acquired Fund.

Please note that PFI is not required to obtain shareholder approval of the Reorganization. Consequently, we are not asking you for a proxy, and we are requesting that you not send us a proxy. The enclosed Information Statement/Prospectus, however, provides information about the Reorganization and the Plan.

If you have any questions regarding the Reorganization, please call our shareholder services department toll free at 1-800-222-5852.

PRINCIPAL FUNDS, INC.

680 8th Street

Des Moines, Iowa 50392-2080

INFORMATION STATEMENT/PROSPECTUS

RELATING TO THE REORGANIZATION OF THE

MIDCAP GROWTH FUND I INTO THE MIDCAP GROWTH FUND III

This Information Statement/Prospectus is furnished in connection with a Plan of Acquisition (the “Plan”) providing for the combination of the MidCap Growth Fund I (the “Acquired Fund”) into the MidCap Growth Fund III (the “Acquiring Fund”). Each of these Funds is a separate series or fund of Principal Funds, Inc. (“PFI”).

Under the Plan: (i) the Acquiring Fund will acquire all the assets, subject to all the liabilities, of the Acquired Fund in exchange for shares of the Acquiring Fund; (ii) the Acquiring Fund shares will be distributed to the shareholders of the Acquired Fund; and (iii) the Acquired Fund will liquidate and terminate (the “Reorganization”). As a result of the Reorganization, each shareholder of the Acquired Fund will become a shareholder of the Acquiring Fund. The total value of all shares of the Acquiring Fund issued in the Reorganization will equal the total value of the net assets of the Acquired Fund. The number of full and fractional shares of the Acquiring Fund received by a shareholder of the Acquired Fund will be equal in value to the value of that shareholder’s shares of the Acquired Fund as of the close of regularly scheduled trading on the New York Stock Exchange (“NYSE”) on the closing date of the Reorganization. Holders of Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5, and Institutional Class shares will receive, respectively, Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5, and Institutional Class shares of the Acquiring Fund. The Reorganization is expected to occur as of the close of regularly scheduled trading on the NYSE on November 21, 2008. The terms and conditions of the Reorganization are more fully described below in this Information Statement/Prospectus and in the Form of Plan of Acquisition which is attached hereto as Appendix A.

Please note that PFI is not required to obtain shareholder approval of the Reorganization. Consequently, we are not asking you for a proxy, and we are requesting that you not send us a proxy.

This Information Statement/Prospectus contains important information shareholders should know about the Reorganization. Please read it carefully and retain it for future reference. PFI’s Annual and Semi-Annual Reports to Shareholders contain additional information about the Funds, and the Annual Report contains discussions of the market conditions and investment strategies that significantly affected these Funds during the fiscal year ended October 31, 2007. Copies of these reports may be obtained at no charge by calling our shareholder services department toll free at 1-800-222-5852.

A Statement of Additional Information dated October ____, 2008 (the "Statement of Additional Information") relating to this Information Statement/Prospectus has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference into this Information Statement/Prospectus. PFI's Prospectus, dated February 29, 2008 and as supplemented ("PFI Prospectus"), and the Statement of Additional Information for PFI, dated May 1, 2008 and as supplemented ("PFI SAI"), have been filed with the SEC and, insofar as they relate to the MidCap Growth Fund I, are incorporated by reference into this Information Statement/Prospectus. Copies of these documents may be obtained without charge by writing to PFI at the address noted above or by calling our shareholder services department toll free at 1-800-222-5852. You may also call our shareholder services department toll fee at 1-800-222-5852 if you have any questions regarding the Reorganization.

PFI is subject to the informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 (the "1940 Act") and files reports, proxy materials and other information with the SEC. Such reports, proxy materials and other information may be inspected and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 (information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-5850). Such materials are also available on the SEC's EDGAR Database on its Internet site at www.sec.gov, and copies may be obtained, after paying a duplicating fee, by email request addressed to publicinfo@sec.gov or by writing to the SEC's Public Reference Room.

The SEC has not approved or disapproved these securities or passed upon the accuracy or adequacy of this Information Statement/Prospectus. Any representation to the contrary is a criminal offense.

The date of this Information Statement/Prospectus is October ____, 2008.

TABLE OF CONTENTS
THE REORGANIZATION	3
Comparison of Acquired and Acquiring Funds	4
Comparison of Investment Objectives and Strategies	8
Fees and Expenses of the Funds	8
Comparison of Principal Investment Risks	11
Performance	13
INFORMATION ABOUT THE REORGANIZATION	15
Plan of Acquisition	15
Reasons for the Reorganization	16
Board Consideration of the Reorganization	16
Description of the Securities to Be Issued	17
Federal Income Tax Consequences	17
CAPITALIZATION	18
ADDITIONAL INFORMATION ABOUT THE FUNDS	19
Certain Investment Strategies and Related Risks of the Funds	19
Multiple Classes of Shares	23
Costs of Investing in the Funds	24
Distribution Plans and Additional Information Regarding Intermediary Compensation	26
Dividends and Distributions	29
Pricing of Fund Shares	30
Purchases, Redemptions, and Exchanges of Shares	31
Frequent Purchases and Redemptions	40
Tax Considerations	41
Portfolio Holdings Information	41
OUTSTANDING SHARES AND SHARE OWNERSHIP	42
FINANCIAL HIGHLIGHTS	42
FINANCIAL STATEMENTS	50
LEGAL MATTERS	50
OTHER INFORMATION	50
APPENDIX A Form of Plan of Acquisition	A-1
APPENDIX B Description of Indices	B-1

INTRODUCTION

This Information Statement/Prospectus is being furnished to shareholders of the Acquired Fund to provide information regarding the Plan and the Reorganization.

Principal Funds, Inc. PFI is a Maryland corporation and an open-end management investment company registered with the SEC under the 1940 Act. PFI currently offers 74 separate series or funds (the “PFI Funds”), including the Acquired and Acquiring Funds. The sponsor of PFI is Principal Life Insurance Company (“Principal Life”), the investment advisor to the PFI Funds is Principal Management Corporation (“PMC”) and the principal underwriters for PFI are Principal Funds Distributor, Inc. (the “Distributor” or “PFD”) for Class A, B, C, Institutional, J, S, and Retirement Class (R-1, R-2, R-3, R-4, and R-5) shares and Princor Financial Services Corporation (“Princor”) for Institutional, J and Retirement Class shares. Principal Life, an insurance company organized in 1879 under the laws of Iowa, PMC, PFD, and Princor are indirect, wholly-owned subsidiaries of Principal Financial Group, Inc. (“PFG”). Their address is the Principal Financial Group, Des Moines, Iowa 50392-2080.

Investment Management. Pursuant to an investment advisory agreement with PFI with respect to the Acquired and Acquiring Funds, PMC provides investment advisory services and certain corporate administrative services to the Funds. As permitted by the investment advisory agreements, PMC has entered into sub-advisory agreements with respect to the Acquired and Acquiring Funds as follows:

Acquired Fund

MidCap Growth Fund I

Sub-Advisor

Mellon Capital Management Corporation (“Mellon Capital”)

Acquiring Fund

MidCap Growth Fund III

Sub-Advisor

Turner Investment Partners, Inc (“Turner”) and Mellon Capital*

*	Upon completion of the Reorganization, Mellon Capital will become an additional sub-advisor to the Acquiring Fund.

Each of PMC, Mellon Capital, and Turner is registered with the SEC as an investment advisor under the Investment Advisers Act of 1940.

Mellon Capital’s address is 500 Grant Street, Suite 4200, Pittsburgh, PA 15258. Mellon Capital is a wholly owned subsidiary of Mellon Financial Corporation (“Mellon”).

Turner’s address is 1205 Westlakes Drive, Suite 100, Berwyn, PA 19312. Turner is an independent firm founded in 1990.

THE REORGANIZATION

At its meeting held on June 9, 2008, the Board of Directors of PFI (sometimes referred to as the “Board”), including all the Directors who are not “interested persons” (as defined in the 1940 Act) of PFI (the “Independent Directors”), approved the Reorganization pursuant to the Plan providing for the combination of the Acquired Fund into the Acquiring Fund. The Board concluded that the Reorganization is in the best interests of the Acquired Fund and the Acquiring Fund and that the interests of existing shareholders of the Funds will not be diluted as a result of the Reorganization. The factors that the Board considered in deciding to approve the Reorganization are discussed below under “Information about the Reorganization – Board Consideration of the Reorganization.”

The Reorganization contemplates: (i) the transfer of all the assets, subject to all of the liabilities, of the Acquired Fund to the Acquiring Fund in exchange for shares of the Acquiring Fund; (ii) the distribution to Acquired Fund shareholders of the Acquiring Fund shares; and (iii) the liquidation and termination of the Acquired Fund. As a result of the Reorganization, each shareholder of the Acquired Fund will become a shareholder of the Acquiring Fund. In the Reorganization, the Acquiring Fund will issue a number of shares with a total value equal to the total value of the net assets of the Acquired Fund, and each shareholder of the Acquired Fund will receive a number of full and fractional shares of the Acquiring Fund with a value equal to the value of that shareholder’s shares of the Acquired Fund, as of the close of regularly scheduled trading on the NYSE on the closing date of the Reorganization (the “Effective Time”). The closing date of the Reorganization is expected to be November 21, 2008. Holders of Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class shares of the Acquired Fund will receive, respectively, Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5,

and Institutional Class shares of the Acquiring Fund. The terms and conditions of the Reorganization are more fully described below in this Information Statement/Prospectus and in the Form of Plan of Acquisition, which is attached hereto as Appendix A.

In connection with approving the Reorganization, the Board approved the appointment of Mellon Capital, the sub-advisor to the Acquired Fund, as an additional sub-advisor to the Acquiring Fund, effective as of the completion of the Reorganization.

In the opinion of legal counsel, the Reorganization will qualify as a tax-free reorganization and, for federal income tax purposes, no gain or loss will be recognized as a result of the Reorganization by the Acquired or Acquiring Fund shareholders. See “Information About the Reorganization – Federal Income Tax Consequences.”

The Reorganization will not result in any material change in the purchase and redemption procedures followed with respect to the distribution of shares. See “Additional Information About the Funds – Purchases, Redemptions and Exchanges of Shares.”

The Acquired Fund will pay or cause to be paid all fees and expenses in connection with the Reorganization. For the estimated expenses of the Reorganization, see “Capitalization” below.

Comparison of Acquired and Acquiring Funds

The following table provides comparative information with respect to the Acquired and Acquiring Funds. In connection with appointment of Mellon Capital as an additional sub-advisor to the Acquiring Fund, the main strategies and risks of the Acquiring Fund will also change to reflect Mellon Capital’s management style and the allocation of the Acquiring Fund’s assets between two sub-advisors. The appointment of Mellon Capital as an additional sub-advisor and these changes in investment policies, which will become effective at the Effective Time of the Reorganization, are reflected in the description of the Acquiring Fund below.

MidCap Growth Fund I	MidCap Growth Fund III
(Acquired Fund)	(Acquiring Fund)

Approximate Net Assets as of April 30, 2008 (unaudited):
$300,763,000	$808,289,000

Investment Advisor:
PMC

Sub-Advisor and Portfolio Managers:
Mellon Capital	Turner and Mellon Capital*

	* Mellon Capital will become an additional sub-
	advisor as of the Effective Time

Adam T. Logan, CFA. Joining the company in	Turner
1998, Mr. Logan is a portfolio manager and Vice
President of Mellon Capital. Previously, he	Tara R. Hedlund, CFA, CPA. Ms. Hedlund joined
performed duties as a financial analyst in Mellon	Turner in 2000. Previously, she was an audit
Financial Corporation’s corporate finance	engagement senior at Arthur Andersen LLP. She has
department. He is currently responsible for the	been in investment management since 1995. She
management of client portfolios with a specific	earned a BBS in Accountancy from Villanova
focus on mid and small capitalization securities. He	University. She has earned the right to use the
earned a BA in Finance from Westminster College	Chartered Financial Analyst designation.

MidCap Growth Fund I	MidCap Growth Fund III
(Acquired Fund)	(Acquiring Fund)
and an MBA from the Katz Graduate School of	Christopher K. McHugh. Mr. McHugh, Vice
Business at the University of Pittsburgh. He has	President and Senior Portfolio Manager, joined
earned the right to use the Chartered Financial	Turner in 1990. Prior to joining Turner, he was a
Analyst designation.	performance specialist at Provident Capital
	Management. He earned a BS in Accounting from
John O’Toole, CFA. Joining the company in 1990,	Philadelphia University and an MBA in Finance
Mr. O’Toole is a Senior Vice President and a	from St. Joseph’s University.
principal of Mellon Capital. Mr. O’Toole holds an
MBA in Finance from the University of Chicago	Jason D. Schrotberger, CFA. Mr. Schrotberger
and a BA in Economics from the University of	joined Turner in 2001. Previously, he was an
Pennsylvania. He has earned the right to use the	investment analyst at BlackRock Financial
Chartered Financial Analyst designation.	Management. He has been in investment
	management since 1994. He earned a BA in
	Economics from Denison University and an MBA in
	Finance from the University of Illinois. He has
	earned the right to use the Chartered Financial
	Analyst designation.

	Mellon Capital

	Adam T. Logan, CFA

	John O’Toole, CFA.

	(See portfolio manager biographical profiles under
	Acquired Fund above.)

Investment Objective:
Both funds seek long-term growth of capital.

Principal Investment Strategies:
Under normal market conditions, the Fund invests	The Fund invests primarily in common stocks and
at least 80% of its net assets (plus any borrowings	other equity securities of U.S. companies with strong
for investment purposes) in common stocks of	earnings growth potential. Under normal market
companies with medium market capitalization	conditions, the Fund invests at least 80% of its net
(those with market capitalizations similar to	assets (plus any borrowings for investment purposes)
companies in the Russell Midcap Growth Index (as	in common stocks of companies with medium
of December 31, 2007, this range was between	market capitalizations (those with market
approximately $0.6 billion and $42.1 billion)) at the	capitalizations similar to companies in the Russell
time of purchase. In the view of Mellon Capital,	Midcap Growth Index (as of December 31, 2007 this
many medium-sized companies:	range was between approximately $0.6 billion and
• are in fast growing industries,	$42.1 billion)) at the time of purchase. Market
• offer superior earnings growth potential, and	capitalization is defined as total current market value
• are characterized by strong balance sheets and	of a company’s outstanding common stock.
high returns on equity.
The Fund may also hold investments in large and	The Fund may purchase securities issued as part of,
small capitalization companies, including emerging	or a short period after, companies’ initial public
and cyclical growth companies. The Fund may	offerings and may at times dispose of those shares
invest up to 25% of its net assets in securities of	shortly after their acquisition. The Fund may invest
foreign companies, including securities of issuers in	up to 25% of its net assets in securities of foreign
emerging countries and securities quoted in foreign	companies, including securities of issuers in
currencies.	emerging countries and securities quoted in foreign
	currencies.
Mellon Capital uses valuation models designed to
identify common stocks of companies that have	Turner invests the assets allocated to it in securities
demonstrated consistent earnings momentum and	of companies that are diversified across economic
	sectors. It attempts to maintain sector concentrations

MidCap Growth Fund I		MidCap Growth Fund III
(Acquired Fund)		(Acquiring Fund)
delivered superior results relative to market analyst	that approximate those of its current benchmark, the
expectations. Other considerations include profit	Russell Midcap Growth Index. The Fund is not an
margins, growth in cash flow and other standard	index fund and does not limit its investment to the
balance sheet measures. The securities held are	securities of issuers in the Russell Midcap Growth
generally characterized by strong earnings	Index.
momentum measures and higher expected earnings
per share growth.	Turner selects stocks that it believes have strong
	earnings growth potential. Turner invests assets
The valuation model incorporates information about	allocated to it in companies with strong earnings
the relevant criteria as of the most recent period for	dynamics, and sells those with deteriorating earnings
which data are available. Once ranked, the	prospects. Turner believes forecasts for market
securities are categorized under the headings “buy,”	timing and sector rotation are unreliable and
“sell,” or “hold.” The decision to buy, sell or hold is	introduce an unacceptable level of risk. As a result,
made by Mellon Capital based primarily on output	under normal market conditions, Turner’s portion of
of the valuation model. However, that decision may	the Fund is fully invested.
be modified due to subsequently available or other
specific relevant information about the security. In	In the view of Mellon Capital, many medium-sized
addition, Mellon Capital manages risk by	companies:
diversifying across companies and industries,	•	are in fast growing industries,
limiting the potential adverse impact from any one	•	offer superior earnings growth potential, and
stock or industry.	•	are characterized by strong balance sheets and
		high returns on equity.
The Fund may purchase securities issued as part of,
or a short period after, companies’ initial public	Mellon Capital may also hold assets allocated to it in
offerings and may at times dispose of those shares	investments in large and small capitalization
shortly after their acquisition.	companies, including emerging and cyclical growth
	companies.

	Mellon Capital uses valuation models designed to
	identify common stocks of companies that have
	demonstrated consistent earnings momentum and
	delivered superior results relative to market analyst
	expectations. Other considerations include profit
	margins, growth in cash flow and other standard
	balance sheet measures. Mellon Capital holds
	securities generally characterized by strong earnings
	momentum measures and higher expected earnings
	per share growth.

	Mellon Capital’s valuation model incorporates
	information about the relevant criteria as of the most
	recent period for which data are available. Once
	ranked, the securities are categorized under the
	headings “buy,” “sell,” or “hold.” The decision to
	buy, sell or hold is made by Mellon Capital based
	primarily on output of the valuation model.
	However, that decision may be modified due to
	subsequently available or other specific relevant
	information about the security. In addition, Mellon
	Capital manages risk by diversifying across
	companies and industries, limiting the potential
	adverse impact from any one stock or industry.

	PMC determines the portion of the Fund's assets
	each Sub-Advisor will manage and may, from time-
	to-time, reallocate Fund assets between the Sub-
	Advisors. The decision to do so may be based on a

MidCap Growth Fund I	MidCap Growth Fund III
(Acquired Fund)	(Acquiring Fund)
	variety of factors, including but not limited to: the
	investment capacity of each Sub-Advisor, portfolio
	diversification, volume of net cash flows, fund
	liquidity, investment performance, investment
	strategies, changes in each Sub-Advisor's firm or
	investment professionals or changes in the number of
	Sub-Advisors. Ordinarily, reallocations of Fund
	assets among Sub-Advisors will generally occur as a
	Sub-Advisor liquidates assets in the normal course of
	portfolio management and with net new cash flows;
	however, at times existing Fund assets may be
	reallocated among Sub-Advisors.

Cash Management:

The Acquiring Fund has cash available in its portfolio to meet redemption requests and to pay expenses. Additionally, the Acquiring Fund receives cash flows when shareholders purchase shares. PMC will invest the cash, which comprises a very small portion of the Acquiring Fund's portfolio, in money market investments and in stock index futures contracts based on the Acquiring Fund's market cap to gain exposure to the market. Stock index futures provide returns similar to those of common stocks. PMC believes that, over the long term, the strategy will enhance the investment performance of the Fund.

Hedging and Other Strategies:

Each of the Funds may invest in inverse floating rate obligations, may engage in hedging transactions through the use of financial futures and options thereon and may also purchase and sell securities on a when-issued or forward commitment basis, invest in mortgage-backed securities, enter into repurchase agreements, invest in stand-by commitments, engage in swap agreements, and lend portfolio securities. Each of the Funds may invest in floating rate and variable rate obligations, including participation interests therein.

Temporary Defensive Investing:

For temporary defensive purposes in times of unusual or adverse market conditions, each of the Funds may invest in cash and cash equivalents. In taking such defensive measures, each of the Funds may fail to achieve its investment objective.

Fundamental Investment Restrictions:

Each of the Funds is subject to the same fundamental investment restrictions which may not be changed without the approval of the shareholders of the Fund. These fundamental restrictions deal with such matters as the issuance of senior securities, purchasing or selling real estate or commodities, borrowing money, making loans, underwriting securities of other issuers, diversification or concentration of investments, and short sales of securities. The fundamental investment restrictions of the Funds are described in the PFI Statement of Additional Information.

Comparison of Investment Objectives and Strategies

The investment objectives of the Acquired and Acquiring Funds are identical – seeking long-term growth of capital – and their principal investment strategies are substantially the same in that each invests principally in equity securities of mid-cap companies and may also invest in foreign securities (including emerging markets) as well as IPOs. Indeed, following the Reorganization, Mellon Capital is expected to manage its portion of the assets of the Acquiring Fund in the same manner that it has managed the Acquired Fund as its sub-advisor. The main differences between the Funds are that the Acquiring Fund but not the Acquired Fund is actively traded, and the Acquired Fund has one sub-advisor while the Acquiring Fund, following the Reorganization, will have two sub-advisors.

The investment objective of each of the Funds may be changed by PFI’s Board of Directors without shareholder approval.

Additional information about the investment strategies and the types of securities in which the Funds may invest is discussed below under “Certain Investment Strategies and Related Risks of the Funds” as well as in the Statement of Additional Information.

The Statement of Additional Information provides further information about the portfolio managers for each Fund, including information about compensation, other accounts managed and ownership of Fund shares.

Fees and Expenses of the Funds

The tables below compare the fees and expenses of the shares of the Acquired and Acquiring Funds. In the Reorganization, the holders of Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class shares of the Acquired Fund will receive, respectively, Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class shares of the Acquiring Fund.

Shareholder Fees (fees paid directly from your investment)

The following table shows the fees and expenses you may pay when you buy and hold Class A or Class C shares of the Funds. Each such class of shares of the Acquired Fund has the same shareholder fees as the corresponding class of shares of the Acquiring Fund. The Institutional and Retirement Class shares of the Funds are not subject to such fees.

	Class A	Class C

Maximum sales charge (load) imposed on	4.50% ⁽¹⁾	None
purchases (as a % of offering price)

Maximum Contingent Deferred Sales Charge	1.00% ⁽²⁾	1.00% ⁽³⁾
(CDSC) (as a % of dollars subject to charge)
Redemption or Exchange Fee (as a % of	1.00% ⁽⁴⁾	1.00% ⁽⁴⁾
amount redeemed/exchanged)

(1)	Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2)	A CDSC may apply on certain redemptions made within 18 months following purchases of $1 million or more made
	without a sales charge.
(3)	A CDSC applies on certain redemptions made within 12 months.
(4)	Excessive trading fees are charged when $30,000 or more of shares are redeemed or exchanged to another fund within
	30 days after they are purchased. Excessive trading fees will not be applied to shares acquired in connection with the
	Reorganization.

Fees and Expenses as a % of average daily net assets

The following table shows: (a) the ratios of expenses to average net assets of each of the above share classes of the Acquired Fund for the fiscal year ended October 31, 2007; (b) the ratios of expenses to average net assets of such share classes of the Acquiring Fund for the fiscal year ended October 31, 2007; and (c) the pro forma expense ratios of such share classes of the Acquiring Fund for the fiscal year ending October 31, 2007 assuming that the Reorganization had taken place at the commencement of the fiscal year ended October 31, 2007.

Annual Fund Operating Expenses


						Fee Waiver
		Manage-			Total	and/or
		ment	12b-1	Other	Operating	Expense	Net
	Class	Fees	Fees	Expenses	Expenses⁽¹⁾	Reimbursement	Expenses

(a) MidCap Growth Fund I
(Acquired Fund)	A	1.00%	0.25%	1.20%	2.45%	0.70%⁽²⁾	1.75%
	C	1.00%	1.00%	26.20%	28.20%	25.70%⁽²⁾	2.50%
	R-1	1.00%	0.35%	0.54%	1.89%	-	1.89%
	R-2	1.00%	0.30%	0.46%	1.76%	-	1.76%
	R-3	1.00%	0.25%	0.33%	1.58%	-	1.58%
	R-4	1.00%	0.10%	0.29%	1.39%	-	1.39%
	R-5	1.00%	N/A	0.27%	1.27%	-	1.27%
	Institutional	1.00%	N/A	0.01%	1.01%	-	1.01%

(b) MidCap Growth Fund III
(Acquiring Fund)	A	0.99%	0.25%	0.58%	1.82%	0.07%⁽²⁾	1.75%
	C	0.99%	1.00%	8.81%	10.80%	8.30%⁽²⁾	2.50%
	R-1	0.99%	0.35%	0.54%	1.88%	-	1.88%
	R-2	0.99%	0.30%	0.46%	1.75%	-	1.75%
	R-3	0.99%	0.25%	0.33%	1.57%	-	1.57%
	R-4	0.99%	0.10%	0.29%	1.38%	-	1.38%
	R-5	0.99%	N/A	0.27%	1.26%	-	1.26%
	Institutional	0.99%	N/A	0.01%	1.00%	-	1.00%

(c) MidCap Growth Fund III
(Acquiring Fund)
(Pro forma assuming
Reorganization)	A	0.99%	0.25%	0.58%	1.82%	0.07%⁽²⁾	1.75%
	C	0.99%	1.00%	6.80%	8.79%	6.29%⁽²⁾	2.50%
	R-1	0.99%	0.35%	0.54%	1.88%	-	1.88%
	R-2	0.99%	0.30%	0.46%	1.75%	-	1.75%
	R-3	0.99%	0.25%	0.33%	1.57%	-	1.57%
	R-4	0.99%	0.10%	0.29%	1.38%	-	1.38%
	R-5	0.99%	N/A	0.27%	1.26%	-	1.26%
	Institutional	0.99%	N/A	0.01%	1.00%	-	1.00%

Other Expenses for the Retirement Class shares includes:
	R-1	R-2	R-3	R-4	R-5
	Class	Class	Class	Class	Class
Service Fee	0.25%	0.25%	0.17%	0.15%	0.15%
Administrative Service Fee	0.28	0.20	0.15	0.13	0.11

(1)	Expense information has been restated to reflect current fees. Effective October 31, 2007, the Acquiring Fund's
	management fees were decreased. Certain other operating expenses of the Acquired and Acquiring Fund have
	increased effective February 29, 2008.

(2)	PMC has contractually agreed to limit the Fund's expenses attributable to Class A and Class C shares and, if
	necessary, pay expenses normally payable by the Fund, excluding interest expense, through the period ending
	February 28, 2009. The expense limit will maintain a total level of operating expenses (expressed as a percent
	of average net assets on an annualized basis) not to exceed 1.75% for Class A and 2.50% for Class C shares,
	respectively.

Examples: The following examples are intended to help you compare the costs of investing in shares of the Acquired and Acquiring Funds. The examples assume that fund expenses continue at the rates shown in the table above, that you invest $10,000 in the particular fund for the time periods indicated and that all dividends and distributions are reinvested. The examples also assume that your investment has a 5% return each year. The examples should not be considered a representation of future expense of the Acquired or Acquiring Fund. Actual expense may be greater or less than those shown.

		1	3	5	10
If you sell your shares at the end of the period:		Year	Years	Years	Years
MidCap Growth Fund I (Acquired Fund)	Class A	$718	$1,198	$1,714	$3,124
	Class C	353	4,552	7,361	10,320
	Class R-1	192	594	1,021	2,212
	Class R-2	179	554	954	2,073
	Class R-3	161	499	860	1,878
	Class R-4	142	440	761	1,669
	Class R-5	129	403	697	1,534
	Institutional	103	322	558	1,236

MidCap Growth Fund III (Acquiring Fund)	Class A	$718	$1,084	$1,474	$2,563
	Class C	353	2,228	4,107	7,929
	Class R-1	191	591	1,016	2,201
	Class R-2	178	551	949	2,062
	Class R-3	160	496	855	1,867
	Class R-4	140	437	755	1,657
	Class R-5	128	400	692	1,523
	Institutional	102	318	552	1,225

MidCap Growth Fund III (Acquiring Fund)
(Pro forma assuming Reorganization)	Class A	$718	$1,084	$1,474	$2,563
	Class C	353	1,898	3,521	7,068
	Class R-1	191	591	1,016	2,201
	Class R-2	178	551	949	2,062
	Class R-3	160	496	855	1,867
	Class R-4	140	437	755	1,657
	Class R-5	128	400	692	1,523
	Institutional	102	318	552	1,225

		1	3	5	10
If you do not sell your shares at the end of the period:		Year	Years	Years	Years
MidCap Growth Fund I (Acquired Fund)	A	$718	$1,198	$1,714	$3,124
	C	253	4,552	7,361	10,320
	R-1	192	594	1,021	2,212
	R-2	179	554	954	2,073
	R-3	161	499	860	1,878
	R-4	142	440	761	1,669
	R-5	129	403	697	1,534
	Institutional	103	322	558	1,236

MidCap Growth Fund III (Acquiring Fund)	A	$718	$1,084	$1,474	$2,563
	C	253	2,228	4,107	7,929
	R-1	191	591	1,016	2,201
	R-2	178	551	949	2,062
	R-3	160	496	855	1,867
	R-4	140	437	755	1,657
	R-5	128	400	692	1,523
	Institutional	102	318	552	1,225

MidCap Growth Fund III (Acquiring Fund)
(Pro forma assuming Reorganization)	A	$718	$1,084	$1,474	$2,563
	C	253	1,898	3,521	7,068
	R-1	191	591	1,016	2,201
	R-2	178	551	949	2,062
	R-3	160	496	855	1,867
	R-4	140	437	755	1,657
	R-5	128	400	692	1,523
	Institutional	102	318	552	1,225

Investment Management Fees/Sub-Advisory Arrangements

Each Fund pays its investment advisor, PMC, an advisory fee which for each Fund is calculated as a percentage of the Fund’s average daily net assets pursuant to the following fee schedules:

MidCap Growth Fund I
(Acquired Fund)

1.00% for the first $500 million, 0.98% for the next $500 million, 0.96% for the next 500 million, and 0.95% on all assets over $1.5 billion.

MidCap Growth Fund III
(Acquiring Fund)

1.00% for the first $500 million, 0.96% for the next $500 million, 0.94% for the next 500 million, and 0.92% on all assets over $1.5 billion.

As sub-advisors to the Funds, Mellon Capital and Turner are paid sub-advisory fees with respect to each Fund. These sub-advisory fees are paid by PMC, not by the Funds.

A discussion of the basis of the Board’s approval of the advisory and sub-advisory agreements with respect to PMC and Turner, respectively, is available in PFI’s Annual Report to Shareholders for the fiscal year ended October 31, 2007. A discussion of the basis for the Board’s approval of Mellon Capital as an additional sub-advisor to the Acquiring Fund will be available in PFI’s Annual Report to Shareholders ended October 31, 2008.

Comparison of Principal Investment Risks

In deciding whether to approve the Reorganization, shareholders should consider the amount and character of investment risk involved in the respective investment objectives and strategies of the Acquired and Acquiring Funds. As described above, the Acquired and Acquiring Funds have identical investment objectives and substantially the same principal investment strategies. Consequently, the Funds will have substantially the same risks. However, because the Acquiring Fund is actively traded and serves as an underlying Fund for certain PFI Funds that operate as funds of funds, it has certain additional risks. These various risks are described below.

Risks Applicable to both Funds:

·	Equity Securities Risk. Equity securities include common, preferred, and convertible preferred stocks and securities the values of which are tied to the price of stocks, such as rights, warrants, and convertible debt securities. Common and preferred stocks represent equity ownership in a company. Stock markets are volatile, and the price of equity securities (and their equivalents) will fluctuate. The value of equity securities purchased by a fund could decline if the financial condition of the companies in which the fund invests decline or if overall market and economic conditions deteriorate.

·	Foreign Securities Risk. Foreign securities carry risks that are not generally found in securities of U.S. companies. These risks include the loss of value as a result of political instability and financial and economic events in foreign countries. In addition, nationalization, expropriation or confiscatory taxation, and foreign exchange restrictions could adversely affect a fund’s investments in a foreign country. Foreign securities may be subject to less stringent reporting, accounting, and disclosure standards than are required of U.S. companies, and foreign countries may also have problems associated with and causing delays in the settlement of sales.

·	Exchange Rate Risk. Because foreign securities are generally denominated in foreign currencies, the value of the net assets of a fund as measured in U.S. dollars will be affected by changes in exchange rates. To protect against future uncertainties in foreign currency exchange rates, the funds are authorized to enter into certain

	foreign currency exchange transactions. In addition, the funds’ foreign investments may be less liquid and their price more volatile than comparable investments in U.S. securities. Settlement periods may be longer for foreign securities and portfolio liquidity may be affected.

·	Derivatives Risk. Derivatives are investments whose values depend on or are derived from other securities or indexes. A fund's use of certain derivative instruments (such as options, futures, and swaps) could produce disproportionate gains or losses. Derivatives are generally considered more risky than direct investments and, in a down market, could become harder to value or sell at a fair price.

·	Growth Stock Risk. Growth stocks typically trade at higher multiples of current earnings than other securities. Growth stocks are often more sensitive to market fluctuations than other securities because their market prices are highly sensitive to future earnings expectations. Similarly, because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation, making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks. A fund’s strategy of investing in growth stocks also carries the risk that in certain markets growth stocks will underperform value stocks.

·	Initial Public Offerings (“IPOs”) Risk. There are risks associated with the purchase of shares issued in IPOs by companies that have little operating history as public companies, as well as risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. A fund cannot guarantee continued access to IPO offerings and may at times dispose of IPO shares shortly after their acquisition.

·	Market Segment (MidCap) Risk. Funds are subject to the risk that their principal market segment mid capitalization stocks may underperform compared to other market segments or to the equity markets as a whole. Thus, each Fund’s strategy of investing in mid cap stocks carries the risk that in certain markets mid cap stocks will underperform small cap or large cap stocks.

·	MidCap Stock Risk. Medium capitalization companies may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, 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.

·	Securities Lending Risk. The principal risk of securities lending is that the financial institution that borrows securities from the Fund could go bankrupt or otherwise default on its commitment under the securities lending agreement and the Fund might not be able to recover the loaned securities or their value.

·	Credit or Counterparty Risk. Each of the Funds is subject to the risk that the issuer or guarantor of a fixed- income security or other obligation, the counterparty to a derivatives contract or repurchase agreement, or the borrower of the Fund’s securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise to honor its obligations.

·	Management Risk. Each of the Funds is actively managed by its sub-advisor. Each Fund’s performance will thus reflect in part the ability of its sub-advisor to make investment decisions that are suited to achieving the Fund’s investment objective. If the sub-advisor’s strategies do not perform as expected, the Fund could underperform other mutual funds with similar investment objectives or lose money.

·	Liquidity Risk. Each of the Funds is exposed to liquidity risk when trading volume, lack of a market maker, or legal restrictions impair its ability to sell particular securities or close derivative positions at an advantageous price.

·	Market Risk. The value of each Fund’s portfolio may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If a fund’s investments are concentrated in certain sectors, its performance could be worse than the overall market. It is possible to lose money when investing in either Fund.

·	Emerging Market Risk. 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.

Additional Risks Applicable to the Acquiring Fund:

·	Small Company Risk. Investments in companies with smaller capitalizations may involve greater risk and price volatility 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.

·	Active Trading Risk. A fund that actively trades portfolio securities in an attempt to achieve its investment objective may have high portfolio turnover rates that may increase the fund’s brokerage costs, accelerate the realization of taxable gains, and adversely impact fund performance.

·	Underlying Fund Risk. The Principal LifeTime Funds and the Strategic Asset Management (“SAM”) Portfolios operate as funds of funds and invest principally in other PFI Funds ("Underlying Funds"). From time to time, an Underlying Fund may experience relatively large investments or redemptions by a fund of funds due to the reallocation or rebalancing of its assets. These transactions may have adverse effects on Underlying Fund performance to the extent an Underlying Fund is required to sell portfolio securities to meet such redemptions, or to invest cash from such investments, at times it would not otherwise do so. This may be particularly important when a fund of funds owns a significant portion of an Underlying Fund. These transactions may also accelerate the realization of taxable income if sales of portfolio securities result in gains, and could increase transaction costs. In addition, when a fund of funds reallocates or redeems significant assets away from an Underlying Fund, the loss of assets to the Underlying Fund could result in increased expense ratios for that fund.

	PMC is the advisor to the Principal LifeTime Funds. The following table shows the percentage of the outstanding shares of the Acquiring Fund owned by the Principal LifeTime Funds as of October 31, 2007.

PRINCIPAL LIFETIME FUNDS

						Principal
	Principal	Principal	Principal	Principal	Principal	LifeTime
	LifeTime	LifeTime	LifeTime	LifeTime	LifeTime	Strategic
	2010	2020	2030	2040	2050	Income
Underlying Fund	Fund	Fund	Fund	Fund	Fund	Fund	Total
MidCap Growth Fund III	–	7.17%	7.55%	3.94%	1.75%	–	20.41%

Performance

The bar charts below show how each Fund’s total return has varied year-by-year, while the tables below show each Fund’s performance over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference).

Year-By-Year Total Returns (%) as of 12/31 Each Year (Institutional Class)

The year-to-date return for the Institutional Class as of June 30, 2008 is -6.02% .

Year-By-Year Total Returns (%) as of 12/31 Each Year (Institutional Class)

MidCap Growth Fund III (Acquiring Fund)

The year-to-date return for the Institutional Class as of June 30, 2008 is -9.14%.

Average Annual Total Returns (%) for periods ended December 31, 2007
	Past	Since
	1 Year	Inception⁽¹⁾

MidCap Growth Fund I (Acquired Fund)
--Class A	3.89	9.06
(after taxes on distributions )⁽²⁾	1.17	7.29
(after taxes on distributions and sales of share)⁽²⁾	3.83	7.18
--Class C	8.13	9.75
--Institutional Class	10.91	11.44
(after taxes on distributions )⁽²⁾	8.06	9.66
(after taxes on distributions and sales of share)⁽²⁾	8.45	9.26
--R-1 Class⁽³⁾	9.90	10.46
--R-2 Class⁽³⁾	10.00	10.59
--R-3 Class⁽³⁾	10.21	10.81
--R-4 Class⁽³⁾	10.59	11.05
--R-5 Class⁽³⁾	10.54	11.17
Russell Midcap Growth Index⁽⁴⁾	11.43	12.43
Morningstar Mid-Cap Growth Category Average	15.09	11.62

	Past	Past	Since
	1 Year	5 Years	Inception⁽⁵⁾

MidCap Growth Fund III (Acquiring Fund)
--Class A	16.82	17.72	0.88
(after taxes on distributions )⁽²⁾	15.68	17.37	0.67
(after taxes on distributions and sales of share)⁽²⁾	12.48	15.66	0.74
--Class C	22.36	18.30	1.01
--Institutional Class	24.60	19.93	2.25
(after taxes on distributions )⁽²⁾	23.40	19.57	2.03
(after taxes on distributions and sales of share)⁽²⁾	17.60	17.68	1.92
--R-1 Class⁽⁶⁾	23.39	18.87	1.54
--R-2 Class	23.59	19.06	1.48
--R-3 Class	23.78	19.26	1.87
--R-4 Class	24.06	19.47	1.86
--R-5 Class	24.31	19.73	2.05
Russell Midcap Growth Index⁽⁴⁾	11.43	17.90	4.05
Morningstar Mid-Cap Growth Category Average	15.09	16.33	2.88

(1)	Since inception results are measured from the date the Institutional Class shares were first sold (December 29,
	2003).
(2)	After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do
	not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and
	may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund
	shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
(3)	The R-1 Class shares were first sold on November 1, 2004. The R-2, R-3, R-4 and R-5 Classes of shares were
	first sold on June 1, 2004. For periods prior to the date on which the Retirement Classes began operations, their
	returns are based on the performance of the Fund's Institutional Class shares adjusted to reflect the fees and
	expenses of the Retirement Classes. The adjustments result in performance (for the periods prior to the date the
	Retirement Classes began operations) that is no higher than the historical performance of the Institutional Class
	shares.
(4)	Index performance does not reflect deductions for fees, expenses or taxes. For a description of the indices, see
	Appendix B to this Information Statement/Prospectus.
(5)	Since inception results are measured from the date the R-3 Class shares were first sold (December 6, 2000).
(6)	The R-1 Class shares were first sold on November 1, 2004. The R-3 class shares were first sold on December 6,
	2000. For periods prior to the date on which the R-1 Class began operations, its returns are based on the
	performance of the Fund's R-3 Class shares adjusted to reflect the fees and expenses of the R-1 Class. The
	adjustments result in performance (for the periods prior to the date the R-1 Class began operations) that is no
	higher than the historical performance of the R-3 Class shares.

INFORMATION ABOUT THE REORGANIZATION

Plan of Acquisition

The terms of the Plan are summarized below. The summary is qualified in its entirety by reference to the Form of the Plan which is attached as Appendix A to this Information Statement/Prospectus.

Under the Plan, the Acquiring Fund will acquire all the assets and assume all the liabilities of the Acquired Fund. We expect that the closing date will be November 21, 2008, and that the Effective Time of the Reorganization will be as of the close of regularly scheduled trading on the NYSE (normally 3:00 p.m., Central Time) on that date. Each Fund will determine its net asset values as of the close of trading on the NYSE using the procedures described in its then current prospectus (the procedures applicable to the Acquired Fund and the Acquiring Fund are identical). The Acquiring Fund will issue to the Acquired Fund a number of shares of each share class with a total value equal to the total value of the net assets of the corresponding share class of the Acquired Fund outstanding at the Effective Time.

Immediately after the Effective Time, the Acquired Fund will distribute to its shareholders Acquiring Fund shares of the same class as the Acquired Fund shares each shareholder owns in exchange for all Acquired Fund shares of that class. Acquired Fund shareholders will receive a number of full and fractional shares of the Acquiring Fund that are equal in value to the value of the shares of the Acquired Fund that are surrendered in the exchange. In connection with the exchange, the Acquiring Fund will credit on its books an appropriate number of its shares to the account of each Acquired Fund shareholder, and the Acquired Fund will cancel on its books all its shares registered to the account of that shareholder. After the Effective Time, the Acquired Fund will be dissolved in accordance with applicable law.

The Plan may be amended, but no amendment may be made which in the opinion of the Board would materially adversely affect the interests of the shareholders of the Acquired Fund. The Board may abandon and terminate the Plan at any time before the Effective Time if it believes that consummation of the transactions contemplated by the Plan would not be in the best interests of the shareholders of either of the Funds.

Under the Plan, the Acquired Fund will pay or cause to be paid all out-of-pocket fees and expenses incurred in connection with the transactions contemplated by the Plan. These fees and expenses include, but are not limited to, accountants’ fees, legal fees, registration fees, printing expenses, transfer taxes (if any) and the fees of banks and transfer agents.

If the Plan is not consummated for any reason, the Board will consider other possible courses of action.

Reasons for the Reorganization

Board Consideration of the Reorganization

The Board, including the Independent Directors, considered the Reorganization pursuant to the Plan at its meeting on June 9, 2008. The Board considered information presented by PMC, and the Independent Directors were assisted by independent legal counsel. The Board requested and evaluated such information as it deemed necessary to consider the Reorganization. At the meeting, the Board unanimously approved the Reorganization after concluding that participation in the Reorganization is in the best interests of the Acquired Fund and the Acquiring Fund and that the interests of existing shareholders of the Funds will not be diluted as a result of the Reorganization.

In determining whether to approve the Reorganization, the Board made inquiry into a number of matters and considered, among others, the following factors, in no order of priority:

(1)	the identical investment objectives shared by the Funds, as well as their having, as mid-cap equity funds,
	substantially the same principal investment strategies and risks;
(2)	the Funds’ identical fundamental investment restrictions;
(3)	expense ratios and available information regarding the fees and expenses of the Funds;
(4)	comparative investment performance of and other information pertaining to the Funds;
(5)	the potential effect on the Acquired Fund’s shareholders of investing in a larger fund;
(6)	the prospects for growth of and for achieving economies of scale by the Acquired Fund in combination with
	the Acquiring Fund;
(7)	the absence of any material differences in the rights of shareholders of the Funds;
(8)	the financial strength, investment experience and resources of Turner, which serves as the sub-advisor to the
	Acquiring Fund, and of Mellon Capital, which will become an additional sub-advisor to the Acquiring Fund
	upon completion of the Reorganization;
(9)	any direct or indirect benefits expected to be derived by PMC and its affiliates from the Reorganization;
(10)	the direct or indirect federal income tax consequences of the Reorganization, including the expected tax-free
	nature of the Reorganization and the impact of any federal income tax loss carry forwards;
(11)	the fact that the Reorganization will not result in any dilution of Acquired or Acquiring Fund shareholder
	values;
(12)	the terms and conditions of the Plan; and
(13)	possible alternatives to the Reorganization.

The Board’s decision to recommend approval of the Reorganization was based on a number of factors, including the following:

(1)	it should be reasonable for shareholders of the Acquired Fund to have the same investment expectations after
	the Reorganization because each Fund has identical investment objectives and substantially the same principal
	investment strategies;

(2)	Turner and Mellon Capital as the sub-advisors responsible for managing the assets of the Acquiring Fund
	following the Reorganization may be expected to continue to provide high quality investment advisory
	services and personnel for the foreseeable future;

(3)	the Acquiring Fund, which has a substantially larger asset base than the Acquired Fund, has outperformed the
	Acquired Fund for each of the one- and three-year periods ended April 30, 2008, although no assurance can be
	given that the Acquiring Fund will achieve any particular level of performance after the Reorganization; and

(4)	the Acquiring Fund has a lower advisory fee rate and lower operating expense ratios than the Acquired Fund.

Description of the Securities to Be Issued

PFI is a Maryland corporation that is authorized to issue its shares of common stock in separate series and separate classes of series. Each of the Acquired and Acquiring Funds is a separate series of PFI, and the Class A, Class C, Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 and Institutional Class shares of common stock of the Acquiring Fund to be issued in connection with the Reorganization represent interests in the assets belonging to that series and have identical dividend, liquidation and other rights, except that expenses allocated to a particular series or class are borne solely by that series or class and may cause differences in rights as described herein. Expenses related to the distribution of, and other identified expenses properly allocated to, the shares of a particular series or class are charged to, and borne solely by, that series or class, and the bearing of expenses by a particular series or class may be appropriately reflected in the net asset value attributable to, and the dividend and liquidation rights of, that series or class.

All shares of PFI have equal voting rights and are voted in the aggregate and not by separate series or class of shares except that shares are voted by series or class: (i) when expressly required by Maryland law or the 1940 Act and (ii) on any matter submitted to shareholders which the Board has determined affects the interests of only a particular series or class.

The share classes of the Acquired Fund have the same rights with respect to the Acquired Fund that the share classes of the Acquiring Fund have with respect to the Acquiring Fund.

Shares of both Funds, when issued, have no cumulative voting rights, are fully paid and non-assessable, have no preemptive or conversion rights and are freely transferable. Each fractional share has proportionately the same rights as are provided for a full share.

Federal Income Tax Consequences

To be considered a tax-free “reorganization” under Section 368 of the Internal Revenue Code of 1986, as amended (the “Code”), a reorganization must exhibit a continuity of business enterprise. Because the Acquiring Fund will use a portion of the Acquired Fund’s assets in its business and will continue the Acquired Fund’s historic business, the combination of the Acquired Fund into the Acquiring Fund will exhibit a continuity of business enterprise. Therefore, the combination will be considered a tax-free “reorganization” under applicable provisions of the Code. In the opinion of tax counsel to PFI, no gain or loss will be recognized by either of the Funds or their shareholders in connection with the combination, the tax cost basis of the Acquiring Fund shares received by shareholders of the Acquired Fund will equal the tax cost basis of their shares in the Acquired Fund, and their holding periods for the Acquiring Fund shares will include their holding periods for the Acquired Fund shares.

Capital Loss Carryforward. As of October 31, 2007, the Acquiring Fund had no accumulated capital loss carryforward.

Distribution of Income and Gains. Prior to the Reorganization, the Acquired Fund, whose taxable year will end as a result of the Reorganization, will declare to its shareholders of record one or more distributions of all of its previously undistributed net investment income and net realized capital gain, including capital gains on any securities disposed of in connection with the Reorganization. Such distributions will be made to shareholders before the Reorganization. An Acquired Fund shareholder will be required to include any such distributions in such shareholder’s taxable income. This may result in the recognition of income that could have been deferred or might never have been realized had the Reorganization not occurred.

The foregoing is only a summary of the principal federal income tax consequences of the Reorganization and should not be considered to be tax advice. There can be no assurance that the Internal Revenue Service will concur on all or any of the issues discussed above. You may wish to consult with your own tax advisors regarding the federal, state, and local tax consequences with respect to the foregoing matters and any other considerations which may apply in your particular circumstances.

CAPITALIZATION

The following table shows the capitalization of each of the Acquired Fund and the Acquiring Fund as of April 30, 2008, and the pro forma combined capitalization of the Acquiring Fund as if the Reorganization had occurred as of that date.

			NET ASSET	SHARES
	SHARE	NET ASSETS	VALUE	OUTSTANDING
	CLASS	(000S)	PER SHARE	(000S)
MIDCAP GROWTH FUND I
ACQUIRED FUND	Class A	$ 2,986	$10.73	278
	Class C	338	10.61	32
	Institutional	276,989	11.00	25,186
	R-1	1,628	10.60	154
	R-2	3,371	10.60	318
	R-3	4,966	10.70	464
	R-4	5,387	10.82	498
	R-5	5,098	10.88	469
TOTAL ACQUIRED FUND		$300,763		27,399

MIDCAP GROWTH FUND III
ACQUIRING FUND	Class A	$ 36,529	$10.10	3,618
	Class B	10,262	9.86	1,041
	Class C	1,468	10.05	146
	Class J	34,667	9.66	3,590
	Institutional	632,639	10.33	61,234
	R-1	1,250	9.98	125
	R-2	12,927	10.11	1,279
	R-3	32,172	10.42	3,086
	R-4	26,073	10.42	2,501
	R-5	20,302	10.57	1,921
TOTAL ACQUIRING FUND		$808,289		78,541

REDUCTION IN NET ASSETS AND	Class A	*	**	***
DECREASE IN NET ASSET VALUES PER	Class C	*	**	***
SHARE OF THE ACQUIRED FUND TO	Institutional	$(13)	$(0.00)	(1)
REFLECT THE ESTIMATED EXPENSES OF	R-1	*	**	***
THE REORGANIZATION	R-2	*	**	***
	R-3	*	**	***
	R-4	*	**	***
	R-5	*	**	***

INCREASE IN SHARES OUTSTANDING OF	Class A			18
THE ACQUIRED FUND TO REFLECT THE	Class C			2
EXCHANGE FOR SHARES OF THE	Institutional			1,628
ACQUIRING FUND	R-1			9
	R-2			15
	R-3			13
	R-4			19
	R-5			13

MIDCAP GROWTH FUND III		Class A	$ 39,515	$10.10	3,914
ACQUIRING FUND		Class B	10,262	9.86	1,041
(PRO FORMA ASSUMING REORGANIZATION)		Class C	1,806	10.05	180
		Class J	34,667	9.66	3,590
		Institutional	909,615	10.33	88,047
		R-1	2,878	9.98	288
		R-2	16,298	10.11	1,612
		R-3	37,138	10.42	3,563
		R-4	31,460	10.42	3,018
		R-5	25,400	10.57	2,403
	TOTAL ACQUIRING FUND		$1,109,039		107,656
	(PRO FORMA ASSUMING
	REORGANIZATION)
*	Less than $500.
**	Per share amount is less than $.005.
***	Less than 500 shares.

ADDITIONAL INFORMATION ABOUT THE FUNDS

Certain Investment Strategies and Related Risks of the Funds

This section provides information about certain investment strategies and related risks of the Funds. The PFI Statement of Additional Information contains additional information about investment strategies and their related risks.

Market Volatility

Equity securities include common stocks, preferred stocks, convertible securities, depositary receipts, rights, and warrants. Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation. The value of a company’s stock may fall as a result of factors directly relating to that company, such as decisions made by its management or lower demand for the company’s products or services. A stock’s value may also fall because of factors affecting not just the company, but also companies in the same industry or in a number of different industries, such as increases in production costs. The value of a company’s stock may also be affected by changes in financial markets that are relatively unrelated to the company or its industry, such as changes in interest rates or currency exchange rates. In addition, a company’s stock generally pays dividends only after the company invests in its own business and makes required payments to holders of its bonds and other debt. For this reason, the value of a company’s stock will usually react more strongly than its bonds and other debt to actual or perceived changes in the company’s financial condition or prospects. Stocks of smaller companies may be more vulnerable to adverse developments than those of larger companies.

Repurchase Agreements and Loaned Securities

The Funds may invest a portion of their assets in repurchase agreements, although this is not a principal investment strategy. 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 the 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 Funds enter into repurchase agreements only with large, well-capitalized and well-established financial institutions. In addition, the value of the securities collateralizing the repurchase agreement is, and during the entire term of the repurchase agreement remains, at least equal to the repurchase price, including accrued interest.

The Funds may lend their portfolio securities to unaffiliated broker-dealers and other unaffiliated qualified financial institutions. These transactions involve risk of loss to a fund if the counterparty should fail to return such securities to the fund upon demand or if the counterparty’s collateral invested by the fund declines in value as a result of investment losses.

Forward Commitments

The Funds may enter into forward commitment agreements, although this is not a principal investment strategy. These agreements call for a fund to purchase or sell a security on a future date at a fixed price. The Funds may also enter into contracts to sell their investments either on demand or at a specific interval.

Temporary Defensive Measures

From time to time, as part of its investment strategy, each Fund may invest without limit in cash and cash equivalents for temporary defensive purposes in response to adverse market, economic or political conditions. To the extent that the Fund is in a defensive position, it may lose the benefit of upswings and limit its ability to meet its investment objective. For this purpose, cash equivalents include: bank notes, bank certificates of deposit, bankers’ acceptances, repurchase agreements, commercial paper, and commercial paper master notes which are floating rate debt instruments without a fixed maturity. In addition, each Fund may purchase U.S. government securities, preferred stocks and debt securities, whether or not convertible into or carrying rights for common stock.

There is no limit on the extent to which the Funds may take temporary defensive measures. In taking such measures, the Funds may fail to achieve their investment objectives.

Currency Contracts

The Funds may enter into currency contracts, currency futures contracts and options, and options on currencies for hedging and other purposes. A forward currency contract involves a privately negotiated obligation to purchase or sell a specific currency at a future date at a price set in the contract. A Fund will not hedge currency exposure to an extent greater than the aggregate market value of the securities held or to be purchased by the Fund (denominated or generally quoted or currently convertible into the currency). Hedging is a technique used in an attempt to reduce risk. If a Fund’s Sub-Advisor hedges market conditions incorrectly or employs a strategy that does not correlate well with the Fund’s investment, these techniques could result in a loss. 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. There is also a risk of government action through exchange controls that would restrict the ability of the Fund to deliver or receive currency.

Warrants

Each of the Funds may invest in warrants though neither of the Funds use such investments as a principal investment strategy. 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.

Convertible Securities

Convertible securities are fixed-income securities that a Fund has the right to exchange for equity securities at a specified conversion price. The option allows the Fund to realize additional returns if the market price of the equity securities exceeds the conversion price. For example, the Fund may hold fixed-income securities that are convertible into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common stock reached $12, the Fund could realize an additional $2 per share by converting its fixed-income securities.

Convertible securities have lower yields than comparable fixed-income securities. In addition, at the time a convertible security is issued the conversion price exceeds the market value of the underlying equity securities. Thus, convertible securities may provide lower returns than non-convertible fixed-income securities or equity securities depending upon changes in the price of the underlying equity securities. However, convertible securities permit the Fund to realize some of the potential appreciation of the underlying equity securities with less risk of losing its initial investment.

The Funds treat convertible securities as both fixed-income and equity securities for purposes of investment policies and limitations because of their unique characteristics. The Funds may invest in convertible securities without regard to their ratings.

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 that engage in active trading may have higher portfolio turnover rates. Funds with high turnover rates (more than 100%) often have higher transaction costs (which are paid by the Fund) and may have an adverse impact on the Fund’s performance. Turnover rates for each of the Funds may be found in the Fund’s Financial Highlights table. It is recommended that all the factors are considered when the turnover rates of different funds are compared. 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. An investor should also be aware that the “total return” line in the Financial Highlights section already includes portfolio turnover costs.

Exchange Traded Funds (ETFs)

These are a type of index fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to track a particular market index. The Funds could purchase shares issued by an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although ETFs have management fees that increase their costs.

Small and Medium Capitalization 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. Small companies 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.

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. 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 that 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.

Derivatives

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

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

There are many different types of derivatives and many different ways to use them. Futures and options are commonly used for traditional hedging purposes to attempt to protect a fund from exposure to changing interest rates, securities prices, or currency exchange rates and for cash management purposes as a low-cost method of gaining exposure to a particular securities market without investing directly in those securities. A fund may enter into put or call options, future contracts, options on futures contracts and over-the-counter swap contracts (e.g., interest rate swaps, total return swaps and credit default swaps) for both hedging and non-hedging purposes.

Generally, the Funds may not invest in a derivative security unless the reference index or the instrument to which it relates is an eligible investment for the particular Fund. The return on a derivative security may increase or decrease, depending upon changes in the reference index or instrument to which it relates. The risks associated with derivative investments include:

·	the risk that the underlying security, interest rate, market index or other financial asset will not move in the direction the sub-advisor anticipated;

·	the possibility that there may be no liquid secondary market which may make it difficult or impossible to close out a position when desired;

·	the risk that adverse price movements in an instrument can result in a loss substantially greater than a fund’s initial investment; and

·	the counterparty may fail to perform its obligations.

Initial Public Offerings (“IPOs”)

An IPO is a company’s first offering of stock to the public. IPO risk is that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transaction costs. IPO shares are subject to market risk and liquidity risk. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares by sales of additional shares and by concentration of control in existing management and principal shareholders. When a Fund’s asset base is small, a significant portion of the Fund’s performance could be attributable to investments in IPOs because such investments would have a magnified impact on the Fund. As the Fund’s assets grow, the effect of the Fund’s investments in IPOs on the Fund’s performance probably will decline, which could reduce the Fund’s performance. Because of the price volatility of IPO shares, a Fund may choose to hold IPO shares for a very short period of time. This may increase the turnover of the Fund’s portfolio and lead to increased expenses to the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders.

Foreign Investing

The Funds may invest in securities of foreign companies, which are:

·	companies with their principal place of business or principal office outside the U.S. or

·	companies for which the principal securities trading market is outside the U.S.

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

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

With respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect a Fund’s investments in those countries. In addition, a Fund may also suffer losses due to nationalization, expropriation or differing accounting practices and treatments. Investments in foreign securities are subject to laws of the foreign country that may limit the amount and types of foreign investments. Changes of governments or of economic or monetary policies, in the U.S. or abroad,

changes in dealings between nations, or currency convertibility or exchange rates could result in investment losses for a Fund. Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial relative to the actual market values and may be unfavorable to Fund investors.

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

A Fund may choose to invest in a foreign company by purchasing depositary receipts. Depositary receipts are certificates of ownership of shares in a foreign-based issuer held by a bank or other financial institution. They are alternatives to purchasing the underlying security but are subject to the foreign securities to which they relate. Investments in companies of developing countries may be subject to higher risks than investments in companies in more developed countries. These risks include:

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

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

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

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

Multiple Classes of Shares

The Board has adopted an 18f-3 Plan for each of the Funds. Under these plans, the Acquiring Fund currently offers the following shares: Class R-1, Class R-2, Class R-3, Class R-4, Class R-5 (collectively referred to as “Retirement Class Shares”), Class A, Class B, Class C, Class J, and Institutional Class shares. The Acquired Fund offers the same shares with the exception of Class B and Class J shares. The shares are the same except for differences in class expenses, including any Rule 12b-1 fees and any applicable sales charges, excessive trading and other fees. The Acquiring Fund may offer additional share classes in the future.

Costs of Investing in the Funds

Fees and Expenses of the Funds

The fees and expenses of the Funds are described below. Depending on the class of your shares, you may incur one-time or ongoing fees or both. One-time fees include sales or redemption fees. Ongoing fees are the operating expenses of a Fund and include fees paid to the Fund’s manager, underwriter and others who provide ongoing services to the Fund.

Fees and expenses are important because they lower your earnings. However, lower 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.

Institutional and Retirement Class Shares

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

Ongoing fees

Ongoing Fees reduce the value of each share. Because they are ongoing, they increase the cost of investing in the Funds.

Each Fund pays ongoing fees to PMC and others who provide services to the Fund. These fees include:

•	Management Fee – Through the Management Agreement with the Fund, PMC has agreed to provide
	investment advisory services and administrative services to the Fund.

•	Other Expenses – A portion of expenses that are allocated to all classes of the Fund.

The Retirement Class shares may also be charged the following fees:

•	Distribution Fee – Each of the Funds has adopted a distribution plan under Rule 12b-1 of the 1940 Act for
	certain Retirement Class shares. Under the plan, the Class R-1, R-2, R-3, and R-4 shares of each Fund pay
	a distribution fee based on the average daily net asset value (NAV) of the Fund. These fees pay distribution
	and other expenses for the sale of Fund shares and for services provided to shareholders. Over time, these
	fees may exceed other types of sales charges.

•	Service Fee – PMC has entered into a Services Agreement with PFI under which PMC performs personal
	services for shareholders.

•	Administrative Service Fee – PMC has entered into an Administrative Services Agreement with PFI under
	which PMC provides transfer agent and corporate administrative services to the Fund. In addition, PMC
	has assumed the responsibility for communications with and recordkeeping services for beneficial owners
	of Fund shares.

Princor and PFD are the Funds' principal underwriters for Institutional Class and Retirement Class shares. They may, from time-to-time, at their expense, pay a bonus or other consideration or incentive to dealers who have sold or may sell significant amounts of shares. Any such bonus or incentive program will not change the price paid by investors for the purchase of the Funds’ shares or the amount that any particular Fund receives as the proceeds from such sales. In addition, Princor, PFD, or their affiliates may provide financial support to dealers that sell shares of the Funds. This support is based primarily on the amount of sales of fund shares and/or total assets in the Funds. The amount of support may be affected by: total sales; net sales; levels of redemptions; the dealers’ support of, and participation in, Princor’s and PFD’s marketing programs and the extent of a dealer’s marketing programs relating to the Funds. Financial support to dealers may be made from payments from Princor’s and PFD’s resources and from their retention of underwriting concessions.

Class A and Class C shares

Class A and Class C shares of a Fund may pay both one-time fees and ongoing fees as described below.

One-time fees

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

•	Class A shares may be purchased at a price equal to the share price plus an initial sales charge. 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.

•	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.

•	An excessive trading fee of 1.00% is charged on redemptions or exchanges of a Fund’s Class A and Class
	C shares of $30,000 or more if the shares were purchased within 30 days of the redemption or exchange.
	The fee does not apply to redemptions made: through an Automatic Exchange Election or a Periodic
	Withdrawal Plan; due to a shareholder's death or disability (as defined in the Code); or to satisfy minimum
	distribution rules imposed by the Code. The fee is calculated as a percentage of market value of the shares
	redeemed or exchanged at the time of redemption or exchange (without regard to the effect of any CDSC
	that may apply).

Ongoing Fees
Class A and Class C shares of the Funds pays various ongoing fees to PMC and others who provide services.
Ongoing fees reduce the value of each share. Because they are ongoing, they increase the cost of investing in the
Funds.

The share classes of the Funds pay the following ongoing fees:

•	Management Fee – Through the Management Agreement with the Fund, PMC has agreed to provide
	investment advisory services and corporate administrative services to the Fund.

•	Other Expenses – A portion of expenses that are allocated to all classes of the Fund.

•	Distribution Fee – Each of the Funds has adopted a distribution plan under Rule 12b-1 under the 1940 Act
	for its Class A and Class C shares. Under the plan, each such share class of each Fund pays a distribution
	fee based on the average daily net asset value (NAV) of the Fund. These fees pay distribution expenses for
	the sale of Fund shares by the Distributor of each Fund and other selling dealers. See “Distribution Plans
	and Additional Information Regarding Intermediary Compensation” below.
•	Transfer Agent Fee – Principal Shareholder Services, Inc. ("PSS") has entered into a Transfer Agency
	Agreement with PFI under which PSS provides transfer agent services to the Class A and Class C shares of
	the Funds. These services are currently provided at cost.

Class A and Class C shares of the Funds also pay expenses of registering and qualifying shares for sale, the cost of producing and distributing reports and prospectuses to Class A and Class C shareholders and the cost of shareholder meetings held solely for Class A and Class C shares.

PSS registers Class A and Class C shares with the states, and each of the Funds pays the cost associated with this activity under the terms of the Transfer Agency Agreement.

You may obtain more information about sales charge reductions and waivers through a link on PFI’s website at www.PrincipalFunds.com, from the Statement of Additional Information, or from your Investment Representative.

Distribution Plans and Additional Information Regarding Intermediary Compensation

Institutional Class Shares

Neither Fund has adopted a 12b-1 Plan for Institutional Class shares.

Retirement Class Shares

PFI has adopted Distribution and Service Plans under Rule 12b-1 under the 1940 Act (each, a “12b-1 plan”) for the Class R-1, R-2, R-3, and R-4 shares of the Fund. Under the 12b-1 Plans, each Fund will make payments from its assets attributable to the particular share class to the Fund’s Distributor for distribution-related expenses and for providing services to shareholders of that share class. Payments under the 12b-1 plans will not automatically terminate for funds that are closed to new investors or to additional purchases by existing shareholders. The Board will determine whether to terminate, modify, or leave unchanged the 12b-1 plan for any fund at the time the Board directs the implementation of the closure of the fund. Because Rule 12b-1 fees are ongoing fees, over time they will increase the cost of an investment in the Funds and may cost more than paying other types of sales charges.

The Distributors for the Retirement share classes of Principal Funds described in this prospectus are Princor and PFD, both wholly owned subsidiaries of PFG. The term “Distributors” as used in this section refers to both Princor and PFD.

The maximum annual Rule 12b-1 distribution and/or service fee (as a percentage of average daily net assets) for each of the above classes of the Funds are set forth below:

Share Class	12b-1 Fee
R-1	0.35%
R-2	0.30%
R-3	0.25%
R-4	0.10%

Retirement Plan Services. Each Fund pays a Service Fee and Administrative Services Fee to PMC for providing services to retirement plan shareholders. PMC typically pays some or all of these fees to Principal Life Insurance Company, which has entered into an agreement to provide these services to the retirement plan shareholders. PMC may also enter into agreements with other intermediaries to provide these services, and pay some or all of the Fees to such intermediaries.

Plan recordkeepers, who may have affiliated financial intermediaries that sell shares of the funds, may be paid additional amounts. In addition, financial intermediaries may be affiliates of entities that receive compensation from the Distributor for maintaining retirement plan “platforms” that facilitate trading by affiliated and non-affiliated financial intermediaries and recordkeeping for retirement plans.

The amounts paid to plan recordkeepers for recordkeeping services, and their related service requirements may vary across fund groups and share classes. This may create an incentive for financial intermediaries and their Investment Representatives to recommend one fund complex over another or one class of shares over another.

Class A and Class C shares

PFI has adopted Distribution and Service Plans under 12b-1 under the 1940 Act (each, a “12b-1 plan”) for Class A and Class C shares of each of the Funds. Under the 12b-1 Plans, each Fund may make payments from its assets attributable to the particular share class to the Fund’s Distributor for distribution-related expenses and for providing services to shareholders of that share class. Payments under the 12b-1 plans will not automatically terminate for funds that are closed to new investors or to additional purchases by existing shareholders. The Board will determine whether to terminate, modify, or leave unchanged the 12b-1 plan for any fund at the time the Board directs the implementation of the closure of the fund. Because Rule 12b-1 fees are ongoing fees, over time they will increase the cost of an investment in the Funds and may cost more than paying other types of sales charges.

The Distributor for Class A and Class C shares is PFD.

The maximum annual Rule 12b-1 distribution and/or service fee (as a percentage of average daily net assets) for each of the above classes of the Funds are set forth below:

Share Class	12b-1 Fee
Class A	0.25%
Class C	1.00%

Service Fees. PFD may pay service fees to dealers and other intermediaries at the annual rate of 0.25% of the average daily net assets of such shares for which they are the dealers of record. Generally, to receive service fees from PFD, dealers or other intermediaries must be the dealer of record for shares with average daily net assets of at least $100,000. Generally, Class A shares must be held for three months before these fees are paid. In the case of Class C shares, generally these fees are not paid until such shares have been held for twelve months.

Distribution Fees. The proceeds from the Rule 12b-1 distribution fees paid by Class C shareholders, together with any applicable sales charge, are paid to PFD. PFD generally uses distribution fees to finance any activity that is primarily intended to result in the sale of shares. Examples of such expenses include compensation to salespeople, including ongoing commission payments for Class C shares, and selected dealers (including financing the commission paid to the dealer at the time of the sale), printing of prospectuses and statements of additional information and reports for other than existing shareholders, and preparing and conducting sales seminars.

Commissions, Finders' Fees and Ongoing Payments. In the case of Class A shares, all or a portion of the initial sales charge that you pay may be paid by PFD to financial intermediaries selling Class A shares. PFD may pay these financial intermediaries a finders' fee of up to 1.00% on purchases of $1,000,000 or more. PFD may pay financial intermediaries a fee of up to 1.00% on initial investments of $500,000 or more by qualified retirement plans in omnibus accounts, which are not subject to initial sales charges. Additionally, PFD generally makes ongoing payments to your financial intermediary for services provided to you at an annual rate of 0.25% of average net assets attributable to your investment in Class A shares.

In the case of Class C shares, PFD will pay, at the time of your purchase, a commission to your financial intermediary in an amount equal to 1.00% of your investment. Additionally, PFD generally makes ongoing payments to your financial intermediary for distribution and services provided to you at an annual rate of 1.00% of average net assets attributable to your investment in Class C shares.

Transfer Agency and Retirement Plan Services. Principal Shareholder Services, Inc. acts as the transfer agent for the Funds. As such, it registers the transfer, issuance, and redemption of fund shares and disburses dividends and other distributions to fund shareholders.

Many Fund shares are owned by financial intermediaries for the benefit of their customers. In those cases, the Funds often do not maintain an account for these investors. Thus, some or all of the transfer agency functions for these accounts are performed by the financial intermediaries. The transfer agent may pay these financial intermediaries fees for sub-transfer agency and/or related recordkeeping services.

The amounts paid to financial intermediaries and plan record-keepers for sub-transfer agency and recordkeeping services, and their related service requirements may vary across fund groups and share classes. This may create an incentive for financial intermediaries and their Investment Representatives to recommend one fund complex over another or one class of shares over another.

Other Payments to Financial Intermediaries

Payments to Investment Representatives and Their Firms. Financial intermediaries market and sell shares of the Acquired and Acquiring Funds. These financial intermediaries receive compensation from the Distributors and their affiliates for selling shares of the Funds and/or providing services to the Funds’ shareholders. Financial intermediaries may include, among others, broker-dealers, registered investment advisors, banks, and trust companies. Investment Representatives who deal with investors on an individual basis are typically associated with a financial intermediary. The Distributors and their affiliates may fund this compensation from various sources, including any sales charge and/or Rule 12b-1 Plan fee that the shareholder or the Funds pay to the Distributors. Individual Investment Representatives may receive some or all of the amounts paid to the financial intermediary with which he or she is associated.

Other Payments to Intermediaries. In addition to the commissions paid at the time of sale, ongoing payments, and the reimbursement of costs associated with education, training and marketing efforts, conferences, seminars, due diligence trip expenses, ticket charges, and other general marketing expenses, some or all of which may be paid to financial intermediaries (and, in turn, to your Investment Representative), the Distributors and their affiliates, at their expense, currently provide additional payments to financial intermediaries that sell shares of the Funds for distribution services. Although payments made to each qualifying financial intermediary in any given year may vary, such payments will generally not exceed (a) 0.25% of the current year’s sales of Fund shares by that financial intermediary and/or (b) 0.25% of average daily net assets of Fund shares serviced by that financial intermediary over the year.

A number of factors are considered in determining the amount of these additional payments, including each financial intermediary’s Fund sales, assets, and redemption rates as well as the willingness and ability of the financial intermediary to give the Distributors access to its Investment Representatives for educational and marketing purposes. In some cases, financial intermediaries will include the Funds on a ‘‘preferred list.’’ The Distributor’s goals include making the Investment Representatives who interact with current and prospective investors and shareholders more knowledgeable about the Funds so that they can provide suitable information and advice about the and related investor services.

Additionally, the Distributor may provide payments to reimburse directly or indirectly the costs incurred by these financial intermediaries and their associated Investment Representatives in connection with educational seminars and training and marketing efforts related to the Funds for the firms’ employees and/or their clients and potential clients. The costs and expenses associated with these efforts may include travel, lodging, entertainment, and meals. The Distributor may also provide payment or reimbursement for expenses associated with qualifying dealers’ conferences, transactions (‘‘ticket’’) charges, and general marketing expenses.

In connection with PMC’s December 2006 purchase of WM Advisors, the investment advisor to the WM Funds, and WM Advisors’ two subsidiaries, WM Funds Distributor, Inc. and WM Shareholder Services, Inc. (the "Transaction"), New American Capital, Inc. and its parent company Washington Mutual, Inc. ("WaMu") have agreed to make certain contingent payments to PMC with respect to each of the first four years following the closing of the Transaction. Such payments must be made if aggregate management fee revenues to PMC and its affiliates from assets under management in funds and other financial products advised by PMC and its affiliates (including the Acquired and Acquiring Funds) (collectively, the "Principal Products") sold through WaMu and its affiliates (including WM Financial Services, Inc., a broker-dealer subsidiary of WaMu) fall below certain specified targets during any such year. This could result in up to $30 million being paid by WaMu or New American Capital, Inc. to PMC with respect to each of those four years following the closing of the Transaction. As a result, WM Financial Services, Inc. (and/or it affiliates) will have an additional incentive to sell Principal Products following the closing of the Transaction.

If one mutual fund sponsor makes greater distribution assistance payments than another, your Investment Representative and his or her financial intermediary may have an incentive to recommend one fund complex over another. Similarly, if your Investment Representative or his or her financial intermediary receives more distribution assistance for one share class versus another, then they may have an incentive to recommend that share class.

Please speak with your Investment Representative to learn more about the total amounts paid to your Investment Representative and his or her financial intermediary by the Funds, the Distributor and its affiliates, and by sponsors of other mutual funds he or she may recommend to you. You should also carefully review disclosures made by your Investment Representative at the time of purchase.

As of March 1, 2007, the Distributor anticipates that the firms that will receive additional payments for distribution of the Funds (other than commissions paid at the time of sale, ongoing payments, and the reimbursement of cost associated with education, training and marketing efforts; conferences; ticket charges; and other general marketing expenses) include:

Advantage Capital Corporation	Mutual Service Corporation
Advest, Inc.	National Financial Services Corp.
A.G. Edwards & Sons, Inc.	National Investors Corporation
AIG Advisors, Inc.	National Planning Corporation
American Portfolios Financial Services, Inc.	NFP Securities, Inc.
Ameriprise Financial Services Corp.	Oppenheimer & Co., Inc.

Associated Financial Group	Pacific Select Distributors, Inc.
Associated Securities Corp.	Pershing
AXA Advisors, LLC	Piper Jaffray & Co.
Cadaret, Grant & Co., Inc.	ProEquities, Inc.
Charles Schwab & Co., Inc.	Prospera Financial Services, Inc.
Citigroup Global Markets, Inc.	Prudential Investment Management Services, LLC
Commonwealth Financial Network	Raymond James & Associates, Inc.
Farmers Financial Solutions, LLC	Raymond James Financial Services, Inc.
FFP Securities, Inc.	RBC Dain Rauscher, Inc.
FSC Securities Corporation	Royal Alliance Associates, Inc.
G.A. Repple & Company	Scottrade, Inc.
H. Beck, Inc.	Securities America, Inc.
INVEST Financial Corporation	Sentra Securities Corp./Spelman and Co., Inc.
Investacorp, Inc.	SII Investments, Inc.
Investment Advisors & Consultants, Inc.	Sorrento Pacific Financial, LLC
Investment Centers of America, Inc.	Southwest Securities, Inc.
Janney Montgomery Scott, LLC	SunAmerica Securities, Inc.
Jefferson Pilot Securities Corporation	Triad Advisors, Inc.
Linsco/Private Ledger Corp.	UBS Financial Services, Inc.
McDonald Investments, Inc.	United Planners’ Financial Services of America
Merrill Lynch, Pierce, Fenner & Smith Inc.	Wachovia Securities, LLC
M.L. Stern & Co.	WM Financial Services, Inc.
Morgan Stanley DW, Inc.	Waterstone Financial Group, Inc.

To obtain a current list of such firms, call 1-800-222-5852.

Although a Fund may use brokers who sell shares of the Funds to effect portfolio transactions, the sale of shares is not considered as a factor when selecting brokers to effect portfolio transactions.

Your financial intermediary may charge fees and commissions, including processing fees, in addition to those described in this prospectus. The amount and applicability of any such fee is determined and disclosed separately by the financial intermediary. You should ask your Investment Representative for information about any fees and/or commissions that are charged.

Dividends and Distributions

The Acquired and Acquiring Funds pay their net investment income on an annual basis. The payment date is the last business day of the year. Payments are made to shareholders of record on the business day prior to the payment date. You may ask to have your dividends paid to you in cash. If you do not request cash payments, your dividend payment will be reinvested back into additional shares of the Funds.

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 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.

NOTES:

•	A Fund’s declaration of income dividends and capital gains has the effect of reducing the share price by the
	amount of the dividend or capital gain declared.
•	Distributions from a Fund, whether received in cash or reinvested in additional shares, may be subject to
	federal (and state) income tax.
•	For these reasons, buying shares of a Fund shortly before it makes a distribution may be disadvantageous to
	you.
•	Special tax rules apply to dividends and distributions paid to retirement plans.

Pricing of Fund Shares
The shares of the Funds are bought and sold at the current share price. The share price of each class of each
Fund is calculated each day the NYSE is open (shares are not priced on the days on which the NYSE is closed for
trading, generally New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday/Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas). The share price is
determined as of the close of business of the NYSE (normally 3:00 p.m. Central Time). When an 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 received in good
order by us at our transaction processing center. In order for us to process your purchase order on the day it is
received, we must receive the order (with complete information):

•	on a day that the NYSE is open and

•	prior to the close of trading on the NYSE (normally 3 p.m. Central Time).

Orders received after the close of the NYSE or on days that the NYSE is not open will be processed on the next
day that the NYSE is open for normal trading. If we receive an application or purchase request for a new mutual
fund account or subsequent purchase into an existing account that is accompanied by a check and the application or
purchase request does not contain complete information, we may hold the application (and check) for up to two
business days while we attempt to obtain the necessary information. If we receive the necessary information within
two business days, we will process the order using the next share price calculated. If we do not receive the
information within two business days, the application and check will be returned to you.

For each of the Funds, the share price is calculated by:

•	taking the current market value of the total assets of the Fund

•	subtracting liabilities of the Fund

•	dividing the remainder proportionately into the classes of the Fund

•	subtracting the liability of each class

•	dividing the remainder by the total number of shares owned in that class.

NOTES:

•	If market quotations are not readily available for a security owned by a Fund, its fair value is determined
	using a policy adopted by the Directors. Fair valuation pricing is subjective and creates the possibility that
	the fair value determined for a security may differ materially from the value that could be realized upon the
	sale of the security.

•	A Fund’s securities may be traded on foreign securities markets that generally complete trading at various
	times during the day prior to the close of the NYSE. Generally, the values of foreign securities used in
	computing a Fund’s NAV are the market quotations as of the close of the foreign market. Foreign securities
	and currencies are also converted to U.S. dollars using the exchange rate in effect at the close of the NYSE.
	Occasionally, events affecting the value of foreign securities occur when the foreign market is closed and
	the NYSE is open. The Fund has adopted policies and procedures to “fair value” some or all securities held
	by a Fund if significant events occur after the close of the market on which the foreign securities are traded
	but before the Fund’s NAV is calculated.

	Significant events can be specific to a single security or can include events that affect a particular foreign
	market or markets. A significant event can also include a general market movement in the U.S. securities
	markets. If PMC believes that the market value of any or all of the foreign securities is materially affected
	by such an event, the securities will be valued, and the Fund’s NAV will be calculated, using the policy
	adopted by the Fund. These fair valuation procedures are intended to discourage shareholders from
	investing in the Fund for the purpose of engaging in market timing or arbitrage transactions.

	The trading of foreign securities generally or in a particular country or countries may not take place on all
	days the NYSE is open, or may trade on days the NYSE is closed. Thus, the value of the foreign securities
	held by the Fund may change on days when shareholders are unable to purchase or redeem shares.

•	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 local price and 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 Fund has a policy to value such securities at a price at which the Sub-Advisor expects
	the securities may be sold.

Purchases, Redemptions, and Exchanges of Shares

The purchase, redemption and exchange procedures with respect to shares of the Acquired and Acquiring Funds are the same. These procedures vary based on the class of shares owned.

Purchases of Shares

Institutional Class shares may be purchased from Princor or PFD, the principal underwriters for this class. There are no sales charges on Institutional Class shares. There are no restrictions on amounts to be invested in Institutional Class shares.

Shareholder accounts for the Fund are maintained under an open account system. Under this system, an account is opened and maintained for each investor. Each investment is confirmed by sending the investor a statement of account showing the current purchase or sale and the total number of shares owned. The statement of account is treated by the Fund as evidence of ownership of Fund shares. Share certificates are not issued.

The Fund may reject or cancel any purchase orders for any reason. For example, the Fund does not permit market timing because short-term or other excessive trading into and out of the Funds may harm performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject any purchase orders from market timers or investors that, in PMC’s opinion, may be disruptive to the Fund. For these purposes, PMC may consider an investor’s trading history in the Fund or other Funds sponsored by Principal Life and accounts under common ownership or control. PMC may recommend to the Board, and the Board may elect, to close certain funds to new and existing investors.

Retirement Class Shares may be purchased:
•	via the internet
	•	standard method of accepting data for plans with fewer than 1,000 current and terminated (within the
		last five years) members
	•	available 7 days a week (7 a.m. to 9 p.m. Central Time
•	using a modem
	•	plan contributions transferred electronically
	•	standard method of accepting data for plans with more than 1,000 current and terminated (within the
		last five years) members
	•	available 24 hours a day, 7 days a week

To eliminate the need for safekeeping, the Funds will not issue certificates for shares. The Funds may periodically close to new purchases of shares or refuse any order to buy shares if PMC determines that doing so would be in the best interests of the Fund and its shareholders.

Class A and Class C shares. Information regarding sales charges and dealer reallowances are provided below. Each class has different costs associated with buying, redeeming, and holding shares. Which class is best for you depends upon:

•	the dollar amount you are investing,
•	the amount of time you plan to hold the investment, and
•	any plans to make additional investments in PFI.

Please consult with your Investment Representative before choosing the class of shares that is appropriate for
you.

	Fund and share class selections must be made at the time of purchase. If you are making an initial purchase of
PFI Funds of $100,000 or more and have selected Class C shares, the purchase will be of Class A shares of the
Fund(s) you have selected. If you are making subsequent purchases into your existing PFI Fund Class C share
accounts and the combined value of the subsequent investment and your existing Class A and Class C share
accounts combined for Rights of Accumulation purposes exceeds $1,000,000, the subsequent investment will be
applied to purchase Class A shares of the Fund(s) you have selected.

CLASS A SHARES

Initial Sales Charge

•	You generally pay a sales charge on an investment in Class A shares, which varies based on the amount
	invested and the Fund selected.
•	If you invest $50,000 or more, the sales charge is reduced.
•	You might be eligible for a reduced sales charge. See “Sales Charge Waiver or Reduction (Class A shares).”
•	Sales charges might be reduced under the Rights of Accumulation or Statement of Intention, as described
	below.

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 a 60-day
notice to shareholders of existing accounts.

	To receive a reduction in your Class A initial sales charge, you or your Investment Representative must let the
Fund know at the time you purchase shares that you qualify for such a reduction. If you or your Investment
Representative do not let the Fund know that you are eligible for a reduction, you may not receive a sales charge
discount to which you are otherwise entitled. It may be necessary for you to provide information and records, such
as account statements.

Purchase Without an Initial Sales Charge (Class A shares)

•	No initial sales charge will apply to purchases of $1 million or more, although a 1.00% contingent deferred
	sales charge may apply to redemptions made within 18 months after purchase.

•	No initial sales charge will apply to shares purchased with the proceeds of redemptions of Class A shares of the
	PFI Funds (other than the PFI Money Market Fund, unless such shares were obtained by exchange of shares of
	a Fund that imposes an initial sales charge) or was waived in connection with a Required Minimum
	Distribution, involuntary redemption or due to the death of the shareholder, within 60 days of redemption. It is
	the responsibility of the shareholder to notify PFI at the time of repurchase if the purchase proceeds are from a
	redemption of the Fund within the past 60 days.

•	A Fund’s Class A shares may be purchased without a sales charge by the following individuals, groups, and/or
	entities:

	•	by its current and former Directors, member companies of the Principal Financial Group, and their active or
		retired employees, officers, directors, brokers, or agents (for the life of the account). This also includes their
		immediate family members (spouse, domestic partner, children (regardless of age), and parents), and trusts
		created by or primarily for the benefit of these individuals;
	•	by the Premier Credit Union;
	•	by non-ERISA clients of Principal Global Investors LLC;
	•	by any employee or registered representative (and their immediate family members and employees) of an
		authorized broker-dealer or company that has entered into a selling agreement with Financial Services
		Corporation (“Princor”) or the Distributor;
	•	through a “wrap account” offered by Princor or through broker-dealers, investment advisors, and other
		financial institutions that have entered into an agreement with Princor or the Distributor 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;

	•	to fund non-qualified plans administered by a member company of the Principal Financial Group pursuant
		to a written service agreement;
	•	by accounts established as a result of the conversion of Class R shares of the Fund;
	•	by any investor who buys Class A shares through an omnibus account with certain financial intermediaries,
		such as a bank or other financial institution, that does not accept or charge the initial sales charge. In
		addition, the CDSC generally applicable to redemptions of shares made within 18 months after purchase of
		$1 million or more will not be imposed on redemptions of shares purchased through such omnibus account
		where no sales charge payments were advanced for purchases made through these entities;
	•	by current and retired Washington Mutual employees and their immediate family members, including
		children up to and including age 25;
	•	by individuals who were eligible to purchase shares without payment of a sales charge of a predecessor
		fund (a fund previously included in the WM Group of Funds) prior to the date the successor fund
		commenced operations;
	•	by clients of registered investment advisors that have entered into arrangements with Princor or the
		Distributor providing for the shares to be used in particular investment products made available to such
		clients and for which such registered investment advisors may charge a separate fee;
	•	existing participants in Employer-Sponsored Plans (as defined in Purchase at a Reduced Initial Sales
		Charge (Class A Shares)) that had a least $1 million in PFI as of January 12, 2007 can purchase Class A
		shares at net asset value for the duration of that account; and
	•	new participants in such Employer-Sponsored Plans that had at least $2.8 million in PFI as of January 12,
		2007 can purchase Class A shares within the plan at net asset value provided the participant notes that he or
		she meets this qualification on the participant’s initial application to purchase shares.

Purchase at a Reduced Initial Sales Charge (Class A Shares)
1)	Rights of Accumulation. The sales charge varies with the size of your purchase. Purchases made by you, your
	spouse or domestic partner, your children, the children of your spouse or domestic partner up to and including
	the age of 25 and/or a trust created by or primarily for the benefit of such persons (together “a Qualified
	Purchaser”) will be combined along with the value of existing Class A, B, C and J shares of PFI owned by such
	persons, to determine the applicable sales charge. Class A shares of the Money Market Fund are not included in
	the calculation unless they were acquired in exchange from other PFI Fund shares. If the total amount being
	invested in PFI is near a sales charge breakpoint, you should consider increasing the amount invested to take
	advantage of a lower sales charge.

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. If the intended investment is not
	made (or shares are sold during the 13 month period), sufficient shares will be sold to pay the additional sales
	charge due. An SOI is not available for 401(a) plan purchases.

3)	Employer Sponsored Plans. The maximum sales charge for all purchases made in an account that is included in
	a payroll deduction plan (“Employer Sponsored Plan”) established prior to March 1, 2002 with Principal
	Management Corporation as the Funds’ transfer agent, is the sales charge that applies to purchases of at least
	$100,000 but less than $250,000 as described in the sales charge tables below; the regular sales charge applies
	to purchases of $250,000 or more in such accounts and to all purchases of the Short-Term Bond, Short-Term
	Income, Ultra Short Bond and LargeCap S&P 500 Index Fund shares. The reduced sales charge applies to
	purchases made by or on behalf of participants to such plans who become participants on or before July 28,
	2007.

	Purchase of Class A Shares. The offering price for Class A shares is the NAV next calculated after receipt of
an investor’s order in proper form by the Fund or its servicing agent, plus any applicable initial sales charge. The
right-hand column in each table indicates what portion of the sales charge is paid to Investment Representatives and
their brokerage firms (“dealers”) for selling Class A shares. For more information regarding compensation paid to
dealers, see “Distribution Plan and Additional Information Regarding Intermediary Compensation.”

Class A shares of the 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. Class A shares purchased with proceeds from the redemption of Class A shares of other PFI Funds within 60 days of the redemption are not subject to an initial sales charge provided the shareholder notifies PFI that the purchase proceeds are from the redemption of Class A shares. Your sales charge may be reduced for larger purchases as indicated below.

	Class A Sales Charges – Acquired and Acquiring Funds
		Sales Charge as % of
		Offering	Amount	Dealer Allowance
	Amount of Purchase	Price	Invested	as % of Offering Price
	Less than $50,000	4.50%	4.71%	4.00%
	$50,000 but less than $100,000	4.00%	4.17%	3.50%
	$100,000 but less than $250,000	3.50%	3.63%	3.00%
	$250,000 but less than $500,000	2.50%	2.56%	2.00%
	$500,000 but less than $1,000,000	2.00%	2.04%	1.75%
	$1,000,000 or more	0.00%	0.00%	0.00%*

*	PFD may pay authorized dealers commissions on purchases of Class A shares over $1 million calculated as follows:
	1.00% on purchases between $1 million and $3 million, 0.50% on the next $2 million, 0.35% on the next $5 million,
	and 0.25% on the amount purchased in excess of $10 million. The commission rate is determined based on the
	purchase amount combined with the current market value of existing investments in Class A, B, and C shares.

Contingent Deferred Sales Charge (“CDSC”) on Class A Shares. Class A shares purchased in amounts of $1
million or more are generally subject to a CDSC of 1.00% if the shares are redeemed during the first 18 months after
purchase, unless the dealer, at its discretion, has waived the commission. PFD may pay authorized dealers
commissions up to 1.00% of the price of such purchases. The CDSC may be waived for redemptions of Class A
shares as described under “CDSC Calculation and Waivers.”

CLASS C SHARES
Class C shares may not be suitable for large investments. Due to the higher expenses associated with Class C
shares, it may be more advantageous for investors currently purchasing, intending to purchase, or with existing
assets in amounts that may qualify for a reduced sales charge on Class A shares, including through Rights of
Accumulation and/or Statement of Intention, to purchase Class A shares.

PFI seeks to prevent investments in Class C shares by shareholders with at least $1 million of investments in the
PFI Funds eligible for inclusion pursuant to Rights of Accumulation. The Funds will consider initial purchases of $1
million or more, and subsequent purchases that would result in an investment of $1 million or more when combined
with a shareholder’s existing account values, as determined using Rights of Accumulation, as a purchase of Class A
shares.

The offering price for Class C shares is the NAV next calculated after receipt of an investor's order in proper
form by PFI or its servicing agent, with no initial sales charge.

•	A CDSC of 1.00% may apply if redeemed during the first 12 months after purchase. Class C shares do not
	convert to Class A shares, so future distribution and service fees do not decrease.

•	Class C shares have higher annual expenses than Class A shares because they are subject to distribution
	fees.

Within 60 days of a redemption of Class C shares, the proceeds may be used to repurchase Class C shares. It is
the responsibility of the shareholder to notify PFI at the time of the repurchase if the purchase proceeds are from a
redemption of Class C shares. Shares purchased with redemption proceeds are not subject to the twelve month
CDSC. If a CDSC has been waived in connection with a Required Minimum Distribution, involuntary redemption,
or death of a shareholder, redemption proceeds may not be used to repurchase Class C shares. Following these
circumstances, redemption proceeds may be used to purchase Class C shares which will be subject to the twelve
month CDSC.

PFD currently pays authorized dealers commissions of up to 1.00% of the price of Class C shares sold by them.

Contingent Deferred Sales Charge (''CDSC'') on Class C Shares. Each initial and subsequent purchase of
Class C shares is subject to a CDSC of 1.00% for a period of 12 months from the date of purchase. Shares will be
redeemed first from shares purchased through reinvested dividends and capital gain distributions, which are not
subject to the CDSC, and then in order of purchase. The CDSC may be waived for redemptions of Class C shares as
described under ''CDSC Calculation and Waivers.''

CDSC CALCULATION AND WAIVERS
The CDSC, if any, is based on the lesser of the market value at the time of redemption or the initial purchase
price of the shares sold. The CDSC does not apply to shares purchased with reinvested dividends or other
distributions. The CDSC is not charged on exchanges. However, the original purchase date of the shares from which
an exchange is made is used to determine if the newly acquired shares are subject to the CDSC when they are sold.

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). The CDSC does not apply to
shares redeemed according to a periodic withdrawal plan limited to no more than 1.00% per month (measured
cumulatively for non-monthly plans) of the value of the Fund account at the time, and beginning on the date, the
periodic withdrawal plan is established.

The CDSC is waived on shares which are sold:
•	within 90 days after an account is re-registered due to a shareholder’s death;
•	due to the shareholder’s disability, as defined in the Code provided the shares were purchased prior to the
	disability;
•	to pay surrender charges; or
•	involuntarily from small balance accounts.
NOTE: To have your CDSC waived, you must let your advisor or PFI know at the time you redeem shares that you
qualify for such a waiver.

Payment. Payment for shares of the Funds purchased as a direct rollover IRA is made by the retirement plan
trustees. Payment for other shares is generally made via personal check or cashiers check. We consider your
purchase of Fund shares by check to be your authorization to make an automated clearing house (“ACH”) debit
entry to your account. Shares purchased by check may be sold only after the check has cleared your bank, which
may take up to 7 calendar days.

Payments are to be made via personal or financial institution check (for example, a bank or cashier's check). We
reserve the right to refuse any payment that we feel presents a fraud or money laundering risk. Examples of the types
of payments we will not accept are cash, money orders, travelers' checks, credit card checks, and foreign checks.

Your Investment Representative can help you buy shares of the Funds by mail, through bank wire, direct
deposit or Automatic Investment Plan. Contact the Fund at 1-800-222-5852 to obtain bank wire instructions. No
wires are accepted on days when the NYSE is closed or when the Federal Reserve is closed (because the bank that
would receive your wire is closed).

Direct Deposit
Your Investment Representative can help you make a Direct Deposit from your paycheck (if your employer
approves) or from a government allotment. Direct Deposit allows you to deposit automatically all or part of your
paycheck (or government allotment) to your PFI account(s). You will receive a Direct Deposit Authorization Form
to give to your employer or the governmental agency (either of which may charge a fee for this service). Shares PFI
will be purchased on the day the ACH notification is received by Wells Fargo, N.A. On days when the NYSE is
closed, but the bank receiving the ACH notification is open, your purchase will be priced at the next calculated share
price.

Automatic Investment Plan

Your Investment Representative can help you establish an Automatic Investment Plan. You may make regular
monthly investments with automatic deductions from your bank or other financial institution account. You select the
day of the month the deduction is to be made. If that date is a non-trading day, we will process the deduction on the
next trading day. If the next trading day falls in the next month or year, we will process the deduction on the day

prior to your selected day. The minimum initial investment is waived if you set up an Automatic Investment Plan
when you open your account. Minimum monthly purchase is $100 per Fund.

Redemptions of Shares
Institutional Class Shares of the Fund may be redeemed upon request. There is no charge for the redemption.
Shares are redeemed at the NAV per share next computed after the request is received by the Fund in proper and
complete form. The Fund generally sends payment for shares sold the business day after the sell order is received.
Under unusual circumstances, the Fund may suspend redemptions, or postpone payment for more than seven days,
as permitted by federal securities law.

Retirement Class Shares may be sold back to the Fund any day the NYSE is open, subject to any restrictions
imposed by a plan. For more information about how to sell shares of the Funds, including any charges that a plan
may impose, please consult the plan. The Fund generally sends payment for shares sold the business day after the
sell order is received. Under unusual circumstances, the Fund may suspend redemptions, or postpone payment for
more than seven days, as permitted by federal securities law.

Distributions in Kind

Payment for shares of the Funds tendered for redemption is ordinarily made by check. However, the Funds may
determine that it would be detrimental to the remaining shareholders of a Fund to make the payment of a redemption
order wholly or partly in cash. Under certain circumstances, therefore, each of the Funds may pay redemption
proceeds in whole or in part by a distribution “in kind” of securities from the Fund’s portfolio in lieu of cash. If a
Fund pays the redemption proceeds in kind, the redeeming shareholder might incur brokerage or other costs in
selling the securities for cash. Each Fund will value securities used to pay redemptions in kind using the same
method the Fund uses to value its portfolio securities as described in this information statement/prospectus.

Redemption Fees

The Board of Directors of both, the Acquiring and the Acquired, Funds have determined that it is not necessary
to impose a fee upon the redemption of fund shares, because both Funds have adopted transfer restrictions as
described in “Exchange of Fund Shares.”

Class A and Class C 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 or excessive trading fee. There is
no additional charge for a sale of shares however; you will be charged a $10 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. It may take additional business days for your financial institution to post this payment to your account at that
financial institution. At your request, the check will be sent overnight (a $15 overnight fee will be deducted from
your account unless other arrangements are made). Shares purchased by check may be sold only after the check has
cleared your bank, which may take up to 7 Calendar days or more. A sell order from one owner is binding on all
joint owners.

* a day when the NYSE is open for normal business.

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:

•	payable to all owners on the account (as shown in the account registration); and
•	mailed to the address on the account (if not changed within last month) or previously authorized bank
	account.
For other payment arrangements, please call PFI. You should also call PFI for special instructions that may
apply to sales from accounts:

•	when an owner has died; or
•	owned by corporations, partnerships, agents or fiduciaries.

Payment for shares sold is generally sent the business day after the sell order is received. Under unusual
circumstances, each Fund may suspend redemptions, or postpone payment for more than seven days, as permitted by
the federal securities law.
–Sell Shares By Mail
•	Send a letter or distribution form (call us for the form) which is signed by the owner/owners of the account
	to the address specified on your account statement.
•	Specify the Fund and account number.
•	Specify the number of shares or the dollar amount to be sold.
•	A medallion signature guarantee* will be required if the:
	•	sell order is for more than $100,000;
	•	check is being sent to an address other than the account address;
	•	account address has been changed within thirty days of the sell order; or
	•	check is payable to a party other than the account shareholder(s) or Principal Life.
		* 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
•	The request may be made by a shareholder or by the shareholder’s Investment Representative
•	The combined amount requested from all funds to which the redemption request relates is $100,000 or less.
•	The address on the account must not have been changed within the last thirty days and telephone privileges
	must apply to the account from which the shares are being sold.
•	If our phone lines are busy, you may need to send in a written sell order.
•	To sell shares the same day, the order must be received before the close of normal trading on the NYSE
	(generally 3:00 p.m. Central Time).
•	If previously authorized, checks can be sent to a shareholder’s U.S. bank account.
–Periodic Withdrawal Plans
You may set up a periodic withdrawal plan on a monthly, quarterly, semiannual or annual basis to:
	•	sell enough shares to provide a fixed amount of money ($25 minimum amount);
	•	pay insurance or annuity premiums or deposits to Principal Life (call us for details); and
	•	provide an easy method of making monthly installment payments (if the service is available from your
		creditor who must supply the necessary forms).
You may set up a periodic withdrawal plan by:
	•	completing the applicable section of the application; or
	•	sending us your written instructions; or
	•	calling us if you have telephone privileges on the account (telephone privileges may not be available
		for all types of accounts).
Your periodic withdrawal plan continues until:
	•	you instruct us to stop; or
	•	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.

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.

Excessive Trading Fee. An excessive trading fee may apply to redemptions made within 30 days of purchase
as described under “Frequent Purchases and Redemptions” below. If excessive trading is deemed to be occurring,
additional restrictive actions may be taken, as described in the “Frequent Purchases and Redemption” section.

Class A and Class C shares

Within 60 calendar days after the sale of shares, you may reinvest the amount of the sale proceeds into any PFI
Fund Class A shares without a sales charge if the shares that were sold were Class A shares, or on which the CDSC
was waived in connection with a Required Minimum Distribution, involuntary redemption, or due to the death of the
shareholder. Within 60 calendar days after the sale of Class C shares, any amount of the sale proceeds that you
reinvest will be reinvested in Class C shares; shares purchased by redemption proceeds are not subject to the twelve
month CSDC. It is the responsibility of the shareholder to notify PFI at the time of repurchase if the purchase
proceeds are from a redemption of the Fund within the past 60 days.

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.

Distributions in Kind

Payment for shares of the Funds tendered for redemption is ordinarily made by check. However, the Funds may
determine that it would be detrimental to the remaining shareholders of a Fund to make the payment of a redemption
order wholly or partly in cash. Under certain circumstances, therefore, each of the Funds may pay redemption
proceeds in whole or in part by a distribution “in kind” of securities from the Fund’s portfolio in lieu of cash. If a
Fund pays the redemption proceeds in kind, the redeeming shareholder might incur brokerage or other costs in
selling the securities for cash. Each Fund will value securities used to pay redemptions in kind using the same
method the Fund uses to value its portfolio securities as described in this information statement/prospectus.

Exchanges

Institutional and Retirement Class shares
An exchange between Funds is a redemption of shares of one Fund and a concurrent purchase of shares in
another Fund with the redemption proceeds. A shareholder, including a beneficial owner of shares held in nominee
name or a participant in a participant-directed employee benefit plan, may exchange Fund shares under certain
circumstances. In addition to any restrictions an intermediary or an employee benefit plan imposes, Fund shares may
be exchanged, without charge, for shares of any other Fund of PFI, provided that:

•	the shareholder has not exchanged shares of the Fund within 30 days preceding the exchange, unless the
	shareholder is exchanging into the Money Market Fund,
•	the share class of such other Fund is available through the plan, and
•	the share class of such other Fund is available in the shareholder’s state of residence.

All exchanges completed on the same day are considered a single exchange for purposes of this exchange
limitation. In addition, the Fund will reject an order to purchase shares of any Fund, except shares of the Money
Market Fund, if the shareholder redeemed shares from that Fund within the preceding 30-day period. The 30-day
exchange or purchase restriction does not apply to exchanges or purchases made on a scheduled basis such as
scheduled periodic portfolio rebalancing transactions.

If Fund shares are purchased through an intermediary that is unable or unwilling to impose the 30-day exchange
restriction described above, Fund management may waive this restriction in lieu of the exchange limitation that the
intermediary is able to impose if, in management’s judgment, such limitation is reasonably likely to prevent
excessive trading in Fund shares. In order to prevent excessive exchanges, and under other circumstances where the
Fund Board of Directors or PMC believes it is in the best interests of the Fund, the Fund reserves the right to revise
or terminate this exchange privilege, limit the amount or further limit the number of exchanges, reject any exchange
or close an account.

Class A and Class C shares
Class A and Class C shares may be exchanged without a sales charge or CDSC for the same class of any other
PFI Fund (except Money Market). PFI reserves the right to revise or terminate the exchange privilege at any time.
Notice will be provided to shareholders of any such change, to the extent required by law.
You may exchange shares by:
•	sending a written request to the address provided on your account statement,
•	completing an Exchange Authorization Form (available on www.PrincipalFunds.com),
•	via the Internet at www.PrincipalFunds.com, or
•	calling us, if you have telephone privileges on the account.

Automatic exchange election
This election authorizes an exchange from one PFI Fund to another on a monthly, quarterly, semiannual, or
annual basis. You can set up an automatic exchange by:
•	completing the Automatic Exchange Election section of the application;
•	calling us if telephone privileges apply to the account from which the exchange is to be made; or
•	sending us your written instructions.
Your automatic exchange continues until:
•	you instruct us to stop by calling us if telephone privileges apply to the account or by sending us your
	written instructions; or
•	your Fund account balance is zero.
You may specify the day of the exchange (if none selected, the exchange will be made on the 15th of the
month). If the selected day is not a trading day, the sale will take place on the next trading day (if that day falls in the
month after your selected date, the transaction will take place on the trading day before your selected date). If
telephone privileges apply to the account, you may change the date or amount by telephoning us.
General
•	An exchange by any joint owner is binding on all joint owners.
•	If you do not have an existing account in the PFI 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.
•	All exchanges are subject to the minimum investment and eligibility requirements of the PFI Fund being
	acquired.
•	You may acquire shares of a PFI Fund only if its shares are legally offered in your state of residence.
•	For an exchange to be effective the day we receive your instruction, we must receive the instruction before
	the close of normal trading on the NYSE (generally 3:00 p.m. Central Time).
When money is exchanged or transferred from one account registration or tax identification number to another,
the account holder is relinquishing his or her rights to the money. Therefore exchanges and transfers can only be
accepted by telephone if the exchange (transfer) is between:
•	accounts with identical ownership;
•	an account with a single owner to one with joint ownership if the owner of the single owner account is also
	an owner of the account with joint ownership;
•	a single owner to a UTMA account if the owner of the single owner account is also the custodian on the
	UTMA account; or
•	a single or jointly owned account to an IRA account to fund the yearly IRA contribution of the owner (or
	one of the owners in the case of a jointly owned account).
The exchange is treated as a sale of shares for federal (and state) income tax purposes and may result in a capital
gain or loss. Income tax rules regarding the calculation of cost basis may make it undesirable in certain
circumstances to exchange shares within 90 days of their purchase.

Each Fund reserves the right to revise or terminate the exchange privilege at any time. Notice will be provided
to shareholders of any such change, to the extent required by law.

Excessive Trading fee. An excessive trading fee may apply to exchanges made within 30 days of purchase as
described in “Frequent Purchases and Redemptions.” If excessive trading is deemed to be occurring, additional
restrictive actions may be taken, as described below.

Frequent Purchases and Redemptions
The PFI Funds are not designed for, and do not knowingly accommodate, frequent purchases and redemptions
of fund shares by investors. If you intend to trade frequently and/or use market timing investment strategies, you
should not purchase these Funds.

Frequent purchases and redemptions pose a risk to the PFI Funds because they may:

•	Disrupt the management of the PFI Funds by:
	•	forcing the PFI Funds to hold short-term (liquid) assets rather than investing for long term growth,
		which results in lost investment opportunities for the Fund; and
	•	causing unplanned portfolio turnover;
•	Hurt the portfolio performance of the Funds; and
•	Increase expenses of the PFI Funds due to:
	•	increased broker-dealer commissions and
	•	increased recordkeeping and related costs.

Certain PFI Funds may be at greater risk of harm due to frequent purchases and redemptions. For example,
those Funds that invest in foreign securities, including the Acquired and Acquiring Funds, may appeal to investors
attempting to take advantage of time-zone arbitrage. It is necessary to identify such abusive trading practices
because the abuses described above will negatively impact the Fund.

The PFI Funds have adopted procedures to “fair value” foreign securities under certain circumstances, which
are intended, in part, to discourage excessive trading of shares of the Funds. The Boards of Directors of the Funds
have also adopted policies and procedures with respect to frequent purchases and redemptions of shares of the
Funds. The Funds monitor trading activity to identify and take action against abuses. While the policies and
procedures are designed to identify and protect against abusive trading practices, there can be no certainty that all
instances of abusive trading will be identified and prevented and the Funds may be negatively impacted and may
cause investors to suffer the harms described. When abusive trading is identified, the policies and procedures will be
applied in a fair and uniform manner. The following actions may include, but not limited to:

•	Rejecting exchange instructions from shareholder or other person authorized by the shareholder to direct
	exchanges;
•	Restricting submission of exchange requests by, for example, allowing exchange requests to be submitted
	by 1st class U.S. mail only and disallowing requests made by facsimile, overnight courier, telephone or via
	the internet;
•	Limiting the number of exchanges during a year;
•	Requiring a holding period of a minimum of 30 days before permitting exchanges among the Funds where
	there is evidence of at least one round-trip exchange (exchange or redemption of shares that were
	purchased within 30 days of the exchange/redemption); and
•	Taking such other action as directed by the Fund.

Currently the Funds impose an excessive trading fee on redemptions or exchanges of $30,000 or more of Class
A, B, C, and J shares redeemed within 30 days after they are purchased. The fee does not apply to redemptions or
exchanges made pursuant to an Automatic Exchange Election or Periodic Withdrawal Plan; due to a shareholder’s
death or disability (as defined in the Code). The fee is equal to 1.00% of the total redemption or exchange amount.
The fee is paid to the Funds and is intended to offset the trading costs, market impact, and other costs associated
with short-term money movement in and out of the Funds.

If an intermediary is unwilling to impose the Fund’s excessive trading fee, the Fund may waive such fee if it
determines that the intermediary is able to implement other policies and procedures reasonably designed to prevent
excessive trading in Fund shares. If an intermediary is unable to implement the Fund’s excessive trading policy or to
implement other procedures reasonably designed to prevent excessive trading in Fund shares, the Fund may waive

the application of its excessive trading policy with respect to transactions of beneficial owners underlying the intermediary’s omnibus account if, in Fund management’s opinion, the purchases and redemptions at the omnibus account level are not likely to have an adverse impact on the management of the Fund’s portfolio. The Fund will monitor net purchases and redemptions in any such omnibus account in an effort to identify trading activity that might adversely impact the management of the Fund’s portfolio and, if such excessive trading is identified, will require the intermediary to prohibit ongoing excessive trading by the underlying beneficial owner or owners whose transactions are determined to be excessive.

The Funds have reserved the right to accept or reject, without prior written notice, any exchange requests. In some instances, an exchange may be completed prior to a determination of abusive trading. In those instances, we will reverse the exchange and return the account holdings to the positions held prior to the exchange. We will give the shareholder that requested the exchange notice in writing in this instance.

Tax Considerations

Shareholders are responsible for federal income tax (and any other taxes, including state and local income taxes, if applicable) on dividends and capital gains distributions whether such dividends or distributions are paid in cash or reinvested in additional shares.

Generally, dividends paid by the Funds from net short-term capital gains will be taxed as ordinary income. Distributions properly designated by a Fund as deriving from net gains on securities held for more than one year are taxable as such (generally at a 15% tax rate), regardless of how long you have held your shares.

A dividend or distribution made shortly after the purchase of shares of a PFI Fund by a shareholder, although in effect a return of capital to that shareholder, would be taxable to that shareholder as described above.

The information contained in this Information Statement/Prospectus is not a complete description of the federal, state, local, or foreign tax consequences of investing in the Fund. You should consult your tax advisor before investing in the Fund.

Portfolio Holdings Information

PFI will publish month-end portfolio holdings information for the PFI Funds on the principal.com website and the PrincipalFunds.com website on the 15th business day of the following month. The information will include all of each Fund’s holdings, and may include information regarding the top ten holdings as well. The information will remain on the website until PFI files portfolio holding information with the SEC for a period that includes the date on which the holdings are published on the websites. Also, from time to time, information relating to the impact of specific events, such as national disasters, corporate debt defaults, or similar events, on a Fund’s portfolio will be published on the website.

Third parties who need portfolio holdings information to provide services to the Funds may be provided such information prior to its posting on the website, solely for legitimate business purposes and subject to confidentiality agreements. A description of PFI's policies and procedures with respect to the disclosure of portfolio securities is available in the Statement of Additional Information.

OUTSTANDING SHARES AND SHARE OWNERSHIP

The following table shows as of September 2, 2008, the Record Date for the Reorganization, the number of
shares outstanding for each class of the Acquired and Acquiring Funds:

*To be completed at the time of the definitive filing.*


MidCap Growth Fund I		MidCap Growth Fund III
(Acquired Fund)		(Acquiring Fund)
	Shares		Shares
Share Class	Outstanding	Share Class	Outstanding
A	XXX,XXX.XXX	A	XXX,XXX.XXX
		B	XXX,XXX.XXX
C	XXX,XXX.XXX	C	XXX,XXX.XXX
		J	XXX,XXX.XXX
Institutional	XXX,XXX.XXX	Institutional	XXX,XXX.XXX
R-1	XXX,XXX.XXX	R-1	XXX,XXX.XXX
R-2	XXX,XXX.XXX	R-2	XXX,XXX.XXX
R-3	XXX,XXX.XXX	R-3	XXX,XXX.XXX
R-4	XXX,XXX.XXX	R-4	XXX,XXX.XXX
R-5	XXX,XXX.XXX	R-5	XXX,XXX.XXX

As of the September 2, 2008, Record Date, the Directors and Officers of PFI together owned less than 1% of the
outstanding shares of any class of shares of the Acquired or Acquiring Funds.

As of the September 2, 2008, Record Date, the following persons owned of record, or were known by PFI to
own beneficially, 5% or more of the outstanding shares of any class of shares of the Acquired Fund:

		Percentage of
Share Class	Name/Address of Shareholder	Ownership
*To be completed at the time of the definitive filing.*

As of the September 2, 2008, Record Date, the following persons owned of record, or were known by PFI to
own beneficially, 5% or more of the outstanding shares of any class of shares of the Acquiring Fund:

		Percentage
Share Class	Name/Address of Shareholder	Ownership
*To be completed at the time of the definitive filing.*

FINANCIAL HIGHLIGHTS

The financial highlights table for each of the Acquired Fund and the Acquiring Fund is intended to help investors understand the financial performance of each Fund for the past five fiscal years (or since inception in the case of the Acquired Fund, which has been in operation for less than five years) and for the semi-annual period ending April 30, 2008. Certain information reflects financial results for a single share of a Fund. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in a particular Fund (assuming reinvestment of all dividends and distributions). Information for the fiscal years ended October 31, 2003 through October 31, 2007 has been audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along with each Fund's financial statements, is included in PFI's Annual Report to Shareholders for the fiscal year ended October 31, 2007. Copies of this report are available on request as described above. Information for the semi-annual period ended April 30, 2008 has not been audited.

FINANCIAL HIGHLIGHTS

PRINCIPAL FUNDS, INC.

(unaudited)

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

	2008^(a)	2007	2006	2005	2004	2003
MIDCAP GROWTH FUND III
R-3 shares
Net Asset Value, Beginning of Period	$ 12 .35	$ 9 .72	$ 8 .99	$ 7 .66	$ 7 .45	$ 5 .30
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .04)	(0 .10)	(0 .08)	(0 .10)	(0 .09)	(0 .09)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .12)	3.01	0.88	1 .43	0 .30	2 .24

Total From Investment Operations	(1 .16)	2.91	0.80	1 .33	0 .21	2 .15
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–	–	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–	–	–

Net Asset Value, End of Period	$ 10 .42	$ 12 .35	$ 9 .72	$ 8 .99	$ 7 .66	$ 7 .45

Total Return	(9 .91)%^(c)	30 .65%	8 .87%	17 .36%	2.82%	40 .57%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 32,172	$ 32,810	$ 29,290	$ 17,158	$ 13,413	$ 4,371
Ratio of Expenses to Average Net Assets	1 .56%^(d)	1 .57%	1 .57%	1 .57%	1.47%	1 .56%
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .57%^(e)	1 .57%^(e)
Ratio of Net Investment Income to Average Net Assets	(0 .85)%^(d)	(0 .98)%	(0 .85)%	(1 .19)%	(1 .17)%	(1 .33)%
Portfolio Turnover Rate	157.3%^(d)	144 .9%	145 .8%	185.7%^(f)	163 .7%	163 .3%

	2008^(a)	2007	2006	2005	2004	2003
MIDCAP GROWTH FUND III
R-2 shares
Net Asset Value, Beginning of Period	$ 12 .01	$ 9 .47	$ 8 .78	$ 7 .49	$ 7 .30	$ 5 .21
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .05)	(0 .12)	(0 .09)	(0 .11)	(0 .10)	(0 .09)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .08)	2.94	0.85	1 .40	0 .29	2 .18

Total From Investment Operations	(1 .13)	2.82	0.76	1 .29	0 .19	2 .09
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–	–	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–	–	–

Net Asset Value, End of Period	$ 10 .11	$ 12 .01	$ 9 .47	$ 8 .78	$ 7 .49	$ 7 .30

Total Return	(9 .94)%^(c)	30 .50%	8 .63%	17 .22%	2 .60%	40 .12%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 12,927	$ 14,941	$ 11,823	$ 9,866	$ 6,991	$ 2,461
Ratio of Expenses to Average Net Assets	1 .74%^(d)	1 .75%	1 .75%	1 .75%	1 .65%	1 .74%
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .75%^(e)	1 .75%^(e)
Ratio of Net Investment Income to Average Net Assets	(1 .02)%^(d)	(1 .16)%	(0 .98)%	(1 .37)%	(1 .35)%	(1 .52)%
Portfolio Turnover Rate	157.3%^(d)	144 .9%	145 .8%	185.7%^(f)	163 .7%	163 .3%

	2008^(a)	2007	2006	2005
MIDCAP GROWTH FUND III
R-1 shares
Net Asset Value, Beginning of Period	$ 11 .88	$ 9 .39	$ 8 .72	$ 7 .44
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .06)	(0 .13)	(0 .11)	(0 .13)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .07)	2 .90	0 .85	1.41

Total From Investment Operations	(1 .13)	2 .77	0 .74	1.28
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–

Net Asset Value, End of Period	$ 9 .98	$ 11 .88	$ 9 .39	$ 8 .72

Total Return	(10.06)%^(c)	30 .22%	8 .46%	17 .20%^(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,250	$ 871	$ 528	$ 156
Ratio of Expenses to Average Net Assets	1 .87%^(d)	1 .88%	1 .88%	1.88%
Ratio of Net Investment Income to Average Net Assets	(1 .18)%^(d)	(1 .30)%	(1 .18)%	(1 .60)%
Portfolio Turnover Rate	157.3%^(d)	144 .9%	145 .8%	185 .7%^(f)

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL FUNDS, INC.

(unaudited)

	2008^(a)	2007	2006	2005⁽ⁱ⁾
MIDCAP GROWTH FUND III
Class A shares
Net Asset Value, Beginning of Period	$ 11 .99	$ 9 .46	$ 8 .77	$ 8 .40
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .05)	(0 .12)	(0 .09)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .07)	2.93	0.85	0 .41

Total From Investment Operations	(1 .12)	2.81	0.76	0 .37
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–

Net Asset Value, End of Period	$ 10 .10	$ 11 .99	$ 9 .46	$ 8 .77

Total Return^(j)	(9 .88)%^(c)	30 .43%	8 .64%	4.40%^(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 36,529	$ 39,400	$ 27,926	$ 25,628
Ratio of Expenses to Average Net Assets^(k)	1 .72%^(d)	1 .75%	1 .75%	1 .75%^(d)
Ratio of Net Investment Income to Average Net Assets	(1 .00)%^(d)	(1 .17)%	(0 .97)%	(1 .40)%^(d)
Portfolio Turnover Rate	157 .3%^(d)	144 .9%	145 .8%	185.7%^(d),(f)

	2008^(a)	2007	2006	2005⁽ⁱ⁾
MIDCAP GROWTH FUND III
Class B shares
Net Asset Value, Beginning of Period	$ 11 .78	$ 9 .36	$ 8 .75	$ 8 .40
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .09)	(0 .20)	(0 .16)	(0 .06)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .06)	2.90	0.84	0 .41

Total From Investment Operations	(1 .15)	2.70	0.68	0 .35
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–

Net Asset Value, End of Period	$ 9 .86	$ 11 .78	$ 9 .36	$ 8 .75

Total Return^(j)	(10 .32)%^(c)	29 .55%	7 .74%	4.17%^(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 10,262	$ 12,895	$ 10,516	$ 10,436
Ratio of Expenses to Average Net Assets^(k)	2 .50%^(d)	2 .50%	2 .50%	2 .50%^(d)
Ratio of Net Investment Income to Average Net Assets	(1 .78)%^(d)	(1 .91)%	(1 .71)%	(2 .14)%^(d)
Portfolio Turnover Rate	157 .3%^(d)	144 .9%	145 .8%	185.7%^(d),(f)

	2008^(a)	2007^(l)
MIDCAP GROWTH FUND III
Class C shares
Net Asset Value, Beginning of Period	$ 11 .99	$ 9 .79
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .09)	(0 .17)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .08)	2.37

Total From Investment Operations	(1 .17)	2.20
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	–

Total Dividends and Distributions	(0 .77)	–

Net Asset Value, End of Period	$ 10 .05	$ 11 .99

Total Return^(j)	(10 .31)%^(c)	22 .47%^(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,468	$ 1,070
Ratio of Expenses to Average Net Assets^(k)	2 .50%^(d)	2 .50%^(d)
Ratio of Net Investment Income to Average Net Assets	(1 .80)%^(d)	(1 .94)%^(d)
Portfolio Turnover Rate	157 .3%^(d)	144 .9%

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL FUNDS, INC.

(unaudited)

	2008^(a)	2007	2006	2005	2004	2003
MIDCAP GROWTH FUND III
Class J shares
Net Asset Value, Beginning of Period	$ 11 .50	$ 9 .08	$ 8 .43	$ 7 .20	$ 7 .03	$ 5 .03
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .05)	(0 .11)	(0 .09)	(0 .12)	(0 .12)	(0 .10)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .02)	2.81	0.81	1 .35	0 .29	2 .10

Total From Investment Operations	(1 .07)	2.70	0.72	1 .23	0 .17	2 .00
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–	–	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–	–	–

Net Asset Value, End of Period	$ 9 .66	$ 11 .50	$ 9 .08	$ 8 .43	$ 7 .20	$ 7 .03

Total Return^(g)	(9 .86)%^(c)	30 .49%	8 .51%	17.08%	2.42%	39 .76%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 34,667	$ 38,498	$ 27,963	$ 22,011	$ 15,436	$ 9,625
Ratio of Expenses to Average Net Assets	1 .68%^(d)	1 .72%	1 .78%	1.89%	1.92%	1 .95%
Ratio of Gross Expenses to Average Net Assets^(h)	–	–	1 .78%	1.89%	2 .02%^(e)	2 .72%^(e)
Ratio of Net Investment Income to Average Net Assets	(0 .96)%^(d)	(1 .13)%	(1 .02)%	(1 .51)%	(1 .63)%	(1 .73)%
Portfolio Turnover Rate	157 .3%^(d)	144 .9%	145 .8%	185 .7%^(f)	163 .7%	163 .3%

	2008^(a)	2007	2006	2005	2004	2003
MIDCAP GROWTH FUND III
Institutional shares
Net Asset Value, Beginning of Period	$ 12 .21	$ 9 .56	$ 8 .80	$ 7 .45	$ 7 .20	$ 5 .10
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .02)	(0 .04)	(0 .02)	(0 .06)	(0 .04)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .09)	2.97	0.85	1.41	0 .29	2.14

Total From Investment Operations	(1 .11)	2.93	0.83	1.35	0 .25	2.10
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–	–	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–	–	–

Net Asset Value, End of Period	$ 10 .33	$ 12 .21	$ 9 .56	$ 8 .80	$ 7 .45	$ 7 .20

Total Return	(9 .61)%^(c)	31 .39%	9 .41%	18.12%	3.47%	41 .18%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 632,639	$ 536,957	$ 324,293	$ 275,439	$ 9	$ 8
Ratio of Expenses to Average Net Assets	0.99%^(d)	1 .00%	1 .00%	1.00%	0.89%	0 .99%
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1.00%^(e)	1 .00%^(e)
Ratio of Net Investment Income to Average Net Assets	(0 .29)%^(d)	(0 .42)%	(0 .22)%	(0 .65)%	(0 .60)%	(0 .76)%
Portfolio Turnover Rate	157.3%^(d)	144 .9%	145 .8%	185.7%^(f)	163 .7%	163 .3%

	2008^(a)	2007	2006	2005	2004	2003
MIDCAP GROWTH FUND III
R-5 shares
Net Asset Value, Beginning of Period	$ 12 .49	$ 9 .79	$ 9 .04	$ 7 .67	$ 7 .43	$ 5 .26
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .03)	(0 .07)	(0 .05)	(0 .07)	(0 .07)	(0 .07)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .12)	3.05	0.87	1 .44	0 .31	2 .24

Total From Investment Operations	(1 .15)	2.98	0.82	1 .37	0 .24	2 .17
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–	–	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–	–	–

Net Asset Value, End of Period	$ 10 .57	$ 12 .49	$ 9 .79	$ 9 .04	$ 7 .67	$ 7 .43

Total Return	(9 .71)%^(c)	31 .16%	9 .05%	17 .86%	3 .23%	41 .25%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 20,302	$ 20,495	$ 27,099	$ 10,711	$ 8,533	$ 7,384
Ratio of Expenses to Average Net Assets	1 .25%^(d)	1 .26%	1 .26%	1 .26%	1 .15%	1 .24%
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .26%^(e)	1 .26%^(e)
Ratio of Net Investment Income to Average Net Assets	(0 .54)%^(d)	(0 .67)%	(0 .48)%	(0 .88)%	(0 .86)%	(1 .03)%
Portfolio Turnover Rate	157.3%^(d)	144 .9%	145 .8%	185.7%^(f)	163 .7%	163 .3%

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL FUNDS, INC.

(unaudited)

	2008^(a)	2007	2006	2005	2004	2003
MIDCAP GROWTH FUND III
R-4 shares
Net Asset Value, Beginning of Period	$ 12 .34	$ 9 .69	$ 8 .95	$ 7 .61	$ 7 .38	$ 5 .25
Income from Investment Operations:
Net Investment Income (Operating Loss)^(b)	(0 .03)	(0 .09)	(0 .08)	(0 .09)	(0 .08)	(0 .07)
Net Realized and Unrealized Gain (Loss) on Investments	(1 .12)	3.02	0.89	1 .43	0 .31	2 .20

Total From Investment Operations	(1 .15)	2.93	0.81	1 .34	0 .23	2 .13
Less Dividends and Distributions:
Distributions from Realized Gains	(0 .77)	(0 .28)	(0 .07)	–	–	–

Total Dividends and Distributions	(0 .77)	(0 .28)	(0 .07)	–	–	–

Net Asset Value, End of Period	$ 10 .42	$ 12 .34	$ 9 .69	$ 8 .95	$ 7 .61	$ 7 .38

Total Return	(9 .83)%^(c)	30 .96%	9 .03%	17 .61%	3 .12%	40 .57%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 26,073	$ 27,327	$ 17,680	$ 226	$ 124	$ 408
Ratio of Expenses to Average Net Assets	1 .37%^(d)	1 .38%	1 .38%	1 .38%	1 .24%	1 .37%
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .38%^(e)	1 .38%^(e)
Ratio of Net Investment Income to Average Net Assets	(0 .66)%^(d)	(0 .80)%	(0 .77)%	(1 .01)%	(0 .99)%	(1 .14)%
Portfolio Turnover Rate	157.3%^(d)	144 .9%	145 .8%	185.7%^(f)	163 .7%	163 .3%

^(a)Six months ended April 30, 2008.

^(b)Calculated based on average shares outstanding during the period.

^(c)Total return amounts have not been annualized.

^(d)Computed on an annualized basis.

^(e)Expense ratio without commission rebates.

^(f)Portfolio turnover rate excludes approximately $34,689,000 of securities from the acquisition of Principal Partners MidCap Growth Fund, Inc. and $23,000 from portfolio realignment.

^(g)Total return is calculated without the contingent deferred sales charge.

^(h)Excludes expense reimbursement from Manager.

⁽ⁱ⁾Period from June 28, 2005, date shares first offered, through October 31, 2005.

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

^(k)Reflects Manager's contractual expense limit.

^(l)Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.17 per share from January 10, 2007, through January 16, 2007.

FINANCIAL HIGHLIGHTS

PRINCIPAL FUNDS, INC.

(unaudited)

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

	2008^(a)	2007	2006	2005	2004^(b)
MIDCAP GROWTH FUND I
R-3 shares
Net Asset Value, Beginning of Period	$ 13 .05	$ 12 .62	$ 11 .80	$ 10 .16	$ 10 .24
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .04)	(0 .06)	(0 .07)	(0 .10)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .91)	2 .08	1 .61	1 .74	(0 .04)

Total From Investment Operations	(0 .95)	2 .02	1 .54	1 .64	(0 .08)
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–	–

Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–	–

Net Asset Value, End of Period	$ 10 .70	$ 13 .05	$ 12 .62	$ 11 .80	$ 10 .16

Total Return	(7 .94)%^(d)	17 .50%	13 .38%	16.14%	(0 .78)%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 4,966	$ 3,329	$ 2,601	$ 1,206	$ 735
Ratio of Expenses to Average Net Assets	1 .58%^(e)	1 .57%	1 .57%	1.57%	1 .44%^(e)
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .57%^(e),(f)
Ratio of Net Investment Income to Average Net Assets	(0 .69)%^(e)	(0 .52)%	(0 .59)%	(0 .88)%	(0 .86)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84.5%	91.1%^(e)

	2008^(a)	2007	2006	2005	2004^(b)
MIDCAP GROWTH FUND I
R-2 shares
Net Asset Value, Beginning of Period	$ 12 .96	$ 12 .56	$ 11 .77	$ 10 .15	$ 10 .24
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .04)	(0 .09)	(0 .09)	(0 .12)	(0 .05)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .92)	2 .08	1 .60	1 .74	(0 .04)

Total From Investment Operations	(0 .96)	1 .99	1 .51	1 .62	(0 .09)
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–	–

Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–	–

Net Asset Value, End of Period	$ 10 .60	$ 12 .96	$ 12 .56	$ 11 .77	$ 10 .15

Total Return	(8 .08)%^(d)	17 .34%	13 .15%	15.96%	(0 .88)%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,371	$ 3,685	$ 1,729	$ 522	$ 241
Ratio of Expenses to Average Net Assets	1 .76%^(e)	1 .75%	1 .75%	1.75%	1 .72%^(e)
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .75%^(e),(f)
Ratio of Net Investment Income to Average Net Assets	(0 .85)%^(e)	(0 .73)%	(0 .74)%	(1 .05)%	(1 .22)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84.5%	91.1%^(e)

	2008^(a)	2007	2006	2005
MIDCAP GROWTH FUND I
R-1 shares
Net Asset Value, Beginning of Period	$ 12 .96	$ 12 .57	$ 11 .80	$ 10 .19
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .05)	(0 .11)	(0 .11)	(0 .13)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .91)	2 .09	1 .60	1 .74

Total From Investment Operations	(0 .96)	1 .98	1 .49	1 .61
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–
Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–

Net Asset Value, End of Period	$ 10 .60	$ 12 .96	$ 12 .57	$ 11 .80

Total Return	(8 .08)%^(d)	17 .22%	12 .93%	15.80%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,628	$ 1,103	$ 232	$ 130
Ratio of Expenses to Average Net Assets	1 .89%^(e)	1 .88%	1 .88%	1 .88%
Ratio of Net Investment Income to Average Net Assets	(1 .00)%^(e)	(0 .91)%	(0 .87)%	(1 .09)%
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84.5%

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL FUNDS, INC.

(unaudited)

	2008^(a)	2007	2006	2005^(h)
MIDCAP GROWTH FUND I
Class A shares
Net Asset Value, Beginning of Period	$ 13 .10	$ 12 .68	$ 11 .87	$ 11 .47
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .04)	(0 .09)	(0 .09)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .93)	2.10	1.62	0.44

Total From Investment Operations	(0 .97)	2.01	1.53	0.40
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–

Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–

Net Asset Value, End of Period	$ 10 .73	$ 13 .10	$ 12 .68	$ 11 .87

Total Return⁽ⁱ⁾	(8 .07)%^(d)	17 .32%	13 .21%	3.49%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,986	$ 3,573	$ 1,722	$ 365
Ratio of Expenses to Average Net Assets^(j)	1.75%^(e)	1 .75%	1 .75%	1.75%^(e)
Ratio of Net Investment Income to Average Net Assets	(0 .83)%^(e)	(0 .75)%	(0 .76)%	(0 .90)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84.5%^(e)

	2008	2007
MIDCAP GROWTH FUND I
Class C shares
Net Asset Value, Beginning of Period	$ 13 .02	$ 11 .69
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .08)	(0 .16)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .93)	1.49

Total From Investment Operations	(1 .01)	1.33
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	–

Total Dividends and Distributions	(1 .40)	–

Net Asset Value, End of Period	$ 10 .61	$ 13 .02

Total Return⁽ⁱ⁾	(8 .45)%^(d)	11 .38%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 338	$ 332
Ratio of Expenses to Average Net Assets^(j)	2.50%^(e)	2 .50%^(e)
Ratio of Net Investment Income to Average Net Assets	(1 .58)%^(e)	(1 .58)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%

	2008^(a)	2007	2006	2005	2004^(g)
MIDCAP GROWTH FUND I
Institutional shares
Net Asset Value, Beginning of Period	$ 13 .34	$ 12 .80	$ 11 .90	$ 10 .18	$ 10 .00
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	–	–	–	(0 .03)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .94)	2.13	1.62	1.75	0 .22

Total From Investment Operations	(0 .94)	2.13	1.62	1.72	0 .18
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–	–

Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–	–

Net Asset Value, End of Period	$ 11 .00	$ 13 .34	$ 12 .80	$ 11 .90	$ 10 .18

Total Return	(7 .67)%^(d)	18 .18%	13 .97%	16.90%	1.80%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 276,989	$ 311,595	$ 249,162	$ 250,351	$ 128,884
Ratio of Expenses to Average Net Assets	1.01%^(e)	1 .00%	1 .00%	1.00%	0.98%^(e)
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1.00%^(e),(f)
Ratio of Net Investment Income to Average Net Assets	(0 .09)%^(e)	0 .02%	0 .01%	(0 .30)%	(0 .49)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84 .5%	91.1%^(e)

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL FUNDS, INC.

(unaudited)

	2008^(a)	2007	2006	2005	2004^(b)
MIDCAP GROWTH FUND I
R-5 shares
Net Asset Value, Beginning of Period	$ 13 .23	$ 12 .73	$ 11 .87	$ 10 .17	$ 10 .24
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .02)	(0 .04)	(0 .03)	(0 .06)	(0 .03)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .93)	2 .13	1 .61	1 .76	(0 .04)

Total From Investment Operations	(0 .95)	2 .09	1 .58	1 .70	(0 .07)
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–	–

Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–	–

Net Asset Value, End of Period	$ 10 .88	$ 13 .23	$ 12 .73	$ 11 .87	$ 10 .17

Total Return	(7 .82)%^(d)	17 .94%	13 .65%	16.72%	(0 .68)%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,098	$ 4,921	$ 1,295	$ 1,016	$ 161
Ratio of Expenses to Average Net Assets	1 .27%^(e)	1 .26%	1 .26%	1.26%	1 .23%^(e)
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .26%^(e),(f)
Ratio of Net Investment Income to Average Net Assets	(0 .35)%^(e)	(0 .29)%	(0 .28)%	(0 .56)%	(0 .67)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84.5%	91.1%^(e)

	2008^(a)	2007	2006	2005	2004^(b)
MIDCAP GROWTH FUND I
R-4 shares
Net Asset Value, Beginning of Period	$ 13 .16	$ 12 .67	$ 11 .83	$ 10 .17	$ 10 .24
Income from Investment Operations:
Net Investment Income (Operating Loss)^(c)	(0 .03)	(0 .05)	(0 .05)	(0 .08)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(0 .91)	2 .13	1 .61	1 .74	(0 .03)

Total From Investment Operations	(0 .94)	2 .08	1 .56	1 .66	(0 .07)
Less Dividends and Distributions:
Distributions from Realized Gains	(1 .40)	(1 .59)	(0 .72)	–	–

Total Dividends and Distributions	(1 .40)	(1 .59)	(0 .72)	–	–

Net Asset Value, End of Period	$ 10 .82	$ 13 .16	$ 12 .67	$ 11 .83	$ 10 .17

Total Return	(7 .78)%^(d)	17 .95%	13 .52%	16.32%	(0 .68)%^(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,387	$ 3,603	$ 1,065	$ 314	$ 10
Ratio of Expenses to Average Net Assets	1 .39%^(e)	1 .38%	1 .38%	1.38%	1 .35%^(e)
Ratio of Gross Expenses to Average Net Assets	–	–	–	–	1 .38%^(e),(f)
Ratio of Net Investment Income to Average Net Assets	(0 .50)%^(e)	(0 .40)%	(0 .40)%	(0 .70)%	(0 .86)%^(e)
Portfolio Turnover Rate	99 .2%^(e)	120 .6%	133 .4%	84.5%	91.1%^(e)

^(a)Six months ended April 30, 2008.

^(b)Period from June 1, 2004, date operations commenced, through October 31, 2004.

^(c)Calculated based on average shares outstanding during the period.

^(d)Total return amounts have not been annualized.

^(e)Computed on an annualized basis.

^(f)Expense ratio without commission rebates.

^(g)Period from December 29, 2003, date operations commenced, through October 31, 2004.

^(h)Period from June 28, 2005, date shares first offered, through October 31, 2005.

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

^(j)Reflects Manager's contractual expense limit.

^(k)Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.20 per share from January 10, 2007, through January 16, 2007.

FINANCIAL STATEMENTS

The financial statements of the Acquiring Fund and the Acquired Fund included in PFI's Annual Report to

Shareholders for the fiscal year ended October 31, 2007 are incorporated by reference into the Statement of

Additional Information and have been so incorporated by reference in reliance on the report of Ernst & Young LLP,

Independent Registered Public Accounting Firm. The unaudited financial statements of the Acquiring Fund and the

Acquired Fund included in PFI's Semi-Annual Report to Shareholders for the six-month period ended April 30,

2008 have also been incorporated by reference into the Statement of Additional Information. Copies of the Annual

and Semi-Annual Reports are available upon request as described above.

LEGAL MATTERS

Certain matters concerning the issuance of shares of the Acquiring Fund will be passed upon by Michael D.

Roughton, Esq., Counsel to PFI. Certain tax consequences of the Reorganization will be passed upon for the

Acquiring Fund by Randy Lee Bergstrom, Esq., Assistant Tax Counsel to PFI and for the Acquired Fund by

Carolyn F. Kolks, Esq., Assistant Tax Counsel to PFI.

OTHER INFORMATION

PFI is not required to hold annual meetings of shareholders and, therefore, it cannot be determined when the

next meeting of shareholders will be held. Shareholder proposals to be presented at any future meeting of

shareholders of any PFI Fund must be received by PFI a reasonable time before its solicitation of proxies for that

meeting in order for such proposals to be considered for inclusion in the proxy materials related to that meeting.

BY ORDER OF THE BOARD OF DIRECTORS

October ______, 2008

Des Moines, Iowa

FORM OF PLAN OF ACQUISITION	Appendix A

MidCap Growth Fund I and
MidCap Growth Fund III

The Board of Directors of Principal Funds, Inc., a Maryland corporation (the “Fund”), deems it advisable that MidCap Growth Fund III series of the Fund (“MidCap Growth III”) acquire all of the assets of MidCap Growth Fund I series of the Fund (“MidCap Growth I”) in exchange for the assumption by MidCap Growth III of all of the liabilities of MidCap Growth I and shares issued by MidCap Growth III which are thereafter to be distributed by MidCap Growth I pro rata to its shareholders in complete liquidation and termination of MidCap Growth I and in exchange for all of MidCap Growth I’s outstanding shares.

MidCap Growth I will transfer to MidCap Growth III, and MidCap Growth III will acquire from MidCap Growth I, all of the assets of MidCap Growth I on the Closing Date and will assume from MidCap Growth I all of the liabilities of MidCap Growth I in exchange for the issuance of the number of shares of MidCap Growth III determined as provided in the following paragraphs, which shares will be subsequently distributed pro rata to the shareholders of MidCap Growth I in complete liquidation and termination of MidCap Growth I and in exchange for all of MidCap Growth I’s outstanding shares. MidCap Growth I will not issue, sell or transfer any of its shares after the Closing Date, and only redemption requests received by MidCap Growth I in proper form prior to the Closing Date shall be fulfilled by MidCap Growth I. Redemption requests received by MidCap Growth I thereafter will be treated as requests for redemption of those shares of MidCap Growth III allocable to the shareholder in question.

MidCap Growth I will declare, and MidCap Growth III may declare, to its shareholders of record on or prior to the Closing Date a dividend or dividends which, together with all previous such dividends, shall have the effect of distributing to its shareholders all of its income (computed without regard to any deduction for dividends paid) and all of its net realized capital gains, if any, as of the Closing Date.

On the Closing Date, MidCap Growth III will issue to MidCap Growth I a number of full and fractional shares of MidCap Growth III, taken at their then net asset value, having an aggregate net asset value equal to the aggregate value of the net assets of MidCap Growth I. The aggregate value of the net assets of MidCap Growth I and MidCap Growth III shall be determined in accordance with the then current Prospectus of MidCap Growth III as of close of regularly scheduled trading on the New York Stock Exchange on the Closing Date.

The closing of the transactions contemplated in this Plan (the “Closing”) shall be held at the offices of Principal Management Corporation, 680 8th Street, Des Moines, Iowa 50392 at 3:00 p.m. Central Time on ________, 2008, or on such earlier or later date as fund management may determine. The date on which the Closing is to be held as provided in this Plan shall be known as the “Closing Date.”

In the event that on the Closing Date (a) the New York Stock Exchange is closed for other than customary weekend and holiday closings or (b) trading on said Exchange is restricted or (c) an emergency exists as a result of which it is not reasonably practicable for MidCap Growth III or MidCap Growth I to fairly determine the value of its assets, the Closing Date shall be postponed until the first business day after the day on which trading shall have been fully resumed.

As soon as practicable after the Closing, MidCap Growth I shall (a) distribute on a pro rata basis to the shareholders of record of MidCap Growth I at the close of business on the Closing Date the shares of MidCap Growth III received by MidCap Growth I at the Closing in exchange for all of MidCap Growth I’s outstanding shares, and (b) be liquidated in accordance with applicable law and the Fund’s Articles of Incorporation.

For purposes of the distribution of shares of MidCap Growth III to shareholders of MidCap Growth I, MidCap Growth III shall credit its books an appropriate number its shares to the account of each shareholder of MidCap Growth I. No certificates will be issued for shares of MidCap Growth III. After the Closing Date and until surrendered, each outstanding certificate, if any, which, prior to the Closing Date, represented shares of MidCap Growth I, shall be deemed for all purposes of the Fund’s Articles of Incorporation and Bylaws to evidence the appropriate number of shares of MidCap Growth III to be credited on the books of MidCap Growth III in respect of such shares of MidCap Growth I as provided above.

A-1

Prior to the Closing Date, MidCap Growth I shall deliver to MidCap Growth III a list setting forth the assets to be assigned, delivered and transferred to MidCap Growth III, including the securities then owned by MidCap Growth I and the respective federal income tax bases (on an identified cost basis) thereof, and the liabilities to be assumed by MidCap Growth III pursuant to this Plan.

All of MidCap Growth I’s portfolio securities shall be delivered by MidCap Growth I’s custodian on the Closing Date to MidCap Growth III or its custodian, either endorsed in proper form for transfer in such condition as to constitute good delivery thereof in accordance with the practice of brokers or, if such securities are held in a securities depository within the meaning of Rule 17f-4 under the Investment Company Act of 1940, transferred to an account in the name of MidCap Growth III or its custodian with said depository. All cash to be delivered pursuant to this Plan shall be transferred from MidCap Growth I’s account at its custodian to MidCap Growth III’s account at its custodian. If on the Closing Date MidCap Growth I is unable to make good delivery to MidCap Growth III’s custodian of any of MidCap Growth I’s portfolio securities because such securities have not yet been delivered to MidCap Growth I’s custodian by its brokers or by the transfer agent for such securities, then the delivery requirement with respect to such securities shall be waived, and MidCap Growth I shall deliver to MidCap Growth III’s custodian on or by said Closing Date with respect to said undelivered securities executed copies of an agreement of assignment in a form satisfactory to MidCap Growth III, and a due bill or due bills in form and substance satisfactory to the custodian, together with such other documents including brokers’ confirmations, as may be reasonably required by MidCap Growth III.

This Plan may be abandoned and terminated if the Board of Directors believe that the consummation of the transactions contemplated hereunder would not be in the best interests of the shareholders of either Fund. This Plan may be amended by the Board of Directors at any time. No amendment may be made with respect to the Plan which in the opinion of the Board of Directors materially adversely affects the interests of the shareholders of MidCap Growth I.

Except as expressly provided otherwise in this Plan, MidCap Growth I will pay or cause to be paid all out-of-pocket fees and expenses incurred in connection with the transactions contemplated under this Plan, including, but not limited to, accountants’ fees, legal fees, registration fees, printing expenses, transfer taxes (if any) and the fees of banks and transfer agents.

IN WITNESS WHEREOF, each of the parties hereto has caused this Plan to be executed by the President or its Executive Vice President as of the
_______^thday of __________, 2008.

PRINCIPAL FUNDS, INC.

on behalf of the following Acquired Fund:

MidCap Growth Fund I

By:

Nora Everett, President

PRINCIPAL FUNDS, INC.

on behalf of the following Acquiring Fund:

MidCap Growth Fund III

By:

Michael J. Beer, Executive Vice President

A-2

DESCRIPTION OF INDICES	Appendix B


The performance tables included in this Information Statement/Prospectus provide performance information of
various indices. These indices are described in this Appendix. An investment cannot be made directly in the indices
and the indices' performance figures do not include any commissions or sales charges that would be paid by
investors purchasing the securities represented by the indices.

Morningstar Mid-Cap Growth Category Average is an average of net asset value (NAV) returns of mutual funds
that typically focus on mid-size companies that are projected to grow faster than average. Many of these mutual
funds focus on companies in rapidly-expanding industries.

Russell Midcap Growth Index is an unmanaged index that measure the investment returns of stocks in the Russell
Midcap Index with higher price-to-book ratios and higher forecasted growth rates.

PART B

INFORMATION REQUIRED IN

A STATEMENT OF ADDITIONAL INFORMATION

PRINCIPAL FUNDS, INC.

680 8th Street

Des Moines, Iowa 50392-2080

STATEMENT OF ADDITIONAL INFORMATION

Dated: October ____, 2008

	This Statement of Additional Information is available to the shareholders of the
MidCap Growth Fund I (the "Acquired Fund"), in connection with the proposed
reorganization of the Acquired Fund into the MidCap Growth Fund III (the "Acquiring
Fund"), each of which is a separate series of Principal Funds, Inc. ( the "Reorganization").

	This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Information Statement/Prospectus dated October __, 2008, which
describes the proposed Reorganization. The Information Statement/Prospectus may be
obtained without charge by writing to Principal Management Corporation, 680 8th Street,
Des Moines, Iowa 50392-2080, or by calling toll free at _________________.

	This Statement of Additional Information incorporates by reference the following
documents (or designated portions thereof) that have been filed with the Securities and
Exchange Commission:

(1)	The Statement of Additional Information of Principal Funds, Inc. ("PFI") dated
	May 1, 2008, as supplemented;

(2)	The financial statements of the Acquired Fund and the Acquiring Fund included
	in PFI's Annual Report to Shareholders for the fiscal year ended October 31, 2007,
	which have been audited by Ernst & Young LLP, Independent Registered Public
	Accounting Firm, as filed on Form N-CSR on December 28, 2007; and

(3)	The unaudited financial statements of the Acquired Fund and the Acquiring Fund
	included in PFI's Semi-Annual Report to Shareholders for the six-month period
	ended April 30, 2008, as filed on Form N-CSRS on July 7, 2008.

	The Annual and Semi-Annual Reports to Shareholders of PFI are available upon
request and without charge by calling toll-free at 1-800-222-5852.

PRO FORMA FINANCIAL STATEMENTS

On June 9, 2008, the Board of Directors of Principal Funds, Inc. approved a Plan of Acquisition whereby, the MidCap Growth Fund III (the "Acquiring Fund") will acquire all the assets of the MidCap Growth Fund I (the "Acquired Fund"), subject to the liabilities of the Acquired Fund, in exchange for a number of shares equal in value to the pro rata net assets of shares of the Acquired Fund (the "Reorganization").

Shown below are unaudited pro forma financial statements for the combined Acquiring Fund, assuming the Reorganization had been consummated as of April 30, 2008. The first table presents pro forma Statements of Assets and Liabilities for the combined Acquiring Fund. The second table presents pro forma Statements of Operations for the combined Acquiring Fund. The third table presents a pro forma Schedule of Investments for the combined Acquiring Fund.

Please see the accompanying notes for additional information about the pro forma financial statements. The pro forma schedules of investments and statements of assets and liabilities and operations should be read in conjunction with the historical financial statements of the Acquired Fund and the Acquiring Fund incorporated by reference in the Statement of Additional Information.

			Statements of Assets and Liabilities
			Principal Funds, Inc.
			April 30, 2008 (unaudited)
			Amounts in thousands

	MidCap		MidCap		Pro Forma			Combined MidCap
	Growth Fund I		Growth Fund III		Adjustments			Growth Fund III

Investment in securities--at cost	$ 291,987		$ 761,839		$	-		$ 1,053,826

Assets
Investment in securities--at value	$ 308,636		$ 855,529		$	-		$ 1,164,165
Cash	1,219		26,759			-		27,978
Receivables:
Capital Shares sold	22		1,374			-		1,396
Dividends and interest	130		237			-		367
Expense reimbursement from Manager	4		3			-		7
Expense reimbursement from Underwriter	-		2			-		2
Investment securities sold	1,318		8,126			-		9,444
Prepaid directors' expenses	1		1			-		2

Total Assets	311,330		892,031			-		1,203,361

Liabilities
Accrued management and investment advisory fees	242		634			-		876
Accrued administrative service fees	2		11			-		13
Accrued distribution fees	4		41			-		45
Accrued service fees	3		13			-		16
Accrued transfer agent fees	5		58			-		63
Accrued other expenses	15		41			-		56
Payables:
Capital Shares reacquired	17		299			-		316
Investment securities purchased	1,087		6,288			-		7,375
Reorganization costs	-		-			13	(d)	13
Collateral obligation on securities loaned, at value	9,192		76,357			-		85,549

Total Liabilities	10,567		83,742			13		94,322

Net Assets Applicable to Outstanding Shares	$ 300,763		$ 808,289		$	(13)		$ 1,109,039


Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 291,890		$ 723,113		$	-		$ 1,015,003
Accumulated undistributed (overdistributed) net investment income (operating loss)	(144)		(1,569)			(13)	(d)	(1,726)
Accumulated undistributed (overdistributed) net realized gain (loss)	(7,632)		(6,945)			-		(14,577)
Net unrealized appreciation (depreciation) of investments	16,649		93,690			-		110,339

Total Net Assets	$ 300,763		$ 808,289		$	(13)		$ 1,109,039


Capital Stock (par value: $.01 a share):
Shares authorized	430,000		455,000			-		455,000
Net Asset Value Per Share:
Class A: Net Assets	$ 2,986		$ 36,529		$	-		$ 39,515
Shares issued and outstanding	278		3,618			18	(c)	3,914
Net asset value per share	$ 10.73		$ 10.10					$ 10.10
Maximum offering price per share	$ 11.35	(a)	$ 10.69	(a)				$ 10.69	(a)


Class B: Net Assets	N/A		$ 10,262		$	-		$ 10,262
Shares issued and outstanding			1,041			-		1,041
Net asset value per share (b)			$ 9.86	(b)				$ 9.86	(b)


Class C: Net Assets	$ 338		$ 1,468		$	-		$ 1,806
Shares issued and outstanding	32		146			2	(c)	180
Net asset value per share	$ 10.61	(b)	$ 10.05	(b)				$ 10.05	(b)


Class J: Net Assets	N/A		$ 34,667		$	-		$ 34,667
Shares issued and outstanding			3,590			-	(c)	3,590
Net asset value per share			$ 9.66	(b)				$ 9.66	(b)


Institutional: Net Assets	$ 276,989		$ 632,639		$	(13)	(d)	$ 909,615
Shares issued and outstanding	25,186		61,234			1,627	(c)	88,047
Net asset value per share	$ 11.00		$ 10.33					$ 10.33


R-1: Net Assets	$ 1,628		$ 1,250		$	-		$ 2,878
Shares issued and outstanding	154		125			9	(c)	288
Net asset value per share	$ 10.60		$ 9.98					$ 9.98


R-2: Net Assets	$ 3,371		$ 12,927		$	-		$ 16,298
Shares issued and outstanding	318		1,279			15	(c)	1,612
Net asset value per share	$ 10.60		$ 10.11					$ 10.11


R-3: Net Assets	$ 4,966		$ 32,172		$	-		$ 37,138
Shares issued and outstanding	464		3,086			13	(c)	3,563
Net asset value per share	$ 10.70		$ 10.42					$ 10.42


R-4: Net Assets	$ 5,387		$ 26,073		$	-		$ 31,460
Shares issued and outstanding	498		2,501			19	(c)	3,018
Net asset value per share	$ 10.82		$ 10.42					$ 10.42


R-5: Net Assets	$ 5,098		$ 20,302		$	-		$ 25,400
Shares issued and outstanding	469		1,921			13	(c)	2,403
Net asset value per share	$ 10.88		$ 10.57					$ 10.57


(a) Maximum offering price is equal to net asset value plus a front-end sales charge of 5.50% of the offering price.
(b) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
(c) Reflects new shares issued, net of retired shares of MidCap Growth Fund I.
(d) Reduction in net assets to reflect the estimated expenses of the Reorganization.

See accompanying notes

STATEMENT OF OPERATIONS
Principal Funds, Inc.
Twelve Months Ended April 30, 2008 (unaudited)

	MidCap Growth	MidCap Growth		Pro Forma		Combined MidCap
Amounts in thousands	Fund I	Fund III		Adjustments		Growth Fund III

Net Investment Income (Operating Loss)
Income:
Dividends	$ 2,636	$	3,383	$ -		$ 6,019
Interest	26		394	-		420
Securities lending	154		455	-		609

Total Income	2,816		4,232	-		7,048
Expenses:
Management and investment advisory fees	3,055		6,666	(157)	(a)	9,564
Distribution Fees - Class A	9		88	-		97
Distribution Fees - Class B	N/A		113	-		113
Distribution Fees - Class C	3		10	-		13
Distribution Fees - Class J	N/A		165	-		165
Distribution Fees - R-1	3		3	-		6
Distribution Fees - R-2	9		40	-		49
Distribution Fees - R-3	8		76	-		84
Distribution Fees - R-4	3		24	-		27
Administrative service fees - R-1	3		3	-		6
Administrative service fees - R-2	5		27	-		32
Administrative service fees - R-3	5		45	-		50
Administrative service fees - R-4	5		32	-		37
Administrative service fees - R-5	4		24	-		28
Registration fees - Class A	13		16	(13)	(a)	16
Registration fees - Class B	N/A		14	-		14
Registration fees - Class C	30		29	(30)	(a)	29
Registration fees - Class J	N/A		19	-		19
Service Fees - R-1	3		2	-		5
Service Fees - R-2	7		33	-		40
Service Fees - R-3	6		52	-		58
Service Fees - R-4	5		38	-		43
Service Fees - R-5	6		32	-		38
Shareholder reports - Class A	2		16	-		18
Shareholder reports - Class B	N/A		4	-		4
Shareholder reports - Class J	N/A		10	-		10
Transfer agent fees - Class A	19		156	-		175
Transfer agent fees - Class B	N/A		48	-		48
Transfer agent fees - Class C	2		3	-		5
Transfer agent fees - Class J	N/A		62	-		62
Auditing and legal fees	3		3	(3)	(a)	3
Custodian fees	2		3	(1)	(a)	4
Directors' expenses	2		3	-		5
Other expenses	3		5	-		8

Total Gross Expenses	3,215		7,864	(204)		10,875

Less: Reimbursement from Manager - Class A	17		16	(17)	(a)	16
Less: Reimbursement from Manager - Class B	N/A		9	-		9
Less: Reimbursement from Manager - Class C	30		28	(30)	(a)	28
Less: Reimbursement from Underwriter - Class J	N/A		17	-		17

Total Net Expenses	3,168		7,794	(204)		10,805

Net Investment Income (Operating Loss)	(352)		(3,562)	204		(3,757)

Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions	12,731		34,402	-		47,133
Change in unrealized appreciation/depreciation of:
Investments	(22,893)		6,245	-		(16,648)

Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies	(10,162)		40,647	-		30,485

Net Increase (Decrease) in Net Assets Resulting from Operations	$ (10,514)	$ 37,085		$ 204		$ 26,728


(a) To adjust expenses to reflect the Combined Fund's estimated fees and expenses, based on elimination of duplicate services.

See accompanying notes

			Schedule of Investments
MidCap Growth	MidCap Growth	Combined MidCap		MidCap Growth	MidCap Growth	Combined MidCap
Fund I	Fund III	Growth Fund III	April 30, 2008 (unaudited)	Fund I	Fund III	Growth Fund III


Shares Held (000's)				Value (000's)
			97.26% COMMON STOCKS
			0.18% Aerospace & Defense
32,350	-	32,350	Rockwell Collins Inc	2,042	-	2,042
			0.21% Aerospace & Defense Equipment
34,550	-	34,550	Goodrich Corp	2,355	-	2,355
			0.66% Agricultural Chemicals
3,950	-	3,950	CF Industries Holdings Inc	528	-	528
12,800	42,220	55,020	Mosaic Co/The (a)	1,568	5,172	6,740
			1.19% Applications Software
43,950	-	43,950	Citrix Systems Inc(a)	1,440	-	1,440
49,050	-	49,050	Quest Software Inc(a)	653	-	653
-	164,814	164,814	Salesforce.com Inc (a)(b	-	10,998	10,998
			0.08% Auction House & Art Dealer
32,400	-	32,400	Sotheby's (b)	897	-	897
			0.06% Beverages - Non-Alcoholic
20,000	-	20,000	Hansen Natural Corp (a)(b)	708	-	708
			0.52% Beverages - Wine & Spirits
-	94,470	94,470	Central European Distribution Corp (a)(b)	-	5,755	5,755
			0.79% Brewery
-	160,300	160,300	Molson Coors Brewing Co	-	8,791	8,791
			0.07% Building - Heavy Construction
21,400	-	21,400	Perini Corp (a)	774	-	774
			1.37% Building - Residential & Commercial
-	426,890	426,890	DR Horton Inc (b)	-	6,613	6,613
3,300	-	3,300	NVR Inc(a)(b)	2,025	-	2,025
-	492,790	492,790	Pulte Homes Inc	-	6,426	6,426
			0.04% Building & Construction Products - Miscellaneous
13,300	-	13,300	USG Corp (a)	470	-	470
			0.24% Cable TV
88,150	-	88,150	DISH Network Corp (a)	2,630	-	2,630
			0.60% Casino Hotels
14,050	48,650	62,700	Wynn Resorts Ltd	1,480	5,125	6,605
			0.47% Casino Services
84,650	64,928	149,578	International Game Technology	2,941	2,256	5,197
			0.92% Cellular Telecommunications
10,850	63,680	74,530	Millicom International Cellular SA (a)(b)	1,172	6,878	8,050
47,200	-	47,200	NII Holdings Inc(a)	2,159	-	2,159
			0.66% Chemicals - Diversified
-	162,440	162,440	Celanese Corp	-	7,269	7,269
			0.31% Chemicals - Specialty
23,700	-	23,700	Lubrizol Corp	1,382	-	1,382
13,850	-	13,850	Sigma-Aldrich Corp	790	-	790
32,100	-	32,100	Terra Industries Inc (a)(b)	1,215	-	1,215
			1.78% Coal
-	93,920	93,920	Alpha Natural Resources Inc (a)	-	4,569	4,569
-	150,880	150,880	Consol Energy Inc	-	12,215	12,215
36,550	-	36,550	Massey Energy Co	1,913	-	1,913
15,700	-	15,700	Walter Industries Inc	1,089	-	1,089
			0.20% Commercial Services
49,250	-	49,250	Weight Watchers International Inc	2,259	-	2,259
			2.03% Commercial Services - Finance
61,450	-	61,450	H&R Block Inc	1,344	-	1,344
18,450	49,710	68,160	Mastercard Inc	5,132	13,827	18,959
58,800	-	58,800	Total System Services Inc	1,399	-	1,399
34,300	-	34,300	Western Union Co/The	789	-	789
			0.39% Computer Services
78,700	-	78,700	Cognizant Technology Solutions Corp (a	2,538	-	2,538
98,900	-	98,900	Electronic Data Systems Corp	1,836	-	1,836
			0.52% Computer Software
-	253,075	253,075	Omniture Inc (a)(b)	-	5,775	5,775
			0.68% Computers - Integrated Systems
-	152,479	152,479	Micros Systems Inc (a)	-	5,436	5,436
86,650	-	86,650	NCR Corp(a)	2,134	-	2,134

			0.14% Computers - Memory Devices
35,200	-	35,200	NetApp Inc (a)	852	-	852
24,850	-	24,850	Western Digital Corp (a)(b)	720	-	720
			0.88% Consulting Services
37,000	-	37,000	Accenture Ltd	1,389	-	1,389
-	72,410	72,410	FTI Consulting Inc (a)	-	4,634	4,634
95,350	-	95,350	SAIC Inc(a)(b)	1,812	-	1,812
32,200	-	32,200	Watson Wyatt Worldwide Inc	1,888	-	1,888
			1.41% Containers - Metal & Glass
52,800	230,810	283,610	Owens-Illinois Inc (a)	2,912	12,729	15,641
			1.30% Cosmetics & Toiletries
-	247,070	247,070	Alberto-Culver Co	-	6,219	6,219
84,150	-	84,150	Avon Products Inc	3,283	-	3,283
-	70,720	70,720	Chattem Inc (a)(b)	-	4,942	4,942
			0.78% Data Processing & Management
49,300	-	49,300	Fidelity National Information Service	1,778	-	1,778
-	136,690	136,690	Fiserv Inc (a)	-	6,910	6,910
			0.61% Dental Supplies & Equipment
-	144,230	144,230	Dentsply International Inc	-	5,606	5,606
33,200	-	33,200	Patterson Cos Inc(a)	1,135	-	1,135
			0.51% Disposable Medical Products
10,600	49,710	60,310	CR Bard Inc	998	4,681	5,679
			2.67% Diversified Manufacturing Operations
32,950	-	32,950	Acuity Brands Inc	1,576	-	1,576
17,100	-	17,100	Cooper Industries Ltd	725	-	725
21,200	-	21,200	Eaton Corp	1,862	-	1,862
27,500	128,880	156,380	Harsco Corp	1,632	7,647	9,279
29,500	-	29,500	Parker Hannifin Corp	2,356	-	2,356
14,450	74,060	88,510	SPX Corp	1,777	9,109	10,886
63,200	-	63,200	Tyco International Ltd	2,957	-	2,957
			1.01% E-Commerce - Services
27,150	-	27,150	NetFlix Inc(a)(b)	868	-	868
12,950	68,090	81,040	Priceline.com Inc (a)(b)	1,653	8,691	10,344
			1.00% Electric - Integrated
40,100	68,340	108,440	Constellation Energy Group Inc	3,394	5,785	9,179
36,950	-	36,950	Edison International	1,928	-	1,928
			1.09% Electric Products - Miscellaneous
-	222,270	222,270	Ametek Inc	-	10,785	10,785
30,650	-	30,650	GrafTech International Ltd(a	602	-	602
24,400	-	24,400	Molex Inc	693	-	693
			0.09% Electronic Components - Miscellaneous
51,850	-	51,850	Gentex Corp	969	-	969
			3.68% Electronic Components - Semiconductors
-	474,010	474,010	Altera Corp	-	10,087	10,087
49,750	-	49,750	Intersil Corp	1,329	-	1,329
-	249,598	249,598	Cavium Networks Inc (a)(b)	-	5,129	5,129
34,050	101,430	135,480	MEMC Electronic Materials Inc (a)	2,144	6,387	8,531
60,500	291,950	352,450	Microchip Technology Inc (b	2,224	10,729	12,953
39,350	-	39,350	National Semiconductor Corp	802	-	802
97,675	-	97,675	Nvidia Corp (a)	2,007	-	2,007
			0.22% Electronic Design Automation
71,450	-	71,450	Cadence Design Systems Inc (a	795	-	795
72,000	-	72,000	Synopsys Inc (a)	1,664	-	1,664
			0.18% Electronic Measurement Instruments
65,650	-	65,650	Agilent Technologies Inc (a	1,983	-	1,983
			1.39% Energy - Alternate Sources
-	152,170	152,170	Covanta Holding Corp (a)(b)	-	4,052	4,052
3,100	35,790	38,890	First Solar Inc (a)	905	10,451	11,356
			1.48% Engineering - Research & Development Services (0.96%)
27,350	-	27,350	EMCOR Group Inc (a)	685	-	685
8,000	50,580	58,580	Fluor Corp	1,223	7,732	8,955
37,500	-	37,500	Jacobs Engineering Group Inc (a)	3,237	-	3,237
65,800	-	65,800	McDermott International Inc (a	3,526	-	3,526
			0.26% Engines - Internal Combustion
46,300	-	46,300	Cummins Inc	2,901	-	2,901
			0.98% Enterprise Software & Services
68,350	-	68,350	BMC Software Inc (a)	2,376	-	2,376
80,100	-	80,100	CA Inc	1,773	-	1,773
-	330,880	330,880	Informatica Corp (a)	-	5,281	5,281
49,600	-	49,600	Sybase Inc (a)(b)	1,459		1,459
			0.62% Entertainment Software
-	255,880	255,880	Activision Inc (a)	-	6,922	6,922
			0.45% E-Services - Consulting
-	257,470	257,470	Websense Inc (a)	-	5,008	5,008
			1.23% Fiduciary Banks
38,200	145,910	184,110	Northern Trust Corp	2,831	10,813	13,644

			0.76% Finance - Investment Banker & Broker
-	203,639	203,639	Interactive Brokers Group Inc (a)(b	-	6,429	6,429
109,400	-	109,400	TD Ameritrade Holding Corp(a)(b)	1,980	-	1,980
			1.26% Finance - Other Services
23,450	-	23,450	FCStone Group Inc (a)	971	-	971
20,500	52,730	73,230	IntercontinentalExchange Inc (a	3,181	8,181	11,362
44,350	-	44,350	Nasdaq OMX Group, Inc (a)	1,616	-	1,616
			0.14% Food - Meat Products
39,650	-	39,650	Hormel Foods Corp	1,563	-	1,563
			0.39% Food - Miscellaneous/Diversified
51,350	-	51,350	ConAgra Foods Inc	1,210	-	1,210
41,350	-	41,350	HJ Heinz Co	1,946	-	1,946
30,200	-	30,200	McCormick & Co Inc/MD	1,141	-	1,141
			0.06% Footwear & Related Apparel
5,150	-	5,150	Deckers Outdoor Corp (a)	711	-	711
			0.11% Gas - Distribution
22,500	-	22,500	Sempra Energy	1,275	-	1,275
			0.59% Hazardous Waste Disposal
-	121,717	121,717	Stericycle Inc (a)	-	6,497	6,497
			0.07% Hospital Beds & Equipment
19,300	-	19,300	Kinetic Concepts Inc (a)	765	-	765
			0.35% Hotels & Motels
62,650	-	62,650	Choice Hotels International Inc	2,161	-	2,161
32,200	-	32,200	Starwood Hotels & Resorts Worldwide Inc	1,681		1,681
			0.07% Human Resources
18,850	-	18,850	Hewitt Associates Inc(a)	773	-	773
			0.67% Independent Power Producer
73,600	-	73,600	Mirant Corp(a)(b)	3,026	-	3,026
-	171,540	171,540	Reliant Energy Inc (a)	-	4,415	4,415
			0.14% Industrial Automation & Robots
29,500	-	29,500	Rockwell Automation Inc/DE	1,600	-	1,600
			1.22% Industrial Gases
-	115,570	115,570	Air Products & Chemicals Inc	-	11,376	11,376
45,600	-	45,600	Airgas Inc	2,195	-	2,195
			0.20% Instruments - Controls
23,000	-	23,000	Mettler Toledo International Inc(a	2,191	-	2,191
			0.12% Instruments - Scientific
42,100	-	42,100	Applera Corp - Applied Biosystems Group	1,343	-	1,343
			0.38% Insurance Brokers
-	92,950	92,950	Aon Corp	-	4,219	4,219
			0.41% Internet Content - Information & News
-	12,470	12,470	Baidu.com ADR (a)	-	4,559	4,559
			0.07% Internet Infrastructure Equipment
38,800	-	38,800	Avocent Corp(a)	757	-	757
			0.77% Internet Infrastructure Software
46,850	191,440	238,290	Akamai Technologies Inc (a)(b	1,676	6,848	8,524
			2.02% Internet Security
58,050	319,206	377,256	McAfee Inc (a)	1,930	10,614	12,544
-	273,650	273,650	VeriSign Inc (a)(b)	-	9,865	9,865
			2.26% Investment Management & Advisory Services
-	60,210	60,210	BlackRock Inc/New York (b)	-	12,150	12,150
-	220,320	220,320	T Rowe Price Group Inc	-	12,902	12,902
			0.80% Leisure & Recreation Products
-	243,760	243,760	WMS Industries Inc (a)(b)	-	8,822	8,822
			0.97% Machinery - Construction & Mining	-
28,200	106,180	134,380	Joy Global Inc	2,094	7,884	9,978
10,850	-	10,850	Terex Corp(a)	756	-	756
			1.06% Machinery - Farm
-	195,380	195,380	AGCO Corp (a)(b)	-	11,748	11,748
			0.14% Machinery - General Industry
18,750	-	18,750	Manitowoc Co Inc.The	709	-	709
21,100	-	21,100	Robbins & Myers Inc	841	-	841
			1.08% Machinery - Pumps	-
9,150	87,470	96,620	Flowserve Corp	1,135	10,854	11,989
			1.26% Medical - Biomedical/Gene
-	77,760	77,760	Alexion Pharmaceuticals Inc (a)(b	-	5,473	5,473
-	116,870	116,870	Charles River Laboratories International (a)	-	6,784	6,784
18,000	-	18,000	Invitrogen Corp(a)	1,684		1,684
			1.88% Medical - Drugs
-	190,810	190,810	Allergan Inc/United States	-	10,756	10,756
63,000	-	63,000	Endo Pharmaceuticals Holdings Inc(a	1,564	-	1,564
67,700	-	67,700	Forest Laboratories Inc(a)	2,350	-	2,350
113,000	-	113,000	King Pharmaceuticals Inc(a)	1,061	-	1,061
11,500	-	11,500	OSI Pharmaceuticals Inc(a)(b)	399	-	399
-	85,159	85,159	Shire PLC ADR (b)	-	4,679	4,679

			0.76% Medical - HMO
37,450	-	37,450	Centene Corp(a)	688	-	688
48,150	-	48,150	Cigna Corp	2,057	-	2,057
43,800	-	43,800	Coventry Health Care Inc(a	1,959	-	1,959
39,750	-	39,750	Health Net Inc(a)	1,164	-	1,164
52,550	-	52,550	Humana Inc(a)	2,511	-	2,511
			0.04% Medical - Outpatient & Home Medical Care
17,050	-	17,050	Lincare Holdings Inc(a)	415	-	415
			0.11% Medical - Wholesale Drug Distribution
30,400	-	30,400	AmerisourceBergen Corp	1,233	-	1,233
			1.37% Medical Instruments
33,200	-	33,200	Edwards Lifesciences Corp(a	1,840	-	1,840
4,950	30,530	35,480	Intuitive Surgical Inc (a)	1,432	8,831	10,263
69,750	-	69,750	St Jude Medical Inc(a)	3,053	-	3,053
			0.53% Medical Laboratory & Testing Service
-	47,358	47,358	Covance Inc (a)	-	3,968	3,968
25,550	-	25,550	Laboratory Corp of America Holdings(a	1,932	-	1,932
			0.81% Medical Products
33,150	129,870	163,020	Henry Schein Inc (a)(b	1,835	7,191	9,026
			0.53% Metal - Iron
6,200	30,400	36,600	Cleveland-Cliffs Inc	994	4,876	5,870
			1.23% Metal Processors & Fabrication
22,100	94,010	116,110	Precision Castparts Corp	2,598	11,052	13,650
			0.56% Multi-Line Insurance
-	95,090	95,090	Assurant Inc	-	6,181	6,181
			1.42% Networking Products
-	171,542	171,542	Atheros Communications Inc (a)(b	-	4,566	4,566
-	406,440	406,440	Juniper Networks Inc (a)	-	11,226	11,226
			0.09% Office Automation & Equipment
68,200	-	68,200	Xerox Corp	953	-	953
			1.22% Oil - Field Services
-	168,220	168,220	Weatherford International Ltd (a	-	13,570	13,570
			2.07% Oil & Gas Drilling
-	62,560	62,560	Diamond Offshore Drilling Inc	-	7,846	7,846
50,850	-	50,850	ENSCO International Inc	3,241	-	3,241
-	197,950	197,950	Nabors Industries Ltd (a)	-	7,431	7,431
78,400	-	78,400	Noble Corp(b)	4,412	-	4,412
			5.28% Oil Company - Exploration & Production
40,000	-	40,000	Chesapeake Energy Corp	2,068	-	2,068
42,350	-	42,350	Cimarex Energy Co	2,638	-	2,638
50,150	232,740	282,890	Denbury Resources Inc (a	1,533	7,112	8,645
31,650	-	31,650	Noble Energy Inc	2,753	-	2,753
-	101,740	101,740	Questar Corp	-	6,311	6,311
-	157,310	157,310	Quicksilver Resources Inc (a)(b	-	6,527	6,527
-	170,915	170,915	Range Resources Corp	-	11,345	11,345
-	227,600	227,600	Southwestern Energy Co (a	-	9,630	9,630
-	75,600	75,600	Ultra Petroleum Corp (a)	-	6,280	6,280
37,850	-	37,850	Unit Corp(a)	2,404	-	2,404
			2.02% Oil Field Machinery & Equipment
-	115,200	115,200	Cameron International Corp (a)	-	5,671	5,671
20,250	-	20,250	FMC Technologies Inc(a)	1,361	-	1,361
70,900	152,870	223,770	National Oilwell Varco Inc (a)	4,853	10,464	15,317
			0.27% Oil Refining & Marketing
22,900	-	22,900	Frontier Oil Corp	569	-	569
23,400	-	23,400	Holly Corp	971	-	971
11,550	-	11,550	Sunoco Inc	536	-	536
35,250	-	35,250	Tesoro Corp	886	-	886
			1.27% Pharmacy Services
-	200,700	200,700	Express Scripts Inc (a)	-	14,053	14,053
			0.62% Printing - Commercial
-	201,635	201,635	VistaPrint Ltd (a)(b)	-	6,862	6,862
			0.16% Publicly Traded Investment Fund
16,100	-	16,100	iShares Russell Midcap Growth Index Fund	1,747	-	1,747
			0.07% Quarrying
12,700	-	12,700	Compass Minerals International Inc	800	-	800
			0.11% Racetracks
28,450	-	28,450	International Speedway Corp	1,207	-	1,207
			0.09% Reinsurance
25,500	-	25,500	Endurance Specialty Holdings Ltd	947	-	947
			0.17% REITS - Healthcare
39,600	-	39,600	Ventas Inc	1,923	-	1,923
			0.09% REITS - Regional Malls
17,350	-	17,350	Taubman Centers Inc	983	-	983
			0.39% REITS - Storage
-	48,120	48,120	Public Storage	-	4,364	4,364
			0.32% REITS - Warehouse & Industrial
56,150	-	56,150	Prologis	3,516	-	3,516

			0.29% Rental - Auto & Equipment
35,900	-	35,900	Aaron Rentals Inc		894	-	894
107,950	-	107,950	Rent-A-Center Inc/TX(a)		2,324	-	2,324
			4.05% Retail - Apparel & Shoe
63,925	-	63,925	American Eagle Outfitters Inc		1,174	-	1,174
35,900	-	35,900	Buckle Inc/The		1,744	-	1,744
102,950	259,559	362,509	Coach Inc (a)		3,662	9,232	12,894
	283,300	283,300	Guess ? Inc		-	10,845	10,845
12,900	-	12,900	Gymboree Corp(a)		558	-	558
-	255,100	255,100	Nordstrom Inc (b)		-	8,995	8,995
23,500	230,960	254,460	Urban Outfitters Inc (a)		805	7,910	8,715
			0.21% Retail - Auto Parts
19,500	-	19,500	Autozone Inc(a)		2,355	-	2,355
			1.13% Retail - Computer Equipment		-
33,350	194,740	228,090	GameStop Corp (a)		1,836	10,718	12,554
			1.34% Retail - Discount
-	158,630	158,630	Big Lots Inc (a)		-	4,288	4,288
26,650	-	26,650	Dollar Tree Inc(a)		842	-	842
83,550	217,510	301,060	TJX Cos Inc		2,692	7,008	9,700
			1.48% Retail - Restaurants
57,800	-	57,800	CEC Entertainment Inc(a)		2,150	-	2,150
-	49,880	49,880	Chipotle Mexican Grill Inc (a)(b)		-	4,894	4,894
-	146,620	146,620	Darden Restaurants Inc		-	5,217	5,217
100,850	-	100,850	Yum! Brands Inc		4,103	-	4,103
			0.31% Retail - Sporting Goods
-	121,340	121,340	Dick's Sporting Goods Inc (a)		-	3,470	3,470
			0.95% Savings & Loans - Thrifts
73,200	476,180	549,380	Hudson City Bancorp Inc		1,400	9,109	10,509
			1.10% Semiconductor Component - Integrated Circuits
46,900	-	46,900	Analog Devices Inc		1,511	-	1,511
44,850	-	44,850	Emulex Corp(a)		587	-	587
117,750	-	117,750	Integrated Device Technology Inc(a		1,259	-	1,259
88,850	-	88,850	Linear Technology Corp		3,106	-	3,106
-	441,685	441,685	Marvell Technology Group Ltd (a		-	5,720	5,720
			1.20% Semiconductor Equipment
58,500	-	58,500	Lam Research Corp(a)		2,389	-	2,389
32,250	-	32,250	Novellus Systems Inc(a)		705	-	705
-	280,226	280,226	Varian Semiconductor Equipment Associates Inc (a		-	10,265	10,265
			0.34% Soap & Cleaning Products
-	66,400	66,400	Church & Dwight Co Inc		-	3,773	3,773
			1.31% Steel - Producers
46,000	-	46,000	AK Steel Holding Corp		2,888	-	2,888
17,250	-	17,250	Nucor Corp		1,302	-	1,302
57,200	240,450	297,650	Steel Dynamics Inc		1,994	8,380	10,374
			0.07% Telecommunication Equipment
156,900	-	156,900	Tellabs Inc(a)		810	-	810
			0.08% Telecommunication Services
71,000	-	71,000	Virgin Media Inc(b)		916	-	916
			0.17% Telephone - Integrated
160,600	-	160,600	Windstream Corp		1,885	-	1,885
			0.53% Television
-	55,590	55,590	Central European Media Enterprises Ltd (a)(b)		-	5,894	5,894
			1.24% Therapeutics		-	-
-	168,287	168,287	BioMarin Pharmaceutical Inc (a)(b		-	6,136	6,136
-	62,130	62,130	United Therapeutics Corp (a)(b)		-	5,250	5,250
139,450	-	139,450	Warner Chilcott Ltd(a)		2,400	-	2,400
			0.08% Tobacco
17,450	-	17,450	Reynolds American Inc		940	-	940
			0.40% Toys
40,400	-	40,400	Hasbro Inc		1,437	-	1,437
103,700	-	103,700	Marvel Entertainment Inc(a)(b		2,975	-	2,975
			0.40% Transport - Marine
43,000	-	43,000	Kirby Corp(a)		2,358	-	2,358
32,300	-	32,300	Tidewater Inc		2,107	-	2,107
			1.03% Transport - Rail
39,800	142,080	181,880	CSX Corp		2,505	8,944	11,449
			1.46% Transport - Services
-	204,930	204,930	Expeditors International Washington Inc		-	9,548	9,548
24,750	71,570	96,320	Ryder System Inc		1,695	4,900	6,595
			0.12% Vitamins & Nutrition Products
31,000	-	31,000	Herbalife Ltd		1,357	-	1,357
			0.74% Wireless Equipment
50,600	-	50,600	American Tower Corp(a)		2,197	-	2,197
-	156,010	156,010	Crown Castle International Corp (a)(b)		-	6,061	6,061
			0.43% X-Ray Equipment
-	163,370	163,370	Hologic Inc (a)(b)		-	4,769	4,769

			TOTAL COMMON STOCKS		299,444	779,172	1,078,616


	Principal
	Amount (000's)					Value (000's)
			6.88% REPURCHASE AGREEMENTS
			Money Center Banks
			Deutsche Bank Repurchase Agreement; 1.98% dated 04/30/08
maturing 05/01/08 (collateralized by U.S. Government
			Agency Issues; $77,235,000; 0.00% - 5.50%; dated 05/09/08 -
$ -	$ 76,361	$ 76,361	04/18/19) (c)	$ -		$ 76,357	$ 76,357
			Finance - Investment Banker & Broker
			Morgan Stanley Repurchase Agreement; 1.98% dated 04/30/08
			maturing 05/01/08 (collateralized by U.S. Government Agency
9,193	-	9,193	Issues; $9,292,000; 0.00%-7.625%; dated 05/12/08-03/14/36) ( c)	9,192		-	9,192

			TOTAL REPURCHASE AGREEMENTS	9,192		76,357	85,549

			Total Investments	$ 308,636		$ 855,529	$ 1,164,165
			-4.97% Liabilities in Excess of Other Assets, Net	(7,873)		(47,240)	(55,113)

			TOTAL NET ASSETS - 100.00%	$ 300,763		$ 808,289	$ 1,109,052



		(a) Non-Income Producing Security
		(b) Security or a portion of the security was on loan at the end of the period.
		(c) Security was purchased with the cash proceeds from securities loans.

	Unrealized Appreciation (Depreciation)
	Unrealized Appreciation	$ 32,114	$110,492	$142,606
	Unrealized Depreciation	(15,580)	(16,969)	(32,549)

	Net Unrealized Appreciation (Depreciation	16,534	93,523	110,057
	Cost for federal income tax purpose	292,102	762,006	1,054,108
All dollar amounts are shown in thousands (000's)

	Portfolio Summary (unaudited)

	Sector			Percent

	Consumer, Non-cyclica			18.80%
	Financial			16.16%
	Industrial			16.10%
	Energy			14.03%
	Consumer, Cyclical			12.66%
	Technology			11.60%
	Communications			8.91%
	Basic Materials			4.76%
	Utilities			1.79%
	Funds			0.16%
	Liabilities in Excess of Other Assets, Net			-4.97%

	TOTAL NET ASSETS			100.00%

	As of April 30, 2008, all securities held by MidCap Growth Fund I would comply with the investment restrictions of MidCap Growth Fund III.

See Accompanying Notes

Pro Forma Notes to Financial Statements

April 30, 2008

(unaudited)

1. Description of the Funds

MidCap Growth Fund I and MidCap Growth Fund III are series of Principal Funds, Inc. (the “Fund”). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.

2. Basis of Combination

On June 9, 2008, the Board of Directors of Principal Funds, Inc., MidCap Growth Fund I approved an Agreement and Plan of Reorganization (the “Reorganization”) whereby, MidCap Growth Fund III will acquire all the assets of MidCap Growth Fund I subject to the liabilities of such fund, in exchange for a number of shares equal to the pro rata net assets of MidCap Growth Fund III.

The Reorganization will be accounted for as a tax-free reorganization of investment companies. The pro forma combined financial statements are presented for the information of the reader and may not necessarily be representative of what the actual combined financial statements would have been had the Reorganization occurred at April 30, 2008. The unaudited pro forma schedules of investments and statements of assets and liabilities reflect the financial position of MidCap Growth Fund I and MidCap Growth Fund III at April 30, 2008. The unaudited pro forma statements of operations reflect the results of operations of MidCap Growth Fund I and MidCap Growth Fund III for the twelve months ended April 30, 2008. The statements have been derived from the Funds’ respective books and records utilized in calculating daily net asset value at the dates indicated above for MidCap Growth Fund I and MidCap Growth Fund III under U.S. generally accepted accounting principles. The historical cost of investment securities will be carried forward to the surviving entity and results of operations of MidCap Growth Fund III for pre-combination periods will not be restated.

The pro forma schedules of investments and statements of assets and liabilities and operations should be read in conjunction with the historical financial statements of the Funds incorporated by reference in the Statements of Additional Information.

3. Significant Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

4. Security Valuation

MidCap Growth Fund I and MidCap Growth Fund III value securities for which market quotations are readily available at market value, which is determined using the last reported sale price. If no sales are reported, as is regularly the case for some securities traded over-the-counter, securities are valued using the last reported bid price or an evaluated bid price provided by a pricing service. Pricing services use electronic modeling techniques that incorporate security characteristics, market conditions and dealer-supplied valuations to determine an evaluated bid price. When reliable market quotations are not considered to be readily available, which may be the case, for example, with respect to restricted securities, certain debt securities, preferred stocks, and foreign securities, the investments are valued at their fair value as determined in good faith by Principal Management Corporation (the “Manager”) under procedures established and periodically reviewed by the Fund’s Board of Directors.

Short-term securities are valued at amortized cost, which approximates market. Under the amortized cost method, a security is valued by applying a constant yield to maturity of the difference between the principal amount due at maturity and the cost of the security to the Funds.

5. Repurchase Agreements

The Funds may invest in repurchase agreements that are fully collateralized, typically by U.S. government or U.S. government agency securities. It is the Funds’ policy that its custodian takes possession of the underlying collateral securities. The fair value of the collateral is at all times at least equal to the total amount of the repurchase obligation. In the event of default on the obligation to repurchase, the Funds have the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event the seller of a repurchase agreement defaults, the Funds could experience delays in the realization of the collateral.

Pro Forma Notes to Financial Statements
April 30, 2008
(unaudited)

6. Capital Shares

The pro forma net asset value per share assumes issuance of shares of MidCap Growth Fund III that would have been issued at April 30, 2008, in connection with the Reorganization. The number of shares assumed to be issued is equal to the net assets of MidCap Growth Fund I, as of April 30, 2008, divided by the net asset value per share of the MidCap Growth Fund III as of April 30, 2008. The pro forma number of shares outstanding, by class, for the combined fund can be found on the statement of assets and liabilities.

7. Pro Forma Adjustments

The accompanying pro forma financial statements reflect changes in fund shares as if the Reorganization had taken place on April 30, 2008. The expenses of the MidCap Growth Fund I were adjusted assuming the fee structure of the MidCap Growth Fund III was in effect for the twelve months ended April 30, 2008.

8. Distributions

No provision for federal income taxes is considered necessary because each fund is qualified as a “regulated investment company” under the Internal Revenue Code and intends to distribute each year substantially all of its net investment income and realized capital gains to shareholders.

PART C

OTHER INFORMATION

Item 15.	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 the
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 the 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 16. Exhibits.

Unless otherwise stated, all filing references are to File No. 33-59474

(1)	a.	Articles of Amendment and Restatement (filed 4/12/96)
	b.	Articles of Amendment and Restatement (filed 9/22/00)
	c.	Articles of Amendment and Restatement dated 6/14/02 (filed 12/30/02)
	d.	Articles of Amendment dated 5/23/05 (filed 9/8/05)
	e.	Articles of Amendment dated 9/30/05 (filed 11/22/05)
	f.	Articles of Amendment dated 7/7/06 (Incorporated by reference from exhibit #1(2)b
		to registration statement No. 333-137477 filed on Form N-14 on 9/20/06)
	g.	Articles of Amendment dated 06/04/08 (filed 07/17/08)

	h.	Articles of Amendment (filed 9/12/97)

	i.	Certificate of Correction dated 9/14/00 (filed 9/22/00)
	j.	Certificate of Correction dated 12/13/00 (filed 10/12/01)

	k.	Articles Supplementary dated 12/11/00 (filed 10/12/01)
	l.	Articles Supplementary dated 3/12/01 (filed 10/12/01)
	m.	Articles Supplementary dated 4/16/02 (filed 12/30/02)
	n.	Articles Supplementary dated 9/25/02 (filed 12/30/02)
	o.	Articles Supplementary dated 2/5/03 (filed 02/26/03)
	p.	Articles Supplementary dated 4/30/03 (filed 9/11/03)
	q.	Articles Supplementary dated 6/10/03 (filed 9/11/03)
	r.	Articles Supplementary dated 9/9/03 (filed 9/11/03)
	s.	Articles Supplementary dated 11/6/03 (filed 12/15/03)
	t.	Articles Supplementary dated 1/29/04 (filed 2/26/04)
	u.	Articles Supplementary dated 3/8/04 (filed 7/27/04)
	v.	Articles Supplementary dated 6/14/04 (filed 9/27/04)
	w.	Articles Supplementary dated 9/13/04 (filed 12/13/04)
	x.	Articles Supplementary dated 10/1/04 (filed 12/13/04)
	y.	Articles Supplementary dated 12/13/04 (filed 2/28/05)
	z.	Articles Supplementary dated 2/4/05 (filed 5/16/05)
	aa.	Articles Supplementary dated 2/24/05 (filed 5/16/05)
	bb.	Articles Supplementary dated 5/6/05 (filed 9/8/05)
	cc.	Articles Supplementary dated 12/20/05 (filed 2/28/06)
	dd.	Articles Supplementary dated 9/20/06 (Incorporated by reference from exhibit #1(4)t
		to registration statement No. 333-137477 filed on Form N-14 on 9/20/06)
	ee.	Articles Supplementary dated 1/12/07 (filed 1/16/07)
	ff.	Articles Supplementary dated 1/22/07 (filed 07/18/07
	gg.	Articles Supplementary dated 7/24/07 (filed 9/28/07)
	hh.	Articles Supplementary dated 09/13/07 (filed 12/14/07)
	ii.	Articles Supplementary dated 1/3/08 (filed 03/05/08)
	jj.	Articles Supplementary dated 3/13/08 (filed 05/01/08)
	kk.	Articles Supplementary dated 06/23/08 (filed 07/17/08)

(2)	By-laws (filed 12/29/05)

(3)	N/A

(4)	Forms of Plans of Reorganization (filed herewith as Appendix A to the Proxy Statement/Prospectus)

(5)	Included in Exhibits 1 and 2 hereto.

(6)	(1)	a.	Management Agreement (filed 9/12/97)
		b.	1st Amendment to the Management Agreement (filed 9/22/00)
		c.	Management Agreement (filed 12/5/00)
		d.	Amendment to Management Agreement dated 9/9/02(filed 12/30/02)
		e.	Amendment to Management Agreement dated 3/11/02 (filed 02/26/03)
		f.	Amendment to Management Agreement dated 12/10/02 (filed 02/26/03)
		g.	Amendment to Management Agreement dated 10/22/03 (filed 12/15/03)
		h.	Amendment to Management Agreement dated 3/8/04 (filed 6/1/04)
		i.	Amendment to Management Agreement dated 6/14/04 (filed 9/27/04)
		j.	Amendment to Management Agreement dated 7/29/04 (filed 9/27/04)
		k.	Amendment to Management Agreement dated 9/13/04 (filed 9/27/04)
		l.	Amendment to Management Agreement dated 12/13/04 (filed 2/28/05)
		m.	Amendment to Management Agreement dated 1/1/05 (filed 2/28/05)
		n.	Amendment to Management Agreement dated 9/30/05 (filed 11/22/05)
		o.	Amendment to Management Agreement dated 1/12/07 (filed 1/16/07)
		p.	Amendment to Management Agreement dated 9/12/07 (filed 9/28/07)
		q.	Amendment to Management Agreement dated 10/01/07 (filed 12/14/07)
		r.	Amendment to Management Agreement dated 10/31/07 (filed 12/14/07)
		s.	Amendment to Management Agreement dated 2/7/08 (filed 05/01/08)

	(2)	a.	American Century Sub-Advisory Agreement (filed 12/5/00)
		b.	Amended & Restated Sub-Adv Agreement with Amer. Century (filed 9/11/03)
		c.	Amended & Restated Sub-Adv Agreement with Amer. Century (filed 9/27/04)
		d.	Amended & Restated Sub-Adv Agreement with Amer. Century dated 6/13/05 (filed 9/8/05)
		e.	Amended & Restated Sub-Adv Agreement with Amer. Century dated
			9/19/06 (Incorporated by reference from exhibit #6(3)e to registration
			statement No. 333-137477 filed on Form N-14 on 10/6/06)

	(3)	a.	Ark Asset Management Sub-Advisory Agreement (filed 2/27/01)
		b.	Amended & Restated Sub-Adv Agreement with Ark (filed 9/11/03)

	(4)	a.	AXA Rosenberg Investment Management LLC Sub-Advisory Agreement
			dated ______________________**

	(5)	a.	Barrow Hanley Sub-Advisory Agreement dtd 7/12/05 (filed 9/8/05)

	(6)	a.	Bernstein Sub-Advisory Agreement (filed 12/5/00)
		b.	Amendment to Bernstein Sub-Advisory Agreement dated 3/28/03 (filed 9/11/03)
		c.	Amended & Restated Bernstein Sub-Advisory Agreement dated 7/1/04 (filed 9/27/04)

	(7)	a.	Causeway Capital Management LLC Sub-Advisory Agreement dated ________________**

	(8)	a.	Columbus Circle Investors Sub-Advisory Agreement dated 1/5/05 (filed 9/8/05)
		b.	Amended & Restated Sub-Adv Agreement with Columbus Circle dated 9/15/05 (filed 10/20/06)

	c.	Amended & Restated Sub-Adv Agreement with Columbus Circle dated
		12/15/06 (filed 1/16/07)

(9)	a.	Dimensional Fund Advisors Sub-Advisory Agreement (filed 6/1/04)

(10)	a.	Edge Asset Management Sub-Advisory Agreement dated 1/12/07 (filed
		1/16/07)

(11)	a.	Emerald Advisors, Inc. Sub-Advisory Agreement (filed 9/27/04)

(12)	a.	Essex Investment Management Company, LLC. Sub-Advisory Agreement
		dated 6/30/06 (filed 10/20/06)

(13)	a.	Goldman Sachs Sub-Advisory Agreement(filed 12/30/02)
	b.	Amended & Restated Sub-Adv Agreement with Goldman Sachs (filed
		9/11/03)
	c.	Amended & Restated Goldman Sachs Sub-Advisory Agreement dated
		11/20/03 (filed 12/15/03)
	d.	Amended & Restated Goldman Sachs Sub-Advisory Agreement dated
		6/30/04 (filed 2/28/05)

(14)	a.	Jacobs Levy Equity Management, Inc. Sub-Advisory Agreement dated
		6/15/06 (filed 10/20/06)
	b.	Amended & Restated Sub-Advisory Agreement with Jacobs Levy dated
		1/2/08 (filed 03/05/08)

(15)	a.	JP Morgan Sub-Advisory Agreement (filed 12/30/02)
	b.	Amended & Restated Sub-Adv Agreement with JP Morgan (filed 9/11/03)
	c.	Amended & Restated Sub-Adv Agreement with JP Morgan dated 7/18/07
		(filed 9/28/07)

(16)	a.	Lehman Brothers dated 7/18/07 (filed 9/28/07)

(17)	a.	Los Angeles Capital Management Sub-Advisory Agreement (filed 9/27/04)
	b.	Amended & Restated Sub-Adv Agreement with LA Capital dated 9/12/05
		(filed 11/22/05)

(18)	a.	MacKay Shields LLC Sub-Advisory Agreement dated 1/2/08 (filed 03/05/08)

(19)	a.	Mazama Capital Management Sub-Advisory Agreement (filed 6/1/04)

(20)	a.	Mellon Equity Associates LLP Sub-Advisory Agreement dtd 12/21/04 (filed
		2/28/05)
	b.	Amended & Restated Sub-Adv Agreement with Mellon Equity dated 8/8/05
		(filed 11/22/05)
	c.	Amended & Restated Sub-Adv Agreement with Mellon Capital dated 1/1/08
		(filed 3/28/08)

(21)	a.	Neuberger Berman Sub-Advisory Agreement (filed 12/5/00)
	b.	Amended & Restated Sub-Adv Agreement with Neuberger Berman (filed
		9/11/03)
	c.	Amended & Restated Sub-Advisory Agreement with Neuberger Berman
		dated 10/31/03 (filed 12/15/03)
	d.	Amended & Restated Sub-Advisory Agreement with Neuberger Berman
		dated 7/1/04 (filed 2/28/05)

(22)	a.	Pacific Investment Management Company LLC Sub-Advisory Agreement
		dated _______________________**

(23)	a.	Principal Global Investors Sub-Advisory Agreement (filed 12/30/02)
	b.	Amended and Restated PGI Sub-Advisory Agreement (filed 02/26/03)
	c.	Amended & Restated Sub-Adv Agreement with PGI (filed 9/11/03)
	d.	Amended & Restated Sub-Adv Agreement with PGI (filed 6/1/04)
	e.	Amended & Restated Sub-Adv Agreement with PGI dtd 7-29-04 (filed 9/27/04)
	f.	Amended & Restated Sub-Adv Agreement with PGI dtd 9-13-04 (filed 12/13/04)
	g.	Amended & Restated Sub-Adv Agreement with PGI dtd 12-13-04 (filed 9/8/05)
	h.	Amended & Restated Sub-Adv Agreement with PGI dtd 7-1-05 (filed 9/8/05)
	i.	Sub-Sub-Advisory Agreement with Spectrum dtd 7/1/2005 (filed 12/29/05)
	j.	Sub-Sub-Advisory Agreement with Post dtd 7/1/2005 (filed 12/29/05)
	k.	Amended & Restated Sub-Adv Agreement with PGI dtd 3/1/06 (filed 2/28/06)

(24)	a.	Principal Capital Real Estate Investors Sub-Advisory Agreement (filed 2/27/01)
	b.	1st Amendment to the PCREI Sub-Advisory Agreement (filed 10/12/01)
	c.	2nd Amendment to the PCREI Sub-Advisory Agreement (filed 10/12/01)
	d.	Amended & Restated Sub-Adv Agreement with PCREI (filed 9/11/03)
	e.	Amended & Restated Sub-Adv Agreement with PREI dated 9/12/05 (filed 12/29/05)
	f.	Amended & Restated Sub-Adv Agreement with PREI dated 1/1/06 (filed 2/28/06)
	g.	Amended & Restated Sub-Adv Agreement with PREI dated 10/1/07 (filed 9/28/07)

(25)	a.	Pyramis Global Advisors, LLC dated 1/1/07 (filed 1/16/07)

(26)	a.	Spectrum Sub-Advisory Agreement (filed 04/29/02)
	b.	Amended & Restated Sub-Adv Agreement with Spectrum (filed 9/11/03)
	c.	Amended & Restated Sub-Adv Agreement with Spectrum dated 9/12/05 (filed 12/29/05)

(27)	a.	T. Rowe Price Sub-Advisory Agreement dated 3/8/04 (filed 6/1/04)
	b.	Amended & Restated Sub-Adv Agreement with T. Rowe Price dated 8/24/04 (filed 9/27/04)
	c.	Amended & Restated Sub-Adv Agreement with T. Rowe Price dated 8/1/05 (filed 12/29/05)
	d.	Amended & Restated Sub-Adv Agreement with T. Rowe Price dated 8/1/06 (filed 10/20/06)

(28)	a.	Turner Sub-Advisory Agreement (filed 12/5/00)
	b.	Amended & Restated Sub-Adv Agreement with Turner dated 10/31/07. (filed 12/14/07)

(29)	a.	UBS Global Asset Management Sub-Advisory Agreement (filed 04/29/02)
	b.	Amended & Restated Sub-Adv Agreement with UBS (filed 9/11/03)
	c.	Amended & Restated Sub-Adv Agreement with UBS dated 4/1/04 filed 6/1/04)

(30)	a.	Vaughan Nelson Investment Management Sub-Advisory Agreement dtd 9/21/05 (filed 11/22/05)

	(31)	a.	Van Kampen Sub-Advisory Agreement dated 1/12/07 (filed 1/16/07)
		b.	Amended & Restated Sub-Adv Agreement with Van Kampen dated 4/1/07
			(filed 7/18/07)(filed 9/28/07)

	(32)	a.	Westwood Management Corporation Sub-Advisory Agreement dated
			7/15/08 (filed 07/17/08)

(7)	(1)	a.	Distribution Agreement (filed 4/12/96)
		b.	1st Amendment to the Distribution Agreement (filed 9/22/00)
		c.	Distribution Agreement (filed 9/22/00)
		d.	Distribution Plan and Agreement (Select Class)(filed 12/30/02)
		e.	Amended and Restated Distribution Plan and Agreement (Select Class)(filed
			12/30/02)
		f.	Amended and Restated Distribution Plan and Agreement (Advisors Select
			Class)(filed 12/30/02)
		g.	Amended and Restated Distribution Plan and Agreement (Advisors
			Preferred Class)(filed 12/30/02)
		h.	Amended and Restated Distribution Plan and Agreement (Class J)(filed
			12/30/02)
		i.	Amended and Restated Distribution Agreement (filed 12/30/02)
		j.	Amendment to Distribution Plan and Agreement (Advisors Preferred Class)
			(filed 02/26/03)
		k.	Amendment to Distribution Plan and Agreement (Advisors Select Class)
			(filed 02/26/03)
		l.	Amendment to Distribution Plan and Agreement (Select Class) (filed
			02/26/03)
		m.	Amendment to Distribution Agreement dtd 03/02 (filed 02/26/03)
		n.	Amendment to Distribution Agreement dtd 12/02 (filed 02/26/03)
		o.	Amended & Restated Distribution Agreement dtd 10/22/03 (filed 12/15/03)
		p.	Amended & Restated Distribution Agreement dtd 6/14/04 (filed 9/27/04)
		q.	Amended & Restated Distribution Agreement dtd 2/24/05 (filed 9/8/05)
		r.	Distribution Agreement (Class A, B and C) dtd 1/12/07 (filed 1/16/07)
		s.	Distribution Agreement (Instl and J) dtd 1/12/07 (filed 1/16/07)
		t.	Distribution Agreement (Class A, B, C, J, Institutional, Advisors Preferred,
			Preferred, Advisors Select, Select, Advisors Signature Classes) dtd 3/11/08
			(filed 05/01/08)

(8)	Not Applicable

(9)	(1)	a.	Domestic Portfolio Custodian Agreement with Bank of New York (filed
			4/12/96)
		b.	Domestic Funds Custodian Agreement with Bank of New York (filed 12/5/00)
		c.	Domestic and Global Custodian Agreement with Bank of New York (filed
			11/22/05)

(10)	Rule 12b-1 Plan
	(1)	R-3 f/k/a Advisors Preferred Plan (filed 9/22/2000)
		a.	Amended & Restated dtd 9/9/02 (filed 12/30/02)
		b.	Amended & Restated dtd 3/11/04 (filed 3/14/04)
		c.	Amended & Restated dtd 6/14/04 (filed 9/27/04)
		d.	Amended & Restated dtd 9/13/04 (filed 9/27/04)
		e.	Amended & Restated dtd 12/13/04 (filed 2/28/05)
		f.	Amended & Restated dtd 9/30/05 (filed 11/22/05

	g.	Amended & Restated dtd 9/11/06 (Incorporated by reference from exhibit
		#10(1)g to registration statement No. 333-137477 filed on Form N-14 on
		10/6/06)
	h.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
	i.	Amended & Restated dtd 3/11/08 (filed 05/01/08)

(2)	R-2 f/k/a Advisors Select Plan (filed 9/22/2000)
	a.	Amended & Restated dtd 9/9/02 (filed 12/30/02)
	b.	Amended & Restated dtd 3/11/04 (filed 3/14/04)
	c.	Amended & Restated dtd 6/14/04 (filed 9/27/04)
	d.	Amended & Restated dtd 9/13/04 (filed 9/27/04)
	e.	Amended & Restated dtd 12/13/04 (filed 2/28/05)
	f.	Amended & Restated dtd 9/30/05 (filed 11/22/05)
	g.	Amended & Restated dtd 9/11/06 (Incorporated by reference from exhibit
		#10(2)g to registration statement No. 333-137477 filed on Form N-14 on
		10/6/06)
	h.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
	i.	Amended & Restated dtd 3/11/08 (filed 05/01/08)

(3)	R-4 f/k/a Select Plan (filed 12/30/02)
	a.	Amended & Restated dtd 9/9/02 (filed 12/30/02)
	b.	Amended & Restated dtd 3/11/04 (filed 3/14/04)
	c.	Amended & Restated dtd 6/14/04 (filed 9/27/04)
	d.	Amended & Restated dtd 9/13/04 (filed 9/27/04)
	e.	Amended & Restated dtd 12/13/04 (filed 2/28/05)
	f.	Amended & Restated dtd 9/30/05 (filed 11/22/05)
	g.	Amended & Restated dtd 9/11/06 (Incorporated by reference from exhibit
		#10(3)g to registration statement No. 333-137477 filed on Form N-14 on
		10/6/06)
	h.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
	i.	Amended & Restated dtd 3/11/08 (filed 05/01/08)

(4)	Class J Plan (filed 12/30/02)
	a.	Amended & Restated dtd 9/9/02 (filed 12/30/02)
	b.	Amended & Restated dtd 9/13/04 (filed 9/27/04)
	c.	Amended & Restated dtd 12/13/04 (filed 2/28/05)
	d.	Amended & Restated dtd 9/30/05 (filed 11/22/05)
	e.	Amended & Restated dtd 9/11/06 (Incorporated by reference from exhibit
		#10(4)e to registration statement No. 333-137477 filed on Form N-14 on
		10/6/06)
	f.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
	g.	Amended & Restated dtd 1/1/08 (filed 03/05/08)
	h.	Amended & Restated dtd 1/1/08 (filed 05/01/08)
	i.	Amended & Restated dtd 3/11/08 (filed 05/01/08)

(5)	R-1 f/k/a Advisors Signature Plan (filed 12/13/04)
	a.	Amended & Restated dtd 9/13/04 (filed 9/27/04)
	b.	Amended & Restated dtd 12/13/04 (filed 2/28/05)
	c.	Amended & Restated dtd 9/30/05 (filed 11/22/05)
	d.	Amended & Restated dtd 9/11/06 (Incorporated by reference from exhibit
		#10(5)d to registration statement No. 333-137477 filed on Form N-14 on
		10/6/06)
	e.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
	f.	Amended & Restated dtd 3/11/08 (filed 5/01/08)

(6)	Class A Plan (filed 2/28/05)

		a.	Amended & Restated dtd 9/30/05 (filed 11/22/05)
		b.	Amended & Restated dtd 12/1/05 (Incorporated by reference from exhibit
			#10(6)b to registration statement No. 333-137477 filed on Form N-14 on
			9/20/06)
		c.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
		d.	Amended & Restated dtd 10/01/07 (filed 12/14/07)

	(7)	Class B Plan (filed 2/28/05)
		a.	Amended & Restated dtd 9/30/05 (filed 11/22/05)
		b.	Amended & Restated dtd 12/1/05 (Incorporated by reference from exhibit
			#10(7)b to registration statement No. 333-137477 filed on Form N-14 on
			9/20/06)
		c.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
		d.	Amended & Restated dtd 3/13/07 (filed 12/14/07)

	(8)	Class C Plan
		a.	dated 9/11/06 (Incorporated by reference from exhibit #10(8)a to registration
			statement No. 333-137477 filed on Form N-14 on 10/6/06)
		b.	Amended & Restated dtd 1/12/07 (filed 1/16/07)
		c.	Amended & Restated dtd 10/01/07 (filed 12/14/07)

	(9)	Class S Plan dtd 5/1/08 (filed 05/01/08)

(11)	Opinion and Consent of counsel, regarding legality of issuance of shares and other matters *

(12)	Forms of Opinions and Consent of counsel on tax matters **

(13)	Not Applicable

(14)	Consent of Independent Registered Public Accountants
	(a)	Consent of Ernst & Young LLP *

(15)	Not Applicable

(16)	(a)	Powers of Attorney*

(17)	(a)	Prospectuses of Principal Funds, Inc. dated February 29, 2008, as supplemented
		(filed June 17, 2008)

	(b)	Statement of Additional Information of Principal Funds, Inc. dated May 1, 2008,
		as supplemented (filed June 17, 2008)

	(c)	Annual Report of Principal Funds, Inc. for the fiscal year ended October 31, 2007
		(filed December 28, 2007)

	(d)	Semi-Annual Report of Principal Funds, Inc. for the period ended April 30, 2008
		(filed July 7, 2008)

*	Filed herein.
**	To be filed by amendment.

Item 17. Undertakings

(1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, the reoffering prospectus will contain the information called for by the applicable registration form for re-offerings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.

(2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.

(3) The undersigned Registrant agrees to file a post-effective amendment to this Registration Statement which will include an opinion of counsel regarding the tax consequences of the proposed reorganization.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant, Principal Funds, Inc., has duly caused this

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 27th day of August, 2008.

Principal Funds, Inc.
	(Registrant)



By	/s/ R. C. Eucher

R. C. Eucher
Director, Vice Chairman and
Chief Executive Officer

Attest:

/s/ Beth Wilson

Beth Wilson

Vice President and Secretary

Pursuant to the requirements 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
R. C. Eucher	Director, Vice Chairman	August 27, 2008
	and Chief Executive
	Officer (Principal
	Executive Officer)

/s/ L. A. Rasmussen
L. A. Rasmussen	Vice President,	August 27, 2008
	Controller and Chief
	Financial Officer
	(Principal Financial
	Officer and Controller)

(L. D. Zimpleman)*
L. D. Zimpleman	Director and	August 27, 2008
	Chairman of the Board


/s/ M. J. Beer
M. J. Beer	Executive Vice President	August 27, 2008


(E. Ballantine)*
E. Ballantine	Director	August 27, 2008


(K. Blake)*
K. Blake	Director	August 27, 2008


(C. Damos)*
C. Damos	Director	August 27, 2008


(R. W. Gilbert)*
R. W. Gilbert	Director	August 27, 2008


(M. A. Grimmett)*
M. A. Grimmett	Director	August 27, 2008


(F. S. Hirsch)*
F. S. Hirsch	Director	August 27, 2008


(W. C. Kimball)*
W. C. Kimball	Director	August 27, 2008

(B. A. Lukavsky)*
B. A. Lukavsky	Director		August 27, 2008


(W. G. Papesh)*
W. G. Papesh	Director		August 27, 2008


(D. Pavelich)*
D. Pavelich	Director		August 27, 2008


		*By	/s/ M. J. Beer
			M. J. Beer
			Executive Vice President

			Pursuant to Powers of Attorney filed herewith.

EXHIBIT INDEX
Exhibit No.	Description
4	Forms of Plans of Reorganization (filed herewith as Appendix A to the Proxy
	Statement/Prospectus)
11	Opinion and Consent of counsel regarding legality of issuance of shares and other matters
14(a)	Consent of Ernst & Young LLP, Independent Registered Public Accountants
16(a)	Powers of Attorney