Due to size constraints, this filing is being made in 2 related submissions.  This submission is the first of 2 related submissions. 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number

811-07572

Principal Funds, Inc.

(Exact name of registrant as specified in charter)

711 High Street, Des Moines, IA 50392-2080
(Address of principal executive offices)	(Zip code)

Principal Management Corporation, Des Moines, IA 50392-2080 (Name and address of agent for service)

Registrant’s telephone number, including area code:		515-247-6783
Date of fiscal year end:	October 31, 2008
Date of reporting period:	October 31, 2008

ITEM 1 – REPORT TO STOCKHOLDERS

PRINCIPAL FUNDS

Principal Money Market Fund

Annual Report

October 31, 2008

Table of Contents

Letter from the President	1
Money Market Fund Performance and Investment Overview	2
Shareholder Expense Example	4
Financial Statements	5
Notes to Financial Statements	8
Schedule of Investments	12
Financial Highlights	18
Report of Registered Independent Public Accounting Firm	19
Supplemental Information	20

Not FDIC Insured

May Lose Value • Not a Deposit • No Bank Guarantee Not Insured by any Federal Government Agency

Nora Everett was named president of Principal Funds effective

March 1, 2008. Nora was formerly senior vice president and

deputy general counsel at The Principal, and has a background

in investments, regulation, and acquisitions.

Dear Shareholder,

By historical standards, the past fiscal year was an exceptional period for the world’s financial markets. Buffeted by an extended period of market volatility and unprecedented disruptions in the credit markets, the S&P 500 declined 36.10% for the period, while the Barclays Capital Aggregate Bond Index closed the period with a gain of 0.30% .¹

Yet while the markets suffered from extreme volatility and the traditional relationships between stock and bond prices were disrupted, our funds weathered this difficult environment. During this market period, 25 of our 49 retail funds outpaced either their benchmarks or their Morningstar peer group, and 13 of our funds beat both of these key measures.² This illustrates the benefits of our extensive research capabilities and investment approach, which are founded on disciplined investing, active management, and adhering to investment fundamentals regardless of market conditions.

Market Declines and Recoveries

Over the past year, the market environment presented challenges for managing financial assets and planning for our financial futures. As the year unfolded, it became clear we were in a significant bear market that did not reward investors and made many nervous enough to question their overall investment strategies.

This is entirely natural. Understandably, people will question their beliefs during these difficult times. Since 1919, there have been 16 economic contractions in the U.S., averaging 13 months in length.³ However, history has shown that the worst 12-month stock market declines have historically been followed by periods of even greater recovery.⁴ While this may not always happen, market cycles are an inherent part of investing.

Although it is difficult to predict the length of any particular market cycle, we encourage investors to continue to follow some time-tested principles, including the need for diversification and maintaining a long-term investment perspective. As we have cited in the past, numerous studies have found that asset allocation — the mix of asset classes you select — is the most important factor in determining the variability of investment returns in your portfolio’s performance.⁵

Investing in multiple asset classes and investment styles affects both investment returns and risk management. When a diversified portfolio is carefully constructed, it can provide a cushion against volatile markets and prices. This remains as true today as ever before. It also helps explain why our target-date Principal LifeTime Funds and target-risk Strategic Asset Management (SAM) Portfolios continue to remain popular choices for investors seeking wider diversification.

While these are challenging times, you do not have to make difficult investing choices alone. We encourage you to meet with your financial professional, who can provide the advice you need to help meet your financial goals. We also have developed a series of educational materials on market volatility and the benefits of disciplined investing, which are available in the Resources section of our Web site, principalfunds.com.

As this letter is being written, it is evident we have entered a recession which may, or may not, last longer than average. Yet regardless of the duration, we remain committed to providing you with the highest quality investment management and shareholder services possible.

Thank you for your continued support.

Note: Asset allocation/diversification does not guarantee a profit or protect against a loss. Past performance is not a guarantee of future results.

1	Based on total return. The S&P 500 is a broad-based index intended to represent the U.S. equity market. The Barclays Capital Aggregate Bond Index (formerly known as the Lehman Brothers Aggregate Bond Index) is a broad-based index intended to represent the U.S. fixed-income market. Indices are unmanaged, and individuals cannot invest directly in an index.
2	Based on Class A shares without sales charge.
3	National Bureau of Economic Research.
4	Ibbotson Associates.
5	G.P. Brinson, L.R. Hood, and G.L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, January/February 1995.

1

Money Market Fund

Portfolio Managers:

Tracy Reeg
Alice Robertson
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund’s allocation to variable rate demand notes added value during the period.¹ Also, the Fund benefited from having a
consistently shorter average-days-to-maturity measurement than did its peers (although the average for the peer group did
decline over the period). On a negative note, the prime money market industry saw large outflows in September, resulting
from one money market fund falling below $1.00 net asset value per share. Throughout the year, the Fund’s exposures to
asset-backed commercial paper and financial credits were adjusted due to the continued stress in the market.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies consistently focus on relative
value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio
construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio
duration based on expectations for short-term movements in interest rates are not part of the overall process.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide
central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented
and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market
environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand
the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic
conditions in history.

1      Variable rate demand notes are debt instruments representing borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate.

2

Money Market Fund

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A contingent deferred sales charge may apply as follows: Class J shares: 1% on redemptions made during the first 18 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. The 7-day simple yield more closely reflects current Fund earnings than the total return data.

Average Annual Total Returns2 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class J Shares	Excluding Sales Charge	2.67%	3.65%	2.55%	2.13%	3/1/01	12/6/00
	Including Sales Charge	1.67%	3.65%	2.55%	2.13%
Class S Shares		2.64%	3.71%	2.67%	2.32%	5/1/08	12/6/00

	7-Day	7-Day			Gross/Net
Yields3 as of October 31, 2008	Simple Yield	Effective Yield	Total Investment Expense		Expense Ratio
Class J Shares	1.56%	1.58%	Class J Shares	As shown in the 2/29/08 prospectus 0.98%
Class S Shares	1.89%	1.91%	Class S Shares	As shown in the 5/1/08 prospectus	0.82%
Fund yields3 as of 9/30/08:
Class J Shares: 2.26% (7-day simple yield);
2.29% (7-day effective yield)
Class S Shares: 2.27% (7-day simple yield);
2.29% (7-day effective yield)

2

Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

3

The 7-day simple yield is calculated based on the income generated by an investment in the fund over a 7-day period and is expressed as an annual percentage rate. The 7-day effective yield is calculated similarly to the 7-day simple yield but assumes that income earned from the fund’s investments is reinvested and compounded.

3

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)

As a shareholder of the Money Market Fund of Principal Funds, Inc., you incur two types of costs: (1) transaction costs (for Class J shares only), including contingent deferred sales charges; and (2) ongoing costs, including management fees; distribution fees; and other fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in Principal Funds, Inc. and to compare these costs with the ongoing costs of investing in other mutual funds.

The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (May 1, 2008 to October 31, 2008), unless otherwise noted.

Actual Expenses

The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. An annual fee of $15.00 or $30.00 may apply to IRA and 403(b) accounts, respectively. These fees are not included in the table below. If they were, the estimate of expenses you paid during the period would be higher, and your ending account value lower, by this amount.

Hypothetical Example for Comparison Purposes

The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in Principal Funds, Inc. and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as sales charges on purchase payments, contingent deferred sales charges, redemption fees or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

		Actual			Hypothetical
			Expenses paid			Expenses paid
		Ending	during the		Ending	during the
	Beginning	Account	period May 1,	Beginning	Account	period May 1,
	Account	Value	2008 through	Account	Value	2008 through
	Value May 1,	October 31,	October 31,	Value May 1,	October 31,	October 31,	Annualized
	2008	2008	2008 (a)	2008	2008	2008 (a)	expense ratio
Money Market Fund
Class J	$1,000.00	$1,009.84	$4.34	$1,000.00	$1,020.81	$4.37	0.86
Class S	1,000.00	1,009.81	4.32	1,000.00	1,020.81	4.37	0.86

^(a) Expenses are equal to a fund's annualized expense ratio multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

4

STATEMENT OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.

	October 31, 2008
		Money Market
Amounts in thousands, except per share amounts		Fund
Investment in securities--at cost		$ 2,805,384
Assets
Investment in securities--at value		$ 2,805,384
Cash		390
Receivables:
Capital Shares sold		4,138
Dividends and interest		1,686
Investment securities sold		7,307
Other assets		27
	Total Assets	2,818,932
Liabilities
Accrued management and investment advisory fees		897
Accrued administrative service fees		38
Accrued distribution fees		484
Accrued service fees		91
Accrued transfer agent fees		510
Accrued directors' expenses		4
Accrued other expenses		103
Payables:
Capital Shares reacquired		8,215
	Total Liabilities	10,342
Net Assets Applicable to Outstanding Shares		$ 2,808,590
Net Assets Consist of:
Capital Shares and additional paid-in-capital		$ 2,812,331
Accumulated undistributed (overdistributed) net realized gain (loss)		(3,741 )
	Total Net Assets	$ 2,808,590
Capital Stock (par value: $.01 a share):
Shares authorized		17,575,000
Net Asset Value Per Share:
Class A: Net Assets		$ 775,670
Shares Issued and Outstanding		776,617
Net Asset Value per share		$ 1.00
Maximum Offering Price		$ 1.00
Class B: Net Assets		$ 87,353
Shares Issued and Outstanding		87,423
Net Asset Value per share		$ 1.00 (a)
Class C: Net Assets		$ 42,966
Shares Issued and Outstanding		42,997
Net Asset Value per share		$ 1.00 (a)
Class J: Net Assets		$ 355,746
Shares Issued and Outstanding		356,136
Net Asset Value per share		$ 1.00 (a)
Class S: Net Assets		$ 951,684
Shares Issued and Outstanding		953,071
Net Asset Value per share		$ 1.00
Institutional: Net Assets		$ 276,963
Shares Issued and Outstanding		277,416
Net Asset Value per share		$ 1.00
R-1: Net Assets		$ 11,194
Shares Issued and Outstanding		11,204
Net Asset Value per share		$ 1.00
R-2: Net Assets		$ 32,085
Shares Issued and Outstanding		32,129
Net Asset Value per share		$ 1.00
R-3: Net Assets		$ 85,636
Shares Issued and Outstanding		85,741
Net Asset Value per share		$ 1.00
R-4: Net Assets		$ 30,868
Shares Issued and Outstanding		30,906
Net Asset Value per share		$ 1.00
R-5: Net Assets		$ 158,425
Shares Issued and Outstanding		158,691
Net Asset Value per share		$ 1.00

^(a) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

5

STATEMENT OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
Amounts in thousands	Money Market Fund
Net Investment Income (Operating Loss)
Income:
Interest	$ 98,160
Total Income		98,160
Expenses:
Management and investment advisory fees		10,671
Distribution fees - Class B		469
Distribution fees - Class C		197
Distribution fees - Class J		617
Distribution fees - Class S		1,273
Distribution fees - R-1		22
Distribution fees - R-2		71
Distribution fees - R-3		148
Distribution fees - R-4		19
Administrative service fees - R-1		18
Administrative service fees - R-2		47
Administrative service fees - R-3		89
Administrative service fees - R-4		24
Administrative service fees - R-5		168
Registration fees - Class A		79
Registration fees - Class B		7
Registration fees - Class C		7
Registration fees - Class J		28
Service fees - Class S		199
Service fees - R-1		16
Service fees - R-2		59
Service fees - R-3		101
Service fees - R-4		28
Service fees - R-5		228
Shareholder reports - Class A		530
Shareholder reports - Class B		5
Shareholder reports - Class C		2
Shareholder reports - Class J		180
Shareholder reports - Class S		150
Transfer agent fees - Class A		1,248
Transfer agent fees - Class B		39
Transfer agent fees - Class J		366
Transfer agent fees - Class S		106
Custodian fees		7
Directors' expenses		77
Professional fees		15
Other expenses		151
Total Expenses		17,461
Net Investment Income (Operating Loss)		80,699
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(3,741 )
Net Realized Gain (Loss) on Investments		(3,741 )
Net Increase (Decrease) in Net Assets Resulting from Operations	$ 76,958

6

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands																	Money Market Fund
																Year Ended				Year Ended
																October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)																$ 80,699				$ 98,162
Net realized gain (loss) from investment transactions and foreign currency transactions																		(3,741 )				–
				Net Increase (Decrease) in Net Assets Resulting from Operations														76,958				98,162
Dividends and Distributions to Shareholders
From net investment income																	(80,699 )				(98,162 )
										Total Dividends and Distributions							(80,699)				(98,162 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																	270,331				1,848,919
									Total increase (decrease) in net assets								266,590				1,848,919
Net Assets
Beginning of period																	2,542,000				693,081
End of period (including undistributed net investment income as set forth below)																$ 2,808,590				$ 2,542,000
Undistributed (overdistributed) net investment income (operating loss)																$ –				$ –
		Class A	Class B Class C					Class J		Class S Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share
Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 1,360,383		$ 101,427		$ 57,949		$ 338,953		$ 1,402,124 $			565,039	$ 29,849		$ 51,998		$ 210,539		$ 106,350 $ 310,028
Reinvested		50,052		685		320		6,153		6,984		8,183		129		526		1,359		472		4,009
Redeemed		(2,587,292 )	(47,954)			(26,486)		(175,216)		(456,037 )		(512,794)		(22,342 )		(35,382)		(148,402 )		(89,857 )		(241,418)
Net Increase (Decrease)	$ (1,176,857 ) $			54,158	$ 31,783		$ 169,890		$ 953,071		$ 60,428		$ 7,636		$ 17,142		$ 63,496		$ 16,965		$ 72,619
Shares:
Sold		1,360,383	101,427			57,949		338,953		1,402,124		565,039		29,849		51,998		210,539		106,350		310,028
Reinvested		50,052		685		320		6,153		6,984		8,183		129		526		1,359		472		4,009
Redeemed		(2,587,292 )	(47,954)			(26,486)		(175,216)		(456,037 )		(512,794)		(22,342 )		(35,382)		(148,402 )		(89,857 )		(241,418)
Net Increase (Decrease)		(1,176,857 )	54,158			31,783		169,890		953,071		60,428		7,636		17,142		63,496		16,965		72,619
Year Ended October 31, 2007
Dollars:
Sold	$ 1,721,034		$ 23,143		$ 15,879		$ 125,082			N/A $		385,893	$ 36,760		$ 62,497		$ 123,442		$ 97,580		$ 199,900
Issued in acquisitions		1,098,364	33,680			6,724		–		N/A		185,502		–		–		–		–		–
Reinvested		74,095		896		204		7,260		N/A		8,471		154		677		933		459		3,093
Redeemed		(1,371,714 )	(27,430)			(11,593)		(103,582)		N/A		(389,281)		(34,924 )		(57,704)		(117,410 )		(90,712 )		(158,453)
Net Increase (Decrease)	$ 1,521,779		$ 30,289		$ 11,214		$ 28,760			N/A $		190,585	$ 1,990		$ 5,470		$ 6,965		$ 7,327		$ 44,540
Shares:
Sold		1,721,034	23,143			15,879		125,082		N/A		385,893		36,760		62,497		123,442		97,580		199,900
Issued in acquisitions		1,098,364	33,680			6,724		–		N/A		185,502		–		–		–		–		–
Reinvested		74,095		896		204		7,260		N/A		8,471		154		677		933		459		3,093
Redeemed		(1,371,714 )	(27,430)			(11,593)		(103,582)		N/A		(389,281)		(34,924 )		(57,704)		(117,410 )		(90,712 )		(158,453)
Net Increase (Decrease)		1,521,779	30,289			11,214		28,760		N/A		190,585		1,990		5,470		6,965		7,327		44,540
Distributions:
Year Ended October 31, 2008
From net investment
income	$ (50,632 )		$ (877) $			(363 ) $		(6,181) $		(6,984)	$ (9,167) $			(129 ) $		(526 ) $		(1,359) $		(472) $		(4,009)
From net realized
gain on investments .		–		–		–		–		–		–		–		–		–		–		–
Total Dividends and
Distributions	$ (50,632 )		$ (877) $			(363 ) $		(6,181) $		(6,984)	$ (9,167) $			(129 ) $		(526 ) $		(1,359) $		(472) $		(4,009)
Year Ended October 31, 2007
From net investment
income	$ (74,669 )		$ (1,068) $			(231 ) $		(7,366)		N/A $		(9,503) $		(154 ) $		(678 ) $		(934) $		(459) $		(3,100)
From net realized
gain on investments .		–		–		–		–		–		–		–		–		–		–		–
Total Dividends and
Distributions	$ (74,669 )		$ (1,068) $			(231 ) $		(7,366)		N/A $		(9,503) $		(154 ) $		(678 ) $		(934) $		(459) $		(3,100)

7

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

1. Organization

Principal Funds, Inc. is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company and operates in the mutual fund industry. Principal Funds, Inc. consists of Money Market Fund (the “Fund”), presented herein, and 73 other funds. Money Market Fund offers eleven classes of shares: Class A, Class B, Class C, Class J, Class S, Institutional, R-1, R-2, R-3, R-4, and R-5.

On December 31, 2006, Principal Financial Services, Inc. and its subsidiary, Principal Management Corporation acquired all of the outstanding stock of WM Advisors, Inc., WM Shareholder Services, Inc., and WM Funds Distributor, Inc. (the “Transaction”). Immediately following the Transaction, WM Advisors, Inc., WM Shareholder Services, Inc., and WM Funds Distributor, Inc. were renamed, Edge Asset Management, Inc., Principal Shareholder Services, Inc., and Principal Funds Distributor, Inc.

Effective January 10, 2007, the initial purchase of $10,000 of Class C shares of Money Market Fund was made by Principal Life Insurance Company.

Effective January 12, 2007, Money Market Fund acquired all the assets and assumed all the liabilities of WM Money Market Fund pursuant to a plan of acquisition approved by the shareholders of WM Money Market Fund on December 15, 2006. The acquisition was accomplished by a tax-free exchange of shares from WM Money Market Fund for shares of Money Market Fund at an exchange rate of 1.00 for Class A, Class B, Class C, and Institutional shares. The aggregate net assets of WM Money Market Fund and Money Market Fund immediately prior to the acquisition were approximately $1,324,270,000 (including approximately $4,000 of accumulated net realized loss) and $742,321,000, respectively. The aggregate net assets of Money Market Fund immediately following the acquisition was $2,066,591,000.

Effective May 1, 2008, the initial purchase of $10,000 of Class S shares of Money Market Fund was made by Principal Life Insurance Company.

Temporary Guarantee Program for Money Market Funds. Following approval by the Board of Directors of Principal Funds, Inc., Money Market Fund submitted to the United States Department of Treasury an agreement to participate in the Temporary Guarantee Program for Money Market Funds (the “Program”).

The Program will guarantee Money Market Fund shareholders that they will receive $1.00 per share they owned as of the close of business on September 19, 2008, or the number of shares held on the date the Fund’s market based net asset value falls below $0.995 per share and the Money Market Fund liquidates, whichever is less. The program is subject to an overall limit of $50 billion for all money market funds participating in the Program. The Program does not cover investors who were not shareholders of the Money Market Fund on September 19, 2008.

The Program remains in effect until December 18, 2008, unless extended by the United States Treasury Department. If the Program is extended, the Board of Directors would need to approve the Money Market Fund’s continued participation in the Program and the Money Market Fund would need to reapply and pay an additional premium. The cost for participating in the initial three-month Program is 0.01% of the net assets of the Fund as of September 19, 2008 and was borne by the Money Market Fund. The cost for participating in the initial three-month Program incurred during the period ended October 31, 2008 is included as a component of miscellaneous expense on the statement of operations.

On November 24, 2008, the United States Treasury Department announced an extension of the Program to April 30, 2009. Money Market Fund has applied to participate in the extension.

All classes of shares represent interests in the same portfolio of investments, and will vote together as a single class except where otherwise required by law or as determined by the Board of Directors of Principal Funds, Inc. In addition, the Board of Directors declares separate dividends on each class of shares.

2. 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. The following summarizes the significant accounting policies of the Fund:

8

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

2. Significant Accounting Policies (Continued)

Security Valuation. The Fund values its securities at amortized cost, which approximates market, as permitted under Rule 2a-7 of the Investment Company Act of 1940. Under the amortized cost method, a security is valued by applying a constant yield to maturity of the difference between the principal amount due at maturity and the cost of the security to the Fund.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31, 2008, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

Income and Investment Transactions. The Fund records investment transactions on a trade date basis. The identified cost basis has been used in determining the net realized gain or loss from investment transactions. Interest income is recognized on an accrual basis. The Fund allocates daily all income and realized gains or losses to each class of shares based upon the relative proportion of the number of settled shares outstanding of each class.

The Fund’s investments are with various issuers in various industries. The schedule of investments contained herein summarizes concentration of credit risk by issuer and industry.

Expenses. Expenses directly attributed to a Fund are charged to that Fund. Other Fund expenses not directly attributed to a Fund are apportioned among the Funds managed by Principal Management Corporation.

The Fund allocates daily all expenses (other than class-specific expenses) to each class of shares based upon the relative proportion of the number of settled shares outstanding of each class. Class-specific expenses charged to each class during the year ended October 31, 2008, are included separately in the statement of operations.

Distributions to Shareholders. The Fund declares all net investment income and any net realized gains from investment transactions as dividends daily to settled shares of record as of that day. Dividends from net investment income and net realized gain from investments are determined in accordance with federal tax regulations, which may differ from U.S. generally accepted accounting principles.

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

On July 13^th, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 became effective for the Fund on November 1, 2007. Management has evaluated the implications of FIN 48 and has determined there was no material impact on the Fund’s financial statements.

3. Operating Policies

Indemnification. Under the Fund’s by-laws present and past officers, directors and employees are indemnified against certain liabilities arising out of the performance of their duties. In addition, in the normal course of business the Fund may enter into a variety of contracts that may contain representations and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund.

9

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

3. Operating Policies (Continued)

Line of Credit. The Fund participates with other registered investment companies managed by Principal Management Corporation (the “Manager”) in an unsecured joint line of credit with two banks which allow the participants to borrow up to $150 million, collectively. Borrowings are made solely to facilitate the handling of unusual and/or unanticipated short-term cash requirements. Interest is charged to each participant, based on its borrowings, at a rate equal to the Fed Funds Rate plus .4%. During the year ended October 31, 2008, the Fund borrowed against the line of credit. The interest expense associated with the borrowings is included in other expenses on the statement of operations.

4. Management Agreement and Transactions with Affiliates

Management Services. The Fund has agreed to pay investment advisory and management fees to Principal Management Corporation (wholly owned by Principal Financial Services, Inc.) computed at an annual percentage rate of the Fund’s average daily net assets. The annual rates used in this calculation for the Fund are as follows:

Net Assets of Funds (in millions)
First	Next	Next	Next	Next $1	Over $3
$500	$500	$500	$500	billion	billion
.40%	.39%	.38%	.37%	.36%	.35%

In addition to the management fee, R-1, R-2, R-3, R-4, and R-5 classes of shares of the Fund pay the Manager a service fee and an administrative service fee computed at an annual percentage rate of each class’s average daily net assets. As of October 31, 2008, the annual rates for the service fee are .25%, .25%, .17%, .15%, and .15% and the annual rates for the administrative service fee are .28%, .20%, .15%, .13%, and .11% for R-1, R-2, R-3, R-4, and R-5, respectively. Class A, Class B, Class C, Class J and Class S shares of the Fund reimburse Principal Shareholder Services, Inc. (the “Transfer Agent”) (wholly owned by Principal Management Corporation) for transfer agent services. In addition, Class S shares pays Principal Shareholder Services, Inc. a service fee computed at an annual percentage rate of Class S shares average daily net assets. The annual rates used in this calculation for the Fund are as follows:

Net Assets of Funds (in millions)

First	Next	Next $4	Next $5	Next $10	Over $20
$500	$500	billion	billion	billion	billion
.06%	.05%	.04%	.03%	.02%	.01%

The Manager has contractually agreed to limit the Fund’s expenses on certain share classes of the Fund. The reductions and reimbursements are in amounts that maintain total operating expenses at or below certain limits. The limits are expressed as a percentage of average daily net assets attributable to each respective class on an annualized basis. The operating expense limits for Class A and Class B shares were 0.64% and 1.74% from November 1, 2007 through February 28, 2008. The operating expense limits for Class A and Class B shares expired on February 28, 2008. The operating expense limit for Class C shares is 1.79% and will expire on February 28, 2009.

Distribution Fees. The Class B, Class C, Class J, Class S, R-1, R-2, R-3, and R-4 shares of the Fund bear distribution fees. The fee is computed at an annual rate of the average daily net assets attributable to each class of the Fund. Distribution fees are paid to Principal Funds Distributor, Inc. or Princor Financial Services Corporation, the principal underwriters, a portion may be paid to other selling dealers for providing certain services. The annual rates are 1.00%, 1.00%, .25%, .35%, .35%, .30%, .25% and .10% for Class B, Class C, Class J, Class S, R-1, R-2, R-3, and R-4 Classes of shares, respectively.

Sales Charges. Principal Funds Distributor, Inc. or Princor Financial Services Corporation, as principal underwriters, receive proceeds of any CDSC on certain Class A, Class B, Class C, and Class J share redemptions. The charge for Class A shares is 1.00% of the lesser of current market value or the cost of shares redeemed. The charge for Class B shares is based on declining rates which begin at 5.00% of the lesser of current market value or the cost of shares being redeemed. The charge for Class C shares is 1.00% of the lesser of current market value or the cost of shares redeemed within 12 months of purchase. The charge for Class J shares is 1.00% of the lesser of current market value or the cost of shares redeemed within 18 months of purchase. The aggregate amounts of these charges retained by Princor Financial Services Corporation and Principal Funds Distributor, Inc. for the period ended October 31, 2008, were $45,000, $298,000 $17,000, and $279,000 for Class A, Class B, Class C, and Class J shares, respectively.

Affiliated Ownership. At October 31, 2008, Principal Life Insurance Company (an affiliate of the Manager), Princor Financial Services Corporation, and benefit plans sponsored on behalf of Principal Life Insurance Company owned 20,084,000 and 33,409,000 shares of Class A and Institutional class shares, respectively.

10

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates (Continued)

Affiliated Brokerage Commissions. No brokerage commissions were paid by the Fund to affiliated broker dealers or any other member of the Principal Financial Group, parent company of Principal Financial Services, Inc., during the period.

5. Capital Share Transactions

For the year ended October 31, 2008, the following table reflects the conversion of Class B shares into Class A shares. The amounts are also shown in the statement of changes in net assets as shares sold and dollars sold for Class A and shares redeemed and dollars redeemed for Class B (amounts in thousands).

	Year Ended October 31, 2008
	Shares	Dollars
Money Market Fund	4,311	$4,311
6. Federal Tax Information

Distributions to Shareholders. Federal tax distributions of ordinary income paid for the years ended October 31, 2008 and October 31, 2007, were $80,699,000 and $98,162,000 respectively.

Capital Loss Carryforward. Capital loss carryforwards are losses that can be used to offset future capital gains although it is unlikely the Fund will recognize future capital gains. As of October 31, 2008 the Fund has a capital loss carryforward of $3,741,000 expiring in 2016.

11

Schedule of Investments
Money Market Fund
October 31, 2008

Principal		Principal
Amount	Value	Amount	Value
(000's)	(000's)	(000's)	(000's)

COMMERCIAL PAPER (88.04%)
Aerospace & Defense Equipment (0.43%)
United Technologies Corp
2.05%, 1/21/2009	$ 12,000 $	11,945
Agricultural Operations (1.14%)
Cargill Inc
2.54%, 11/ 7/2008	10,000	9,996
3.15%, 11/26/2008	13,500	13,470
4.20%, 1/15/2009	8,720	8,644
		32,110
Asset Backed Securities (1.99%)
CAFCO
3.50%, 11/ 3/2008	13,500	13,497
2.77%, 11/ 6/2008	7,500	7,497
4.00%, 12/ 3/2008	12,000	11,957
3.00%, 1/15/2009	10,000	9,938
3.05%, 1/20/2009	13,000	12,912
		55,801
Auto - Car & Light Trucks (1.31%)
BMW US Capital Corp
2.77%, 11/24/2008	12,000	11,983
2.10%, 12/24/2008	12,000	11,963
1.95%, 12/29/2008	12,900	12,859
		36,805
Beverages - Non-Alcoholic (1.69%)
Coca-Cola Co
2.25%, 11/13/2008	11,600	11,591
2.25%, 12/16/2008	10,600	10,570
2.25%, 12/17/2008	12,500	12,464
2.40%, 1/21/2009	13,000	12,930
		47,555
Chemicals - Diversified (2.34%)
BASF AG
2.47%, 11/14/2008	11,000	10,990
2.55%, 11/20/2008	12,600	12,583
2.20%, 12/ 4/2008	10,600	10,578
2.65%, 12/ 9/2008	10,500	10,471
3.58%, 1/15/2009	13,000	12,903
2.88%, 1/28/2009	8,125	8,068
		65,593
Commercial Banks (9.58%)
Calyon North America
2.76%, 11/ 3/2008	12,700	12,698
2.66%, 11/ 5/2008	15,000	14,996
2.76%, 12/ 5/2008	15,000	14,961
3.51%, 12/22/2008	11,000	10,945
2.92%, 1/20/2009	13,000	12,916
Nordea North America
3.75%, 1/12/2009	11,000	10,918
2.88%, 1/23/2009	5,580	5,543

COMMERCIAL PAPER (continued)
Commercial Banks (continued)
Nordea North America (continued)
3.41%, 1/26/2009	$ 13,000 $	12,894
3.37%, 2/ 3/2009	11,000	10,903
Royal Bank of Scotland
2.75%, 11/ 3/2008	11,700	11,698
2.76%, 12/11/2008	12,700	12,661
Skandinaviska Enskilda Banken
2.77%, 11/17/2008	10,600	10,587
2.78%, 11/25/2008	12,000	11,978
Societe Generale North America Inc
2.75%, 11/18/2008	11,800	11,785
2.77%, 12/ 2/2008	4,925	4,913
3.05%, 12/30/2008	6,320	6,288
State Street Corp
2.65%, 11/21/2008	12,500	12,482
2.63%, 12/ 1/2008	13,600	13,570
2.70%, 12/10/2008	13,900	13,859
2.68%, 1/ 2/2009	12,000	11,945
2.77%, 1/ 6/2009	9,000	8,954
Svenska Handelsbanken
2.70%, 11/13/2008	6,100	6,095
2.69%, 12/12/2008	9,000	8,972
Toronto - Dominion Holdings
2.70%, 11/20/2008	9,800	9,786
Westpac Banking Corp
2.89%, 11/12/2008	6,870	6,864
		269,211
Commercial Banks - Non US (2.38%)
DNB NOR BANK ASA
2.50%, 11/ 5/2008	8,130	8,128
2.72%, 11/12/2008	3,500	3,497
2.75%, 11/18/2008	11,600	11,585
2.90%, 11/24/2008	10,800	10,780
3.49%, 1/21/2009	12,900	12,799
Swedbank AB
2.90%, 11/ 5/2008	6,000	5,998
2.95%, 11/24/2008	13,975	13,948
		66,735
Computers (1.14%)
IBM Capital Corp
2.39%, 12/ 5/2008	7,300	7,284
2.39%, 12/ 8/2008	12,500	12,469
3.05%, 1/ 5/2009	12,300	12,232
		31,985
Cosmetics & Toiletries (0.88%)
Procter & Gamble
2.20%, 12/ 3/2008	12,500	12,476
2.20%, 12/12/2008	12,300	12,269
		24,745

See accompanying notes

12

Schedule of Investments
Money Market Fund
October 31, 2008

Principal		Principal
Amount	Value	Amount	Value
(000's)	(000's)	(000's)	(000's)

COMMERCIAL PAPER (continued)
Diversified Financial Services (1.38%)
General Electric Capital
2.62%, 11/19/2008	$ 7,370 $		7,360
2.57%, 11/28/2008		11,000	10,979
2.57%, 12/ 4/2008		5,050	5,038
2.70%, 12/ 8/2008		11,000	10,970
2.57%, 12/17/2008		4,500	4,485
			38,832
Diversified Manufacturing Operations (2.79%)
Danaher Corp
1.60%, 12/24/2008		5,860	5,846
Dover Corp
2.20%, 12/ 4/2008		12,000	11,976
Illinois Tool Works Inc
2.20%, 11/21/2008		11,600	11,586
2.00%, 12/18/2008		12,000	11,969
2.15%, 12/18/2008		13,000	12,963
2.00%, 12/19/2008		12,000	11,968
1.90%, 12/23/2008		12,000	11,967
			78,275
Electric - Integrated (1.68%)
E. ON AG
2.41%, 12/11/2008		12,500	12,467
2.35%, 12/12/2008		10,700	10,671
2.85%, 12/15/2008		12,000	11,958
Southern Company Funding Corp
1.95%, 11/10/2008		12,000	11,994
			47,090
Finance - Auto Loans (2.94%)
Paccar Financial
3.15%, 1/ 5/2009		12,000	11,932
Toyota Motor Credit
2.62%, 11/12/2008		4,520	4,516
2.65%, 11/19/2008		6,030	6,022
2.54%, 11/20/2008		8,250	8,239
3.20%, 12/23/2008		8,000	7,963
3.10%, 1/ 2/2009		12,900	12,831
2.66%, 1/ 5/2009		12,700	12,639
2.63%, 1/ 8/2009		9,500	9,453
3.10%, 2/ 2/2009		9,000	8,928
			82,523
Finance - Consumer Loans (2.64%)
HSBC Finance
2.80%, 12/22/2008		8,000	7,968
John Deere Capital Corp
2.60%, 11/ 4/2008		12,000	11,998
2.20%, 11/25/2008		12,000	11,982
2.50%, 1/ 9/2009		12,000	11,943
2.70%, 1/12/2009		12,000	11,935
2.85%, 1/27/2009		9,560	9,494

COMMERCIAL PAPER (continued)
Finance - Consumer Loans (continued)
John Deere Capital Corp (continued)
3.00%, 1/27/2009	$ 9,020 $		8,955
			74,275
Finance - Credit Card (0.94%)
American Express Credit
2.73%, 11/ 5/2008		3,950	3,949
2.73%, 11/17/2008		5,600	5,593
2.77%, 11/17/2008		11,000	10,987
2.77%, 12/17/2008		5,840	5,819
			26,348
Finance - Investment Banker & Broker (6.56%)
Citigroup Funding
2.74%, 11/ 6/2008		7,840	7,837
2.82%, 11/13/2008		10,000	9,991
2.84%, 11/19/2008		10,000	9,986
2.78%, 11/24/2008		11,100	11,080
2.82%, 12/11/2008		3,740	3,728
ING U.S. Funding
2.79%, 12/ 9/2008		10,700	10,669
3.61%, 12/30/2008		13,000	12,923
3.44%, 1/27/2009		13,000	12,892
JP Morgan Chase
2.75%, 11/18/2008		13,800	13,782
2.75%, 11/20/2008		10,700	10,684
2.75%, 11/25/2008		7,500	7,486
2.72%, 12/17/2008		5,420	5,401
2.80%, 2/ 2/2009		13,800	13,700
Merrill Lynch & Co Inc
0.75%, 11/ 3/2008		35,000	34,999
Morgan Stanley
2.91%, 12/ 3/2008		10,000	9,974
2.92%, 12/19/2008		9,250	9,214
			184,346
Finance - Leasing Company (0.58%)
River Fuel Funding Co
3.03%, 12/ 5/2008		6,000	5,983
3.33%, 1/30/2009		10,400	10,313
			16,296
Finance - Mortgage Loan/Banker (9.25%)
Fannie Mae Discount Notes
2.58%, 11/12/2008		14,000	13,989
2.48%, 12/15/2008		9,700	9,671
2.45%, 12/22/2008		11,500	11,460
2.85%, 1/21/2009		12,500	12,420
2.78%, 1/28/2009		10,500	10,429
1.70%, 1/29/2009		12,000	11,950
2.82%, 2/ 9/2009		13,500	13,394
Federal Home Loan Bank Discount Notes
2.50%, 11/13/2008		13,500	13,489

See accompanying notes

13

Schedule of Investments
Money Market Fund
October 31, 2008

Principal		Principal
Amount	Value	Amount	Value
(000's)	(000's)	(000's)	(000's)

COMMERCIAL PAPER (continued)
Finance - Mortgage Loan/Banker (continued)
Federal Home Loan Bank Discount Notes
(continued)
2.35%, 12/26/2008	$ 10,500 $		10,462
2.50%, 12/30/2008		10,500	10,457
2.40%, 1/30/2009		13,000	12,922
2.50%, 1/30/2009		10,000	9,937
2.35%, 2/ 4/2009		13,000	12,919
Freddie Mac Discount Notes
2.62%, 12/ 9/2008		13,000	12,964
2.55%, 12/16/2008		22,000	21,930
2.05%, 1/ 7/2009		13,000	12,950
2.84%, 1/26/2009		10,000	9,932
2.82%, 2/ 2/2009		11,000	10,920
2.61%, 2/19/2009		12,900	12,797
2.83%, 3/ 2/2009		12,500	12,381
2.90%, 3/16/2009		12,500	12,364
			259,737
Finance - Other Services (3.59%)
CRC Funding
2.75%, 11/ 4/2008		11,700	11,697
2.74%, 11/ 7/2008		4,410	4,408
2.78%, 11/ 7/2008		5,000	4,998
2.76%, 11/14/2008		15,000	14,985
2.77%, 11/17/2008		14,000	13,983
Park Avenue Receivables Company
2.65%, 11/21/2008		11,000	10,984
2.70%, 12/ 1/2008		10,700	10,676
Private Export Funding
2.15%, 11/ 6/2008		5,065	5,064
2.10%, 12/19/2008		12,000	11,966
1.80%, 12/22/2008		12,000	11,969
			100,730
Food - Miscellaneous/Diversified (2.26%)
Unilever Capital
2.70%, 11/ 5/2008		8,800	8,797
3.65%, 1/ 8/2009		10,300	10,229
2.90%, 1/12/2009		7,700	7,655
3.40%, 1/14/2009		12,200	12,115
3.85%, 1/23/2009		12,000	11,894
2.55%, 2/ 6/2009		13,000	12,911
			63,601
Life & Health Insurance (0.36%)
Prudential PLC
2.81%, 11/10/2008		10,000	9,993
Money Center Banks (5.70%)
Bank of America
3.25%, 12/ 2/2008		8,000	7,978
2.71%, 12/ 3/2008		3,000	2,993
2.76%, 12/ 8/2008		15,000	14,957

COMMERCIAL PAPER (continued)
Money Center Banks (continued)
Bank of America (continued)
2.76%, 12/10/2008	$ 5,000 $	4,985
2.76%, 12/12/2008	11,800	11,763
2.75%, 12/16/2008	11,600	11,560
2.76%, 12/18/2008	13,700	13,651
2.90%, 12/23/2008	7,480	7,449
Bank of Scotland PLC
2.78%, 12/15/2008	12,000	11,959
BNP Paribas Finance
2.78%, 11/10/2008	10,700	10,693
2.81%, 11/10/2008	12,500	12,491
2.76%, 11/26/2008	15,000	14,971
2.75%, 12/ 9/2008	10,000	9,971
3.41%, 1/22/2009	14,900	14,784
UBS Finance Delaware LLC
2.83%, 12/ 3/2008	10,000	9,975
		160,180
Multimedia (0.49%)
Walt Disney Co
2.00%, 1/ 7/2009	13,700	13,649
Oil Company - Integrated (2.51%)
BP Capital Markets PLC
2.10%, 11/18/2008	10,000	9,990
2.15%, 1/16/2009	12,000	11,946
ConocoPhilipps
2.10%, 12/10/2008	12,000	11,973
2.00%, 12/11/2008	12,000	11,973
2.10%, 12/26/2008	12,600	12,560
2.00%, 12/29/2008	12,000	11,961
		70,403
Publicly Traded Investment Fund (1.19%)
Merrill Lynch Funds for Instutitions Series -
Government Fund
1.59%, 12/31/2008	33,370	33,370
Regional Banks (0.33%)
Wells Fargo & Co
2.63%, 12/ 3/2008	9,400	9,378
Retail - Discount (0.92%)
Target Corp
2.15%, 12/ 2/2008	13,400	13,375
Wal-Mart Stores
2.17%, 12/ 5/2008	12,500	12,475
		25,850
Special Purpose Banks (1.00%)
Dexia Delaware LLC
0.74%, 11/ 3/2008	28,000	27,999

See accompanying notes

14

Schedule of Investments
Money Market Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
COMMERCIAL PAPER (continued)			COMMERCIAL PAPER (continued)
Special Purpose Entity (12.36%)			Telephone - Integrated (2.87%)
American Honda Finance Corp			AT&T Corp
2.22%, 12/ 2/2008	$ 12,000 $	11,977	2.20%, 11/14/2008	$ 12,500 $	12,490
2.22%, 12/ 8/2008	12,000	11,973	2.25%, 11/17/2008	10,500	10,490
2.00%, 12/10/2008	10,600	10,577	AT&T Inc
2.70%, 1/ 6/2009	2,975	2,960	2.30%, 12/15/2008	10,200	10,171
2.85%, 1/ 6/2009	8,010	7,968	2.30%, 12/16/2008	13,000	12,963
2.90%, 1/29/2009	13,000	12,907	2.30%, 12/17/2008	11,140	11,107
Danske Corp			2.10%, 1/13/2009	12,900	12,845
3.11%, 1/28/2009	12,000	11,909	Telstra Corp
3.04%, 2/ 5/2009	10,000	9,919	2.65%, 11/12/2008	10,600	10,591
3.00%, 2/23/2009	11,500	11,391			80,657
Gemini Securitization Corp			Tobacco (1.24%)
4.20%, 12/ 1/2008	10,000	9,965	Philip Morris Capital
2.77%, 12/ 2/2008	12,500	12,470	2.35%, 11/12/2008	12,500	12,491
2.77%, 12/ 4/2008	12,700	12,668	2.36%, 12/17/2008	12,000	11,964
2.90%, 1/ 6/2009	10,000	9,947	Philip Morris International Inc
3.10%, 1/21/2009	10,000	9,930	2.35%, 12/23/2008	10,500	10,464
National Australia Funding					34,919
2.87%, 12/31/2008	9,520	9,474
			Tools - Hand held (0.25%)
Prudential Funding Corp
2.53%, 11/21/2008	10,600	10,585	Stanley Works
			2.50%, 2/ 4/2009	7,000	6,954
Ranger Funding
2.70%, 11/ 6/2008	10,000	9,996	TOTAL COMMERCIAL PAPER	$ 2,472,550
2.74%, 11/19/2008	22,500	22,469	CERTIFICATE OF DEPOSIT (0.79%)
3.85%, 12/ 1/2008	12,500	12,460	Commercial Banks (0.79%)
2.75%, 12/11/2008	12,800	12,761	Wachovia Bank
3.90%, 12/19/2008	12,000	11,938	2.91%, 11/ 4/2008	11,800	11,800
Shell International Finance BV			2.93%, 11/13/2008	10,500	10,500
2.30%, 2/20/2009	13,000	12,908			22,300
Southern Company Funding
2.45%, 1/13/2009	13,000	12,935	TOTAL CERTIFICATE OF DEPOSIT	$ 22,300
2.50%, 1/14/2009	13,000	12,933	BONDS (6.34%)
2.55%, 1/16/2009	10,300	10,245	Asset Backed Securities (0.10%)
2.45%, 1/22/2009	12,000	11,933	Caterpillar Financial Asset Trust
2.45%, 1/23/2009	10,000	9,944	3.01%, 12/26/2008	668	668
Yorktown Capital			CNH Equipment Trust
2.75%, 11/ 4/2008	11,000	10,997	2.75%, 12/15/2008	835	835
2.76%, 11/ 7/2008	13,800	13,794	John Deere Owner Trust
3.85%, 11/14/2008	5,000	4,993	2.79%, 2/17/2009	1,355	1,355
2.70%, 12/ 5/2008	10,390	10,363			2,858
		347,289	Automobile Sequential (0.72%)
			Honda Auto Receivables Owner Trust
Supranational Bank (1.33%)			2.92%, 2/18/2009 (a)	4,406	4,406
Corp Andina de Fomento
2.77%, 11/ 6/2008	8,000	7,997	Hyundai Auto Receivables Trust
			2.85%, 1/15/2009	5,427	5,427
2.78%, 11/14/2008	9,000	8,991
			Nissan Auto Receivables Owner Trust
2.90%, 1/ 7/2009	10,000	9,946	2.79%, 6/15/2009	4,018	4,018
2.94%, 1/13/2009	10,500	10,437	Volkswagen Auto Loan Enhanced Trust
		37,371	2.84%, 1/20/2009	1,224	1,224

See accompanying notes

15

Schedule of Investments
Money Market Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				TAX-EXEMPT BONDS (continued)
Automobile Sequential (continued)				California (continued)
World Omni Auto Receivables Trust				California Statewide Communities
3.00%, 4/15/2009	$ 5,201 $		5,201	Development Authority
			20,276	2.85%, 8/15/2034	$ 800 $	800
				City of Fairfield CA Landesbank
Commercial Banks (1.25%)				Hessen-Thueringen
Commonwealth Bank of Australia				4.25%, 6/ 1/2034	2,000	2,000
2.96%, 12/ 3/2008 (b)(c)		25,000	25,000	4.25%, 6/ 1/2034	2,700	2,700
Svenska Handelsbanken AB				City of Richmond CA FNMA
4.42%, 1/ 6/2009 (c)		10,000	10,000	2.85%, 8/15/2037	3,200	3,200
			35,000	City of Santa Rosa CA Landesbank
Diversified Banking Institutions (0.09%)				Hessen-Thueringen
				4.25%, 9/ 1/2024	4,665	4,665
JP Morgan Chase & Co
3.92%, 11/ 2/2008 (a)		2,500	2,500	Kern Water Bank Authority Wells Fargo Bank
				NA
				3.75%, 7/ 1/2028	2,600	2,600
Diversified Financial Services (0.47%)				Los Angeles Community College District/CA
IBM International Group Capital LLC				3.05%, 8/ 1/2009	1,800	1,800
3.03%, 11/26/2008 (a)(c)		13,100	13,100
				Los Angeles Department of Water & Power
				Dexia
Life & Health Insurance (0.53%)				6.00%, 7/ 1/2025	5,400	5,400
Monumental Global Funding III				San Jose Redevelopment Agency/CA JP
4.95%, 1/20/2009 (b)(c)		15,000	15,000	Morgan Chase Bank
				3.10%, 8/ 1/2028	32,150	32,150
Medical - Hospitals (0.44%)						57,315
Portland Clinic LLP/The
5.50%, 11/20/2027		12,390	12,390	Colorado (0.29%)
				Colorado Housing & Finance Authority/CO
Medical - Outpatient & Home Medical Care (0.22%)				Wells Fargo Bank NA
Everett Clinic PS				3.75%, 4/ 1/2029	525	525
5.45%, 5/ 1/2022		6,100	6,100	County of Kit Carson CO Wells Fargo Bank NA
				3.25%, 6/ 1/2027	2,100	2,100
Money Center Banks (1.28%)				County of Montrose CO Wells Fargo Bank NA
Bank of New York/The				3.75%, 6/ 1/2010	400	400
2.93%, 11/ 3/2008 (b)		36,000	36,000	Sheridan Redevelopment Agency Citibank NA
				3.50%, 12/ 1/2029	5,000	5,000
Special Purpose Entity (1.24%)						8,025
Corporate Finance Managers Inc				Georgia (0.08%)
5.50%, 2/ 2/2043		14,900	14,900
				Savannah College of Art & Design Inc Bank of
NGSP Inc				America NA
4.00%, 6/ 1/2046		20,000	20,000	4.00%, 4/ 1/2024	2,200	2,200
			34,900
TOTAL BONDS		$ 178,124		Illinois (0.63%)
				Memorial Health System/IL JP Morgan Chase
TAX-EXEMPT BONDS (4.72%)				Bank
Arizona (0.40%)				3.25%, 10/ 1/2024	17,780	17,780
Glendale Industrial Development Authority
Bank of New York				Indiana (0.09%)
4.00%, 7/ 1/2035		7,495	7,495	Ball State University/IN
Tucson Airport Authority Inc/AZ Bank of				3.00%, 9/ 1/2031	2,550	2,550
America NA
4.00%, 12/ 1/2018		3,635	3,635	Iowa (0.09%)
			11,130	Iowa Finance Authority
				3.25%, 3/ 1/2018	2,590	2,590
California (2.04%)
Abag Finance Authority for Nonprofit Corps
4.25%, 11/ 1/2031		2,000	2,000
See accompanying notes			16

Schedule of Investments
Money Market Fund
October 31, 2008
					Portfolio Summary (unaudited)
			Principal
					Sector	Percent
			Amount	Value
			(000's)	(000's)	Financial	57.33%
					Government	9.25%
TAX-EXEMPT BONDS (continued)					Consumer, Non-cyclical	7.88%
New York (0.20%)					Revenue	3.92%
New York City Housing Development Corp					Industrial	3.46%
Landesbank Hessen-Thueringen					Communications	3.36%
4.50%, 6/ 1/2039		$ 5,500 $		5,500	Asset Backed Securities	2.81%
					Energy	2.51%
					Basic Materials	2.34%
North Carolina (0.23%)					Consumer, Cyclical	2.23%
North Carolina Capital Facilities Finance					Utilities	1.68%
Agency					Exchange Traded Funds	1.19%
4.00%, 9/ 1/2018			6,615	6,615	Technology	1.14%
					Insured	0.51%
Oklahoma (0.21%)					Tax Allocation	0.22%
					General Obligation	0.06%
University Hospital Bank of America NA					Other Assets in Excess of Liabilities, Net	0.11%
4.00%, 8/15/2021			5,790	5,790
					TOTAL NET ASSETS	100.00%
Oregon (0.05%)
Lake Oswego Redevelopment Agency Wells
Fargo Bank NA
3.75%, 6/ 1/2020			1,285	1,285
Texas (0.11%)
Port of Port Arthur Navigation District Motiva
Enterprises LLC
5.75%, 5/ 1/2038			3,200	3,200
Washington (0.30%)
Washington State Housing Finance
Commission/WA
2.85%, 9/ 1/2028			1,205	1,205
3.30%, 12/ 1/2028			640	640
2.85%, 9/15/2037			2,730	2,730
2.85%, 12/15/2037			3,855	3,855
				8,430
TOTAL TAX-EXEMPT BONDS			$ 132,410
Total Investments			$ 2,805,384
Other Assets in Excess of Liabilities, Net - 0.11%				3,206
TOTAL NET ASSETS - 100.00%			$ 2,808,590
(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
(b)	Security is Illiquid
(c)	Security exempt from registration under Rule 144A of the Securities Act
	of 1933. These securities may be resold in transactions exempt from
	registration, normally to qualified institutional buyers. Unless otherwise
	indicated, these securities are not considered illiquid. At the end of the
	period, the value of these securities totaled $63,100 or 2.25% of net
	assets.

See accompanying notes

17

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005	2004
MONEY MARKET FUND
Class J shares
Net Asset Value, Beginning of Period	$ 1.00	$ 1.00	$ 1.00	$ 1.00	$ 1.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .03	0 .04	0 .04	0.02	–
Total From Investment Operations	0 .03	0 .04	0 .04	0.02	–
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .03)	(0 .04)	(0 .04)	(0 .02)	–
Total Dividends and Distributions	(0 .03)	(0 .04)	(0 .04)	(0 .02)	–
Net Asset Value, End of Period	$ 1.00	$ 1.00	$ 1.00	$ 1.00	$ 1.00
Total Return(b)	2 .67%	4 .46%	3 .82%	1.79%	0 .08%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 355,746	$ 186,246	$ 157,486	$ 143,460	$ 132,551
Ratio of Expenses to Average Net Assets	0 .87%	0 .98%	1 .11%	1.15%	1 .17%
Ratio of Gross Expenses to Average Net Assets(c)	–	–	1 .11%	1.15%	1 .43%
Ratio of Net Investment Income to Average Net Assets	2 .51%	4 .37%	3 .76%	1.78%	0 .09%
	2008 (d)
MONEY MARKET FUND
Class S shares
Net Asset Value, Beginning of Period	$ 1.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .01
Total From Investment Operations	0 .01
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .01)
Total Dividends and Distributions	(0 .01)
Net Asset Value, End of Period	$ 1.00
Total Return(b)	0 .98%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 951,684
Ratio of Expenses to Average Net Assets	0 .87%(f)
Ratio of Net Investment Income to Average Net Assets	1 .92%(f)
(a) Calculated based on average shares outstanding during the period.
(b) Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c) Excludes expense reimbursement from Manager.
(d) Period from May 1, 2008, date shares first offered, through October 31, 2008.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
	18

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Principal Funds, Inc.

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Money Market Fund (one of 74 portfolios constituting the Principal Funds, Inc. (the “Fund”)) as of October 31, 2008, and the related statements of operations, statements of changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2008 by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Money Market Fund of Principal Funds, Inc. at October 31, 2008, the results of its operations, the changes in its net assets and its financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Des Moines, Iowa
December 23, 2008

19

FUND DIRECTORS AND OFFICERS

Under Maryland law, a Board of Directors oversees the Fund. The Directors have financial or other relevant experience and meet several times during the year to review contracts, Fund activities and the quality of services provided to the Fund. Each director also has the same position with Principal Variable Contracts Funds, Inc. which is also sponsored by Principal Life Insurance Company. Each director holds office for an indefinite term. Directors considered to be “interested persons” as defined in the Investment Company Act of 1940, as amended, as shown below are considered to be interested because of an affiliation with the Manager and Principal Life Insurance Company.

The following directors are considered not to be “interested persons” as defined in the 1940 Act

		Number of
		Portfolios in Fund
		Complex	Other
Name, Position Held with the Fund,	Principal Occupation(s)	Overseen by	Directorships
Address*, and Year of Birth	During past 5 years	Director	Held by Director**
Elizabeth Ballantine	Principal, EBA Associates	114	The McClatchy
Director since 2004			Company
Member, Nominating and Governance
Committee
1948
Kristianne Blake	President, Kristianne Gates Blake,	114	Avista Corporation;
Director since 2007	P.S.		Russell Investment
Member, Operations Committee			Company; Russell
1954			Investment Funds
Craig Damos	CEO/President, Vertical Growth	114	None
Director since 2008	Officer, and CFO, The Weitz
Member, Operations Committee	Company
1954
Richard W. Gilbert	President, Gilbert Communications,	114	Calamos Asset
Director since 1985	Inc.		Management, Inc.
Member, Nominating and Governance
Committee
Member, Executive Committee
1940
Mark A. Grimmett	Executive Vice President and CFO,	114	None
Director since 2004	Merle Norman Cosmetics, Inc.
Member, Audit Committee
1960
Fritz S. Hirsch	President and CEO, Sassy, Inc.	114	None
Director since 2005
Member, Audit Committee
1951
William C. Kimball	Retired. Formerly Chairman and	114	Casey’s General Stores,
Director since 1999	CEO, Medicap Pharmacies, Inc.		Inc.
Member, Nominating and Governance
Committee
1947
Barbara A. Lukavsky	President and CEO, Barbican	114	None
Director since 1987	Enterprises, Inc.
Member, Nominating and Governance
Committee
1940
Daniel Pavelich	Retired. Formerly, Chairman and	114	Catalytic Inc.; Vaagen
Director since 2007	CEO of BDO Seidman.		Bros. Lumber, Inc.
Member, Audit Committee
1944

20

The following directors are considered to be “interested persons” as defined in the 1940 Act, as amended, because of an affiliation with the Manager and Principal Life.

Ralph C. Eucher	Director, Principal Management	114	None
Director, Vice Chairman and CEO	Corporation, since 1999. Director,
Member, Executive Committee	Principal Funds Distributor, Inc. since
1952	2007. Director, Princor since 1999.
President Princor 1999-2005. Senior
Vice President, Principal Life, since
2002. Prior thereto, Vice President.
William G. Papesh	Retired December 2007. Prior thereto,	114	None
Director	President and Director of Edge Asset
Member, Operations Committee	Management, Inc. since 2007;
1943	President and CEO of WM Group of
	Funds 1987-2006.
Larry D. Zimpleman	Chairman and Director, Principal	114	None
Director and Chairman of the Board	Management Corporation and Princor
Member, Executive Committee	since 2001. Chief Executive Officer
1951	Principal Life since 2008, President
	and Chief Operating Officer, Principal
	Life since 2006. President, Retirement
	and Investor Services, Principal
Financial Group, Inc. 2003-2006.
	Executive Vice President, 2001-2003,
	and prior thereto, Senior Vice

President, Principal Life.

*Correspondence intended for each Director who is other than an Interested Director may be sent to 711 High Street, Des Moines, IA 50392.

**Directorships of any company registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Securities Exchange Act or any other mutual fund.

The following table presents officers of the Funds.

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
Craig L. Bassett	Vice President and Treasurer, Principal Life.
Treasurer
711 High Street, Des Moines, IA 50392
1952
Michael J. Beer	Executive Vice President and Chief Operating
Executive Vice President	Officer, Principal Management Corporation.
711 High Street, Des Moines, IA 50392	Executive Vice President, Principal Funds
1961	Distributor, Inc., since 2007. President, Princor, since
2005.
Randy L. Bergstrom	Counsel, Principal Life.
Assistant Tax Counsel
711 High Street, Des Moines, IA 50392
1955

21

Name, Position Held with the Fund, Address, and Year of Birth David J. Brown Chief Compliance Officer 711 High Street, Des Moines, IA 50392 1960	Principal Occupation(s) During past 5 years Vice President, Product & Distribution Compliance, Principal Life. Senior Vice President, Principal Management Corporation since 2004. Senior Vice President, Principal Funds Distributor, Inc., since 2007. Second Vice President, Princor, since 2003, and prior thereto, Vice President, Principal Management Corporation and Princor.
Jill R. Brown Senior Vice President 1100 Investment Blvd, ste 200 El Dorado Hills, CA 95762 1967	Second Vice President, Principal Financial Group and Senior Vice President, Principal Management Corporation and Princor, since 2006. Chief Financial Officer, Princor since 2003. Vice President, Princor 2003-2006. Senior Vice President and Chief Financial Officer, Principal Funds Distributor, Inc., since 2007. Prior thereto, Assistant Financial Controller, Principal Life.
Nora M. Everett President 711 High Street Des Moines, IA 50392 1959 Cary Fuchs Senior Vice President of Distribution 1100 Investment Blvd, ste 200 El Dorado Hills, CA 95762 1957 Steve Gallaher Assistant Counsel 711 High Street Des Moines, IA 50392 1955 Ernie H. Gillum Vice President, Assistant Secretary 711 High Street Des Moines, IA 50392 1955 Patrick A. Kirchner Assistant Counsel 711 High Street, Des Moines, IA 50392 1960 Carolyn F. Kolks Assistant Tax Counsel 711 High Street, Des Moines, IA 50392 1962 Sarah J. Pitts Assistant Counsel 711 High Street, Des Moines, IA 50392 1945 Layne A. Rasmussen Vice President, Controller, and CFO 711 High Street, Des Moines, IA 50392 1958	President since 2008, Senior Vice President and Deputy General Counsel, Principal Financial Group, Inc. 2004-2008. Vice President and Counsel, Principal Financial Group, Inc. 2001-2004. President, Principal Funds Distributor, since 2007; Director of Mutual Fund Operations, Principal Shareholder Services, since 2005; prior thereto, Divisional Vice President Boston Financial Data Services. Second Vice President and Counsel, Principal Life since 2006. Self-Employed Writer in 2005. 2004 and prior thereto Senior Vice President and Counsel of Principal Residential Mortgage, Inc. Vice President and Chief Compliance Officer, Principal Management Corporation, since 2004, and prior thereto, Vice President, Compliance and Product Development, Principal Management Corporation. Counsel, Principal Life. Counsel, Principal Life, since 2003 and prior thereto, Attorney. Counsel, Principal Life. Vice President and Controller – Mutual Funds, Principal Management Corporation.

22

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
Michael D. Roughton	Vice President and Senior Securities Counsel,
Counsel	Principal Financial Group, Inc. Senior Vice President
711 High Street, Des Moines, IA 50392	and Counsel, Principal Management Corporation,
1951	Principal Funds Distributor, Inc., and Princor.
	Counsel, Principal Global.
Adam U. Shaikh	Counsel, Principal Life, since 2006. Prior thereto,
Assistant Counsel	practicing attorney.
711 High Street, Des Moines, IA 50392
1972
Dan Westholm	Director Treasury, since 2003. Prior thereto, Assistant
Assistant Treasurer	Treasurer.
711 High Street, Des Moines, IA 50392
1966
Beth Wilson	Director and Secretary, Principal Funds, since 2007.
Vice President and Secretary	Prior thereto, Business Manager for Pella
711 High Street, Des Moines, IA 50392	Corporation.
1956

The Audit Committee selects the independent auditors for the Fund and oversees the activities of the independent auditors as well as the internal auditors. The committee also receives reports about accounting and financial matters affecting the Fund.

The Executive Committee is selected by the Board. It may exercise all the powers of the Board, with certain exceptions, when the Board is not in session. The Committee must report its actions to the Board.

The Nominating and Governance Committee selects and nominates all candidates who are not “interested persons” of the fund for election to the Board. The committee also oversees the structure and efficiency of the Board of Directors and the committees the Board establishes, and the activities of the Funds’ Chief Compliance Officer.

The Operations Committee oversees the provision of administrative and distribution services to the Funds, communications with the Funds’ shareholders, and provides review and oversight of the Funds’ operations.

Additional information about the Fund is available in the Prospectuses dated February 29, 2008 and the Statement of Additional Information dated September 30, 2008. These documents may be obtained free of charge by writing or telephoning Principal Funds Distributor, Inc., P.O. Box 10423, Des Moines, IA 50306. Telephone 1-800-222-5852.

PROXY VOTING POLICIES

A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities and the results of the proxy votes for the most recent twelve months ended June 30 may be obtained free of charge by telephoning Principal Funds Distributor, Inc., at 1-800-222-5852, at the Principal Funds website at www.principal.com, or at www.sec.gov.

SCHEDULES OF INVESTMENTS

The Fund files complete schedules of investments with the Securities and Exchange Commission as of January 31 and July 31 of each year on Form N-Q. The Fund’s Form N-Q can be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. or on the Commission’s website at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330.

SOURCE OF DISTRIBUTIONS

To the extent that distributions paid by the Funds are comprised of something other than income or capital gains, such as a return of capital, a notice will be included in your quarterly statement pursuant to Section 19(a) of the Investment Company Act of 1940, as amended, and Rule 19a-1 disclosing the source of such distributions. Furthermore, such notices shall be posted monthly on our web site at www.principalfunds.com. You may request a copy of all such notices, free of charge, by telephoning 1-800-222-5852. The amounts and sources of distributions included in such notices are estimates only and should not be reported for tax purposes. The Fund will send shareholders a Form 1099-DIV for the calendar year that will tell shareholders how to report these distributions for federal income tax purposes.

23

BOARD CONSIDERATION OF INVESTMENT ADVISORY CONTRACTS

During the period covered by this report, the Board of Directors of Principal Funds, Inc. (“PFI”) approved the annual review and renewal of the Management Agreement and the Subadvisory Agreements relating to all Funds. In preparation for their approval process, the Independent Directors met with independent legal counsel in advance of the meetings to discuss the information provided.

Annual Review and Renewal of Management Agreement and Subadvisory Agreements.

At its September 8, 2008 meeting, the Board performed its annual review and renewal of the Management Agreement and the Subadvisory Agreements relating to all Funds.

Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”) requires the Board, including a majority of the Directors who have no direct or indirect interest in the investment advisory agreement and are not “interested persons” of PFI, as defined in the 1940 Act (the “Independent Directors”), annually to review and consider the continuation of: (1) the Management Agreement as it relates to the seventy-three (73) series of PFI (each series is referred to as a “Fund”) (2) the subadvisory agreements between the Manager and each of Alliance Capital Management L.P.; American Century Investment Management, Inc.; Ark Asset Management Co., Inc.; Barrow, Hanley, Mewhinney & Strauss; Columbus Circle Investors (“CCI”); Dimensional Fund Advisors, Inc.; Edge Asset Management Inc. (“Edge”); Emerald Advisors, Inc.; Essex Investment Management Company, LLC; Goldman Sachs Asset Management, L.P.; J.P. Morgan Investment Management, Inc.; Jacobs Levy Equity Management, Inc.; Lehman Brothers Asset Management LLC; Los Angeles Capital Management and Equity Research, Inc.; Mackay Shields, LLC; Mazama Capital Management, Inc.; Mellon Capital Management Corporation; Morgan Stanley Investments LP; Neuberger Berman Management, Inc.; Principal Real Estate Investors, LLC (“PREI”); Principal Global Investors, LLC (“PGI”); Pyramis Global Advisors, LLC; Spectrum Asset Management, Inc. (“Spectrum”); T. Rowe Price Associates, Inc.; Turner Investment Partners, Inc.; UBS Global Asset Management (Americas), Inc.; and Vaughan Nelson Investment Management, LP; Westwood; (collectively, the “Subadvisers”). The Management Agreement and the Subadvisory Agreements are collectively referred to as the “Advisory Agreements.” The Board, including the Independent Directors, considered the factors and reached the conclusions described below relating to the selection of the Manager and each Subadviser and the continuation of the Advisory Agreements. On August 11, September 7 and September 8, the Independent Directors also met independently of Fund management and the directors who are interested persons of PFI with their independent legal counsel and an independent consultant. In evaluating the Advisory Agreements, the Board, including Independent Directors, reviewed a broad range of information requested for this purpose by the Independent Directors, including but not limited to the following: (i) the investment performance of each Fund compared to the investment performance of a market index and a broad based industry category determined by Morningstar, (ii) a comparison of each Fund’s management fee (at current asset levels and theoretical asset levels) and expense ratio (at current asset levels) to the advisory fee and expense ratio for the mutual funds in a narrow peer group and a broad-based industry category, both selected by Lipper, (iii) fee schedules applicable to the Manager’s and the Subadvisers’ other clients, (iv) the Manager’s financial results and condition, including its profitability from services it performed for each Fund, (v) an analysis of the Manager’s and each Subadviser’s allocation of the benefits of economies of scale (vi) the Manager’s and each Subadvisers’ record of compliance with applicable laws and regulations, and with each Fund’s investment policies and restrictions, and (vii) the nature and character of the services the Manager and each Subadviser provides to each Fund.

Nature, Extent and Quality of Services

With regard to the Manager, the Board considered the nature, quality and extent of services provided under the Management Agreements, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources were provided under the Management Agreement. The Board also considered the delegation of day-to-day portfolio management responsibility to the Subadvisers and the due diligence program developed by the Manager for identifying, recommending, monitoring and replacing Subadvisers. The Board concluded that this due diligence process was working well. The Board also considered the compliance program established by the Manager and the level of compliance attained for the Funds.

With regard to each Subadviser, the Board considered the nature, quality and extent of services provided under each Subadvisory Agreement. The Board considered the reputation, qualifications and background of the Subadviser, investment approach of the Subadviser, the experience and skills of investment personnel responsible for the day-to-day management of each Fund, and the resources made available to such personnel. The Board also considered the Subadvisers’ compliance with investment policies and general legal compliance. In addition, the Board considered the analysis provided under the Manager’s due-diligence program, which resulted in the Manager recommending that each Subadvisory Agreement be continued.

24

Investment Performance

The Board reviewed each Fund’s investment performance over longer-term periods (both for a blended three- and five-year period and for a three year period), and compared those returns to various agreed-upon performance measures, including market indices and peer group data based upon a broad-based, industry category determined by Morningstar. For Funds that did not have a three year history, the Board reviewed performance for a one-year period. The Board also considered whether each Fund’s investment results were consistent with the Fund’s investment objective and policies. For most Funds, the Board concluded that the Fund’s investment returns met or exceeded acceptable levels of investment performance. There were some Funds, or certain Subadvisers for a multi-manager fund, that had not attained during the relevant period a level of investment performance the Board considered satisfactory. However, the Board noted that the Manager does not directly control investment performance, but rather engages the Subadvisers that manage the portfolios. The Board concluded that the Manager has in place an effective due diligence process to monitor investment performance, to encourage remedial action and to make changes in the Subadviser at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s oversight of the Subadvisers was satisfactory.

As to each Fund, the Manager had advised the Board either that the investment services delivered by the Subadviser to the Fund were reasonable or the Subadviser’s longer-term track record justified continuing the contract with more in-depth monitoring. Based upon all relevant factors, the Board concluded that either: (i) the investment performance of each Fund either met or exceeded acceptable levels of investment performance, and was therefore satisfactory; or (ii) although the Fund experienced underperformance, based upon that Fund’s particular circumstances, it was in the best interests of the Fund to continue to closely monitor performance and to renew the Subadvisory Agreements. In each case involving underperformance, the Board concluded that the Manager was providing effective monitoring.

Investment Management and Subadvisory Fees

The Board considered each Fund’s management fees. The Board received information, based on data supplied by Lipper, comparing each Fund’s contractual management fee (at current asset levels and at theoretical asset levels) and actual (after fee waivers) management fee (at current asset levels) and actual total expense ratio (at current asset levels for Class A shares) to advisory fees and expense ratios of mutual funds in a narrow peer group independently selected by Lipper (“Expense Group”) and a broad-based, industry category defined by Lipper (“Expense Universe”). For PFI Funds that did not offer Class A shares, the information provided was based upon Class I shares. In addition, the Board also reviewed information for Class I shares for certain Funds for which Class A shares were a small component of the Fund’s assets.

In assessing whether the management fees were reasonable, the Board considered a variety of factors, including the amount of the fees, breakpoints, comparison to fees of peer group funds and to other funds managed by the Manager, subadvisory fees paid, services provided, investment performance, total expense ratios, profitability and expense caps. For most Funds, actual management fees and expense ratios were within the third quartile or better when compared to their Expense Group. For some Funds, although actual management fees were higher than the third quartile, total expense ratios were within the third quartile or better. For Funds with expense ratios within the fourth quartile, the Board requested further explanation from the Manager regarding the reasonableness of management fees. The Board considered factors related to certain Funds with both actual management fees and total expenses higher than third quartile as compared to their Expense Group and certain other Funds that experienced significant underperformance. For the SAM Portfolios, the Board determined that the Manager’s unique active asset allocation strategy justified higher management fees than the Funds’ peer groups and that the total expense ratios (including the expenses of the underlying funds) compare favorably. The Board considered that certain comparable PFI Funds have different management fees and noted the reasons cited by the Manager for the differing fees.

With respect to the Board’s review of the expense caps in place with respect to certain Funds, the Board considered the Manager’s proposals to extend the expense caps in place for most Funds for an additional year, to raise the expense caps for certain Funds and to let expense caps for certain other Funds expire, based upon the individual circumstances of these Funds. The Board also considered the Manager’s proposals to either add new expense caps or to lower the expense caps (thereby decreasing the effective expense ratios) applicable to certain share classes of the LargeCap Value Fund III, the MidCap Value Fund II, and the SmallCap Growth Fund II. The Board also considered the Manager’s proposal to decrease the 12b-1 fees by 10 basis points for the Short-Term Income Fund. Considering all factors it deemed relevant, the Board concluded that the management fee schedule for each Fund was reasonable and appropriate in light of the nature and quality of services provided by the Manager and other relevant factors.

The Board considered each Fund’s subadvisory fees. The Board evaluated the subadvisory fees based upon data supplied by Lipper, which compared the contractual subadvisory fees to available information about subadvised funds in the Expense Universe.

For each Subadviser not affiliated with the Manager (“Unaffiliated Subadvisers”) (each Subadviser except PGI, PREI, Edge, CCI and Spectrum), the Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and each Subadviser and that the Manager compensates the Subadviser from its fees.

25

For the Subadvisers that reported fees for “Other Clients” with comparable investment policies and receiving comparable services, the Board noted that most Subadvisers stated that they did not charge higher fees to the Manager for the Funds than were charged to their Other Clients. For the Subadvisers that did not make this representation, the Board considered the Subadviser’s representation that the fees compared favorably with those charged to Other Clients. The Board noted that the different fees to Other Clients were generally a result of fewer assets, a different level of services provided, and/or a different competitive environment at the time of the initiation of the relationship, which had resulted in the lower fees charged to the Other Clients.

For Funds where PGI, PREI, Edge, CCI or Spectrum was engaged as the Subadviser, the Board noted that the Subadviser is an affiliate of the Manager and that, therefore, the parties may allocate the fee among themselves based upon other than competitive factors, but that in the end, the shareholders pay only the management fee. Therefore, in these cases, particularly when no comparative data on subadvisory fees was provided, the Board focused primarily on whether the management fee and total expense ratios were reasonable.

For certain Subadvisers, the Manager was able to negotiate lower fees (AllianceBernstein with respect to LargeCap Value Fund III and J.P. Morgan and Mellon Capital with respect to SmallCap Value Fund I). The Board concluded that these amended fee schedules were appropriate and should be approved.

Based upon all of the above, the Board determined that the subadvisory fees for each Fund, with the amendments proposed by the Manager, were reasonable.

Profitability

The Board reviewed detailed information regarding revenues the Manager receives under the Management Agreements, as well as the estimated direct and indirect costs the Manager incurs in providing to each Fund the services described in the applicable Advisory Agreements, for the year ended December 31, 2007. The Board also considered the returns on revenue generated in connection with the payment of subadvisory fees to affiliated Subadvisers (PGI, PREI, Edge, CCI Circle and Spectrum). The Board concluded that the management fee for each Fund was reasonable, taking into account the profitability percentages the Manager provided.

The Board noted that the Manager compensates each Unaffiliated Subadviser from its own management fees and that the fees were competitive. In concluding that the Unaffiliated Subadvisers’ fees were reasonable, the Board determined that it need not review estimated levels of profits to each Unaffiliated Subadviser because, as the Board noted, the Manager compensates each Unaffiliated Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with each Unaffiliated Subadviser at arm’s-length.

Economies of Scale

The Board considered whether there are economies of scale with respect to the management of each Fund and whether the Funds benefit from any such economies of scale through breakpoints in fees. The Board also reviewed the levels at which breakpoints occurred and the amount of the reductions. The Board also considered whether the effective management fee rate for each Fund under the Management Agreement is reasonable in relation to the asset size of such Fund. The Board concluded that the fee schedule for each Fund reflects an appropriate level of sharing of any economies of scale.

The Board noted that the management fees for the LargeCap S&P 500 Index Fund, MidCap S&P 400 Index Fund and SmallCap S&P 600 Index Fund series (the “Index Funds”) do not include breakpoints. Although their management fee schedules do not contain breakpoints, the Board noted that each Index Fund has a relatively low basis point fee for initial Fund assets and the Board concluded that these Funds do not generate sufficient economies of scale at their current asset sizes to justify a breakpoint at this time.

The Board identified some Funds whose asset levels have exceeded the last breakpoint level in the Fund’s fee schedule. The Board discussed these and other Funds with management and concluded that the existing breakpoints are appropriate at the current asset levels. The Board noted, however, that the Manager would present a proposal at the December board meeting regarding the applicability of potential new breakpoints to address future growth.

The Board considered whether there are economies of scale with respect to the subadvisory services provided to each Fund and, if so, whether the subadvisory fees reflect such economies of scale through breakpoints in fees. The Board also considered whether the effective subadvisory fee rate for each Fund under the Subadvisory Agreement is reasonable in relation to the asset size of such Fund. The Board concluded that the fee schedule for each Fund, with the amendments proposed by the Manager, reflects an appropriate recognition of any economies of scale at current asset levels.

Other Benefits to the Manager and Subadvisers

The Board also considered the character and amount of other incidental benefits received by the Manager and its affiliates from their relationships with the Funds. The Board concluded that management and subadvisory fees for each Fund were reasonable in light of these fall-out benefits.

The Board also considered the character and amount of other incidental benefits received by each Subadviser. The Board considered as a part of this analysis each Subadviser’s soft dollar practices and brokerage practices. The Board concluded that, taking into account these benefits, the fees charged under each Subadvisory Agreement were reasonable.

26

Overall Conclusions

Based upon all of the information it considered and the conclusions it reached, the Board determined unanimously that the terms of each Advisory Agreement continue to be fair and reasonable and that the continuation of each Advisory Agreement, with the changes proposed by the Manager, is in the best interests of each Fund.

27

WE’LL GIVE YOU AN EDGE^®

A mutual fund’s share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

     This annual report is published as general information for the shareholders of Principal Funds. This material is not authorized for distribution unless preceded or accompanied by a current prospectus that includes more information regarding the risk factors, expenses, policies, and objectives of the funds. Investors should read the prospectus carefully before investing.

To obtain an additional prospectus, please contact your financial professional or call 800-222-5852.

For more information about this fund, including its full name, please see the Principal Funds, Inc. prospectus or visit www.principalfunds.com.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group^®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

FV 315-5 | 12/2008 | #11496122010
©2008 Principal Financial Services, Inc.

Principal Funds Distributor, Inc.
711 High Street
Des Moines, IA 50392-6370

Do not use this address for business correspondence.

CLASS A, B, & C SHARES

Principal Strategic Asset Management Portfolios and Principal LifeTime Funds

     Annual Report for Asset Allocation Investments

October 31, 2008

Table of Contents

Letter from the President	1
Economic & Financial Market Review	2
SAM Portfolios’ Performance and Investment Overview:
SAM Flexible Income Portfolio	4
SAM Conservative Balanced Portfolio	6
SAM Balanced Portfolio	8
SAM Conservative Growth Portfolio	10
SAM Strategic Growth Portfolio	12
Principal LifeTime Funds’ Performance and Investment Overview:
Principal LifeTime 2010 Fund	14
Principal LifeTime 2020 Fund	16
Principal LifeTime 2030 Fund	18
Principal LifeTime 2040 Fund	20
Principal LifeTime 2050 Fund	22
Principal LifeTime Strategic Income Fund	24
Glossary	26
Shareholder Expense Example	28
Financial Statements	30
Notes to Financial Statements	49
Schedules of Investments	55
Financial Highlights	77
Report of Registered Independent Public Accounting Firm	88
Supplemental Information	89

Not FDIC Insured

May Lose Value • Not a Deposit • No Bank Guarantee Not Insured by any Federal Government Agency

Nora Everett was named president of Principal Funds effective

March 1, 2008. Nora was formerly senior vice president and

deputy general counsel at The Principal, and has a background

in investments, regulation, and acquisitions.

Dear Shareholder,

By historical standards, the past fiscal year was an exceptional period for the world’s financial markets. Buffeted by an extended period of market volatility and unprecedented disruptions in the credit markets, the S&P 500 declined 36.10% for the period, while the Barclays Capital Aggregate Bond Index closed the period with a gain of 0.30% .¹

Yet while the markets suffered from extreme volatility and the traditional relationships between stock and bond prices were disrupted, our funds weathered this difficult environment. During this market period, 25 of our 49 retail funds outpaced either their benchmarks or their Morningstar peer group, and 13 of our funds beat both of these key measures.² This illustrates the benefits of our extensive research capabilities and investment approach, which are founded on disciplined investing, active management, and adhering to investment fundamentals regardless of market conditions.

Market Declines and Recoveries

Over the past year, the market environment presented challenges for managing financial assets and planning for our financial futures. As the year unfolded, it became clear we were in a significant bear market that did not reward investors and made many nervous enough to question their overall investment strategies.

This is entirely natural. Understandably, people will question their beliefs during these difficult times. Since 1919, there have been 16 economic contractions in the U.S., averaging 13 months in length.³ However, history has shown that the worst 12-month stock market declines have historically been followed by periods of even greater recovery.⁴ While this may not always happen, market cycles are an inherent part of investing.

Although it is difficult to predict the length of any particular market cycle, we encourage investors to continue to follow some time-tested principles, including the need for diversification and maintaining a long-term investment perspective. As we have cited in the past, numerous studies have found that asset allocation — the mix of asset classes you select — is the most important factor in determining the variability of investment returns in your portfolio’s performance.⁵

Investing in multiple asset classes and investment styles affects both investment returns and risk management. When a diversified portfolio is carefully constructed, it can provide a cushion against volatile markets and prices. This remains as true today as ever before. It also helps explain why our target-date Principal LifeTime Funds and target-risk Strategic Asset Management (SAM) Portfolios continue to remain popular choices for investors seeking wider diversification.

While these are challenging times, you do not have to make difficult investing choices alone. We encourage you to meet with your financial professional, who can provide the advice you need to help meet your financial goals. We also have developed a series of educational materials on market volatility and the benefits of disciplined investing, which are available in the Resources section of our Web site, principalfunds.com.

As this letter is being written, it is evident we have entered a recession which may, or may not, last longer than average. Yet regardless of the duration, we remain committed to providing you with the highest quality investment management and shareholder services possible.

Thank you for your continued support.

Note: Asset allocation/diversification does not guarantee a profit or protect against a loss. Past performance is not a guarantee of future results.

1	Based on total return. The S&P 500 is a broad-based index intended to represent the U.S. equity market. The Barclays Capital Aggregate Bond Index (formerly known as the Lehman Brothers Aggregate Bond Index) is a broad-based index intended to represent the U.S. fixed-income market. Indices are unmanaged, and individuals cannot invest directly in an index.
2	Based on Class A shares without sales charge.
3	National Bureau of Economic Research.
4	Ibbotson Associates.
5	G.P. Brinson, L.R. Hood, and G.L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, January/February 1995.

1

Economic & Financial Market Review

Despite Aggressive Fed Actions, Credit Crisis Rages

Few could have predicted the transformation that occurred in the capital markets during the past twelve months. What began as a seemingly isolated crisis in assets related to U.S. subprime mortgages ballooned into an all-encompassing crisis in liquidity and confidence that touched asset classes around the globe. Stocks faltered as the credit crisis expanded. In this tenuous environment, risk premiums soared and investors sought relative safety by investing in U.S. Treasuries.

The Federal Reserve (the Fed) took aggressive actions during the period, including:

• lowering the federal funds rate from 4.5% to 1.00% (the federal funds rate is the interest rate at which financial institutions lend balances to one another overnight).
• lowering the discount rate from 5.0% to 1.25% (the discount rate is the interest rate at which financial institutions can borrow directly from the Fed).
• reviving a Depression-era tool, the primary dealer credit facility, to allow non-banks to borrow directly from the Fed.

As the domestic crisis expanded worldwide, international central banks joined the Fed in massive attempts to foster stability and liquidity in capital markets.

Major U.S. Financial Institutions Falter and Fall

Few of the most prominent U.S. financial institutions weathered the tumult unscathed. Milestones for the period included: JPMorgan bought out Bear Stearns at $10 per share; Fannie Mae and Freddie Mac were placed into conservatorship; Bank of America acquired Merrill Lynch; Lehman Brothers filed for Chapter 11 bankruptcy protection; the Federal Reserve extended an $85 billion loan in exchange for a 79.9% equity stake in AIG; the Reserve Primary Fund — the oldest U.S. money market fund — “broke the buck” as its net asset value dropped below $1 per share; Washington Mutual Bank failed — the largest U.S. bank failure on record — and JPMorgan acquired its deposit base as the bank’s investors were wiped out; Wells Fargo agreed to acquire troubled Wachovia. And the last two major investment banks standing — Goldman Sachs and Morgan Stanley —changed their status to become bank holding companies, agreeing to oversight by the Fed in order to access the discount window.

In October, following intense debate, Congress passed a highly controversial $700 billion credit facility in an effort to slow or halt the escalating cycle of deleveraging by investing directly in troubled assets and troubled financial institutions. At the end of October, approximately $250 billion had been used for direct investments in institutions.

Within this environment, value stocks performed roughly in line with growth stocks, while small-cap stocks had a modest advantage over their larger peers (although returns were decidedly negative for all market segments, as measured by the Russell indices). U.S. real estate investment trust securities also suffered, losing slightly more than the major U.S. equity indices.

2

Commodities Climb, Then Plummet

Commodity prices rose throughout much of the 12-month period. Oil led the way, rising from $85 per barrel at the beginning of the period to nearly $150 per barrel by July (as measured by NYMEX crude oil futures). Prices were driven up in part by strong international demand and by speculation of continued growth in emerging market economies. Soon after reaching their highs, however, commodity prices corrected sharply, due partly to growing signs of a deep global recession. By the end of October, oil had dropped to below $70 per barrel.

Both Emerging and Developed Foreign Markets Suffer

The abrupt and severe correction in commodities markets caused emerging markets (particularly heavy commodities exporters such as Russia) to suffer huge market losses in the midst of skyrocketing risk premiums. Geopolitical turmoil in Russia added to investor angst in that region. Developed markets also suffered heavily, with European financial institutions under tremendous pressure and the outlook for growth significantly weakened. For U.S.-based investors, returns on international stocks generally were even lower due to resurgence in the U.S. dollar.

Risk Aversion Drives Investors to U.S. Treasuries

As credit risk climbed during the period, investors stampeded to the relative safety of U.S. Treasuries. With the investor rush to safety, the broad U.S. fixed-income market significantly lagged Treasuries. Investment-grade corporate bonds (as measured by the Barclays Capital Aggregate Bond Index) trailed like-duration Treasuries by 22.5%, and the financial segment of U.S. corporate bonds lost 25.6% relative to Treasuries. Commercial mortgage-backed securities also lagged Treasuries by 24.5%, reflecting investor fear that commercial real estate would flounder under pressure from depressed residential real estate and restricted credit conditions. Meanwhile, asset-backed securities — which are primarily collateralized by consumer debt — were down 21.0% relative to Treasuries.

*Indices are unmanaged, and individuals cannot invest directly in an index. Returns shown for indices assume reinvestment of all dividends and distributions. See glossary on page 26 for definitions of indices.

3

SAM Flexible Income Portfolio

Portfolio Managers:

Asset Allocation Team
Edge Asset Management, Inc.

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s mortgage- and asset-backed fixed-income holdings added value, outperforming the Barclays Capital Aggregate Bond Index. The Portfolio’s exposure to large-cap value and large-cap growth equities also proved to be top contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. On the negative side, the Portfolio’s exposure to both short-term and high-yield bonds detracted the most from performance amid deteriorating credit markets, as these holdings significantly lagged the Barclays Capital Aggregate Bond Index. Also, the Portfolio’s preferred securities holdings considerably underperformed both their respective benchmark and the Barclays Capital Aggregate Bond Index.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities —was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits.

The Portfolio ended the 12-month period with an overall allocation of 73% fixed income and 27% equities diversified across 16 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio’s performance between 1996 and 1999 benefited from agreements to limit the Portfolio’s expenses. Periods of less than one year are not annualized.

4

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-14.96%	-0.63%	1.42%	3.90%	4.96%	7/25/96	–
	Including Sales Charge	-18.77%	-2.15%	0.50%	3.43%	4.57%
Class B Shares	Excluding Sales Charge	-15.71%	-1.41%	0.63%	3.29%	4.45%	7/25/96	–
	Including Sales Charge	-19.69%	-2.58%	0.29%	3.29%	4.45%
Class C Shares	Excluding Sales Charge	-15.69%	-1.39%	0.65%	3.09%	4.12%	3/1/02	7/25/96
	Including Sales Charge	-16.48%	-1.39%	0.65%	3.09%	4.12%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	5.00%	5.88%
S&P 5003		-36.10%	-5.21%	0.26%	0.40%	5.19%
Capital Market Benchmark3		-7.35%	2.22%	3.15%	4.40%	6.04%
Morningstar Conservative Allocation		-19.43%	-1.61%	1.14%	2.24%	4.01%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			1.18%		1.18%
Class B Shares			1.95%		1.95%
Class C Shares			1.95%		1.95%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -11.05% (1-year); 2.31% (5-year); 4.41% (10-year); 5.28% (since inception) Class B Shares: -11.97% (1-year); 2.11% (5-year); 4.26% (10-year); 5.15% (since inception) Class C Shares: -8.51% (1-year); 2.47% (5-year); 4.07% (10-year); 4.82% (since inception)

2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index.

5

SAM Conservative Balanced Portfolio^*

Portfolio Managers:

Asset Allocation Team
Edge Asset Management, Inc.

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s mortgage- and asset-backed holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to international developed markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities —was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits.

The Portfolio ended the 12-month period with an overall allocation of 40% equities and 60% fixed income diversified across 16 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time, the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. Looking ahead, the management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

*      As of 8/1/00, the SAM Conservative Balanced Portfolio’s objectives and strategies changed. This information should be considered when reviewing past performance. Please see the prospectus for detailed information.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio’s performance between 1996 and 2003 benefited from agreements to limit the Portfolio’s expenses. Periods of less than one year are not annualized.

6

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-20.00%	-0.93%	1.80%	2.69%	3.56%	7/25/96	–
	Including Sales Charge	-24.37%	-2.78%	0.66%	2.11%	3.09%
Class B Shares	Excluding Sales Charge	-20.65%	-1.70%	1.02%	2.06%	3.06%	7/25/96	–
	Including Sales Charge	-24.35%	-2.88%	0.67%	2.06%	3.06%
Class C Shares	Excluding Sales Charge	-20.62%	-1.67%	1.05%	1.94%	2.78%	3/1/02	7/25/96
	Including Sales Charge	-21.36%	-1.67%	1.05%	1.94%	2.78%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	5.00%	5.88%
S&P 5003		-36.10%	-5.21%	0.26%	0.40%	5.19%
Capital Market Benchmark3		-14.88%	0.65%	2.65%	3.64%	6.05%
Morningstar Conservative Allocation		-19.43%	-1.61%	1.14%	2.24%	4.01%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			1.23%		1.23%
Class B Shares			2.00%		2.00%
Class C Shares			1.98%		1.98%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -14.74% (1-year); 3.09% (5-year); 3.07% (10-year); 3.95% (since inception) Class B Shares: -14.66% (1-year); 3.12% (5-year); 3.02% (10-year); 3.92% (since inception) Class C Shares: -11.33% (1-year); 3.49% (5-year); 2.89% (10-year); 3.64% (since inception)

2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index.

7

SAM Balanced Portfolio

Portfolio Managers:

Asset Allocation Team
Edge Asset Management, Inc.

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s mortgage- and asset-backed holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to international developed markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities —was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits.

The Portfolio ended the 12-month period with an overall allocation of 60% equities and 40% fixed income diversified across 16 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time, the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. Looking ahead, the management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio’s performance between 1996 and 1999 benefited from agreements to limit the Portfolio’s expenses. Periods of less than one year are not annualized.

8

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-27.01%	-2.40%	1.58%	4.68%	5.72%	7/25/96	–
	Including Sales Charge	-31.02%	-4.24%	0.43%	4.09%	5.23%
Class B Shares	Excluding Sales Charge	-27.57%	-3.13%	0.78%	4.04%	5.20%	7/25/96	–
	Including Sales Charge	-30.92%	-4.30%	0.43%	4.04%	5.20%
Class C Shares	Excluding Sales Charge	-27.52%	-3.11%	0.82%	3.89%	4.90%	3/1/02	7/25/96
	Including Sales Charge	-28.19%	-3.11%	0.82%	3.89%	4.90%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	5.00%	5.88%
S&P 5003		-36.10%	-5.21%	0.26%	0.40%	5.19%
Capital Market Benchmark3		-22.22%	-1.12%	2.01%	2.72%	5.91%
Morningstar Moderate Allocation		-28.88%	-3.67%	0.77%	2.17%	4.32%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			1.24%		1.24%
Class B Shares			2.00%		2.00%
Class C Shares			2.00%		2.00%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -18.93% (1-year); 3.82% (5-year); 5.90% (10-year); 6.43% (since inception) Class B Shares: -18.74% (1-year); 3.87% (5-year); 5.86% (10-year); 6.40% (since inception) Class C Shares: -15.64% (1-year); 4.22% (5-year); 5.69% (10-year); 6.09% (since inception)

2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index.

9

SAM Conservative Growth Portfolio

Portfolio Managers:

Asset Allocation Team
Edge Asset Management, Inc.

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s mortgage- and asset-backed holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to international developed markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities —was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits. In addition, the Portfolio added two short-term fixed-income funds: the Money Market Fund, sub-advised by Principal Global Investors; and the Short-Term Income Fund, sub-advised by Edge Asset Management, Inc., which invests in securities having effective maturities of five years or less.

The Portfolio ended the 12-month period with an overall allocation of 80% equities and 20% fixed income diversified across 15 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time, the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. Looking ahead, the management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio’s performance between 1996 and 1999 benefited from agreements to limit the Portfolios’ expenses. Periods of less than one year are not annualized.

10

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-33.63%	-4.17%	1.01%	4.66%	5.48%	7/25/96	–
	Including Sales Charge	-37.29%	-5.96%	-0.13%	4.07%	5.00%
Class B Shares	Excluding Sales Charge	-34.12%	-4.91%	0.24%	3.98%	4.94%	7/25/96	–
	Including Sales Charge	-37.16%	-6.07%	-0.13%	3.98%	4.94%
Class C Shares	Excluding Sales Charge	-34.16%	-4.91%	0.23%	3.84%	4.63%	3/1/02	7/25/96
	Including Sales Charge	-34.76%	-4.91%	0.23%	3.84%	4.63%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	5.00%	5.88%
S&P 5003		-36.10%	-5.21%	0.26%	0.40%	5.19%
Capital Market Benchmark3		-29.31%	-3.08%	1.21%	1.63%	5.62%
Morningstar Moderate Allocation		-28.88%	-3.67%	0.77%	2.17%	4.32%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			1.28%		1.28%
Class B Shares			2.04%		2.04%
Class C Shares			2.04%		2.04%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -22.85% (1-year); 4.33% (5-year); 6.44% (10-year); 6.55% (since inception) Class B Shares: -22.74% (1-year); 4.37% (5-year); 6.36% (10-year); 6.49% (since inception) Class C Shares: -19.73% (1-year); 4.73% (5-year); 6.21% (10-year); 6.18% (since inception)

2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index.

11

SAM Strategic Growth Portfolio

Portfolio Managers:

Asset Allocation Team
Edge Asset Management, Inc.

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s cash holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to both international developed and emerging markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. In addition, the Portfolio added two short-term fixed-income funds: the Money Market Fund, sub-advised by Principal Global Investors; and the Short-Term Income Fund, sub-advised by Edge Asset Management, Inc., which invests in securities having effective maturities of five years or less.

The Portfolio ended the 12-month period with an overall allocation of 94% equities and 6% fixed income, diversified across 12 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions get discounted in market prices.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio’s performance between 1996 and 1999 benefited from agreements to limit the Portfolio’s expenses. Periods of less than one year are not annualized.

12

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-37.46%	-5.40%	0.61%	4.07%	5.68%	7/25/96	–
	Including Sales Charge	-40.90%	-7.16%	-0.52%	3.49%	5.20%
Class B Shares	Excluding Sales Charge	-37.94%	-6.11%	-0.17%	3.44%	5.17%	7/25/96	–
	Including Sales Charge	-40.80%	-7.27%	-0.54%	3.44%	5.17%
Class C Shares	Excluding Sales Charge	-37.96%	-6.12%	-0.14%	3.26%	4.81%	3/1/02	7/25/96
	Including Sales Charge	-38.53%	-6.12%	-0.14%	3.26%	4.81%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	5.00%	5.88%
S&P 5003		-36.10%	-5.21%	0.26%	0.40%	5.19%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	1.05%	5.30%
Morningstar Large Blend		-37.17%	-6.07%	-0.27%	0.89%	3.90%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			1.33%		1.33%
Class B Shares			2.09%		2.09%
Class C Shares			2.08%		2.08%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -25.18% (1-year); 4.67% (5-year); 6.16% (10-year); 6.97% (since inception) Class B Shares: -25.08% (1-year); 4.72% (5-year); 6.11% (10-year); 6.94% (since inception) Class C Shares: -22.18% (1-year); 5.09% (5-year); 5.92% (10-year); 6.58% (since inception)

2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index.

13

Principal LifeTime 2010 Fund

Portfolio Managers:

Dirk Laschanzky, CFA David Blake, CFA Tim Dunbar Principal Global Investors, LLC James Fennessey, CFA Michael Finnegan, CFA Randy Welch Principal Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

A majority of this Fund is invested in fixed income, which contributed positively to performance on a relative basis as fixed-income securities significantly outperformed equities for the 12-month period. Other positives for the period included the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperforming the MSCI REIT Index, and the International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperforming the MSCI EAFE Index.

On the negative side, despite outperforming the Merrill Lynch Hybrid Preferred Securities Index, the Preferred Securities Fund detracted from performance. The High Yield Fund I also hurt performance, although historically both of these underlying funds have added value and diversification to the Principal LifeTime Funds. As a whole, the fixed-income funds struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral during the fiscal year. The International Emerging Markets Fund, which had performed well within Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2010 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund. Additionally, we are currently evaluating our options regarding the management of the Inflation Protection Fund used in the Fund.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

14

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Gross and net expense ratios reflect the total annual fund operating expenses of the investment option and its underlying funds. Returns displayed are based on net total investment expense.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-31.75%	-5.50%	-0.27%	0.64%	6/28/05	3/1/01
	Including Sales Charge	-35.51%	-7.25%	-1.39%	-0.10%
Class C Shares	Excluding Sales Charge	-32.22%	-6.05%	-0.61%	0.43%	1/16/07	3/1/01
	Including Sales Charge	-32.87%	-6.05%	-0.61%	0.43%
S&P 5003		-36.10%	-5.21%	0.26%	-1.43%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.71%
MSCI EAFE Index3		-46.62%	-5.26%	3.60%	0.91%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	-0.87%
Principal LifeTime 2010 Blended Index3		-23.25%	-1.89%	1.76%	–
Morningstar Target-Date 2000–2014		-23.56%	-2.37%	1.26%	1.17%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.23%		1.15%
Class C Shares		2.91%		1.90%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -23.48% (1-year); 2.11% (5-year); 1.89% (since inception) Class C Shares: -20.36% (1-year); 2.93% (5-year); 2.44% (since inception)

2

Net asset value is not adjusted for sales charge.

3

Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/28/01. Principal LifeTime Blended Indices only have historical data to 4/30/01. Indices are unmanaged, and individuals cannot invest directly in an index. The Principal LifeTime 2010 Blended Index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy.

15

Principal LifeTime 2020 Fund

Portfolio Managers:

Dirk Laschanzky, CFA David Blake, CFA Tim Dunbar Principal Global Investors, LLC James Fennessey, CFA Michael Finnegan, CFA Randy Welch Principal Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns during the period. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2020 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

16

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Gross and net expense ratios reflect the total annual fund operating expenses of the investment option and its underlying funds. Returns displayed are based on net total investment expense.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-35.25%	-5.56%	0.08%	0.68%	6/28/05	3/1/01
	Including Sales Charge	-38.80%	-7.32%	-1.04%	-0.06%
Class B Shares	Excluding Sales Charge	-35.71%	-6.26%	-0.68%	-0.08%	6/28/05	3/1/01
	Including Sales Charge	-38.79%	-7.43%	-1.04%	-0.08%
Class C Shares	Excluding Sales Charge	-35.75%	-6.20%	-0.28%	0.49%	1/16/07	3/1/01
	Including Sales Charge	-36.37%	-6.20%	-0.28%	0.49%
S&P 5003		-36.10%	-5.21%	0.26%	-1.43%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.71%
MSCI EAFE Index3		-46.62%	-5.26%	3.60%	0.91%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	-0.87%
Principal LifeTime 2020 Blended Index3		-28.40%	-2.85%	1.61%	–
Morningstar Target-Date 2015–2029		-32.34%	-4.42%	0.54%	0.50%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.33%		1.20%
Class B Shares		2.25%		1.95%
Class C Shares		2.91%		1.95%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -25.56% (1-year); 3.03% (5-year); 2.22% (since inception) Class B Shares: -25.56% (1-year); 3.05% (5-year); 2.20% (since inception) Class C Shares: -22.62% (1-year); 3.82% (5-year); 2.79% (since inception)

2

Net asset value is not adjusted for sales charge.

3

Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/28/01. Principal LifeTime Blended Indices only have historical data to 4/30/01. Indices are unmanaged, and individuals cannot invest directly in an index. The Principal LifeTime 2020 Blended Index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy.

17

Principal LifeTime 2030 Fund

Portfolio Managers:

Dirk Laschanzky, CFA David Blake, CFA Tim Dunbar Principal Global Investors, LLC James Fennessey, CFA Michael Finnegan, CFA Randy Welch Principal Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2030 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the portfolio (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

18

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Gross and net expense ratios reflect the total annual fund operating expenses of the investment option and its underlying funds. Returns displayed are based on net total investment expense.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-37.66%	-5.96%	0.03%	0.23%	6/28/05	3/1/01
	Including Sales Charge	-41.08%	-7.71%	-1.08%	-0.50%
Class B Shares	Excluding Sales Charge	-38.04%	-6.59%	-0.66%	-0.49%	6/28/05	3/1/01
	Including Sales Charge	-41.01%	-7.75%	-1.03%	-0.49%
Class C Shares	Excluding Sales Charge	-38.06%	-6.51%	-0.26%	0.09%	1/16/07	3/1/01
	Including Sales Charge	-38.65%	-6.51%	-0.26%	0.09%
S&P 5003		-36.10%	-5.21%	0.26%	-1.43%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.71%
MSCI EAFE Index3		-46.62%	-5.26%	3.60%	0.91%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	-0.87%
Principal LifeTime 2030 Blended Index3		-31.83%	-3.77%	1.29%	–
Morningstar Target-Date 2030+		-38.53%	-6.33%	0.18%	-0.41%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.49%		1.23%
Class B Shares		2.39%		1.98%
Class C Shares		2.91%		1.98%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -27.05% (1-year); 3.41% (5-year); 1.95% (since inception) Class B Shares: -27.05% (1-year); 3.47% (5-year); 1.96% (since inception) Class C Shares: -24.00% (1-year); 4.29% (5-year); 2.58% (since inception)

2

Net asset value is not adjusted for sales charge.

3

Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/28/01. Principal LifeTime Blended Indices only have historical data to 4/30/01. Indices are unmanaged, and individuals cannot invest directly in an index. The Principal LifeTime 2030 Blended Index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy.

19

Principal LifeTime 2040 Fund

Portfolio Managers:

Dirk Laschanzky, CFA David Blake, CFA Tim Dunbar Principal Global Investors, LLC James Fennessey, CFA Michael Finnegan, CFA Randy Welch Principal Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2040 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

20

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Gross and net expense ratios reflect the total annual fund operating expenses of the investment option and its underlying funds. Returns displayed are based on net total investment expense.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-39.41%	-6.30%	-0.08%	0.11%	6/28/05	3/1/01
	Including Sales Charge	-42.75%	-8.06%	-1.20%	-0.62%
Class B Shares	Excluding Sales Charge	-39.79%	-6.98%	-0.79%	-0.61%	6/28/05	3/1/01
	Including Sales Charge	-42.68%	-8.12%	-1.15%	-0.61%
Class C Shares	Excluding Sales Charge	-39.80%	-6.89%	-0.39%	-0.03%	1/16/07	3/1/01
	Including Sales Charge	-40.38%	-6.89%	-0.39%	-0.03%
S&P 5003		-36.10%	-5.21%	0.26%	-1.43%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.71%
MSCI EAFE Index3		-46.62%	-5.26%	3.60%	0.91%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	-0.87%
Principal LifeTime 2040 Blended Index3		-34.23%	-4.33%	1.19%	–
Morningstar Target-Date 2030+		-38.53%	-6.33%	0.18%	-0.41%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.68%		1.25%
Class B Shares		2.60%		2.00%
Class C Shares		4.21%		2.00%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -28.09% (1-year); 3.65% (5-year); 1.99% (since inception) Class B Shares: -28.05% (1-year); 3.73% (5-year); 2.00% (since inception) Class C Shares: -25.17% (1-year); 4.52% (5-year); 2.60% (since inception)

2

Net asset value is not adjusted for sales charge.

3

Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/28/01. Principal LifeTime Blended Indices only have historical data to 4/30/01. Indices are unmanaged, and individuals cannot invest directly in an index. The Principal LifeTime 2040 Blended Index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy.

21

Principal LifeTime 2050 Fund

Portfolio Managers:

Dirk Laschanzky, CFA David Blake, CFA Tim Dunbar Principal Global Investors, LLC James Fennessey, CFA Michael Finnegan, CFA Randy Welch Principal Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns during the period. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2050 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

22

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Gross and net expense ratios reflect the total annual fund operating expenses of the investment option and its underlying funds. Returns displayed are based on net total investment expense.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-40.22%	-6.46%	-0.06%	-0.58%	6/28/05	3/1/01
	Including Sales Charge	-43.50%	-8.20%	-1.20%	-1.31%
Class B Shares	Excluding Sales Charge	-40.67%	-7.06%	-0.34%	-0.68%	3/15/06	3/1/01
	Including Sales Charge	-43.51%	-8.20%	-0.70%	-0.68%
Class C Shares	Excluding Sales Charge	-40.62%	-7.04%	-0.33%	-0.67%	1/16/07	3/1/01
	Including Sales Charge	-41.19%	-7.04%	-0.33%	-0.67%
S&P 5003		-36.10%	-5.21%	0.26%	-1.43%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.71%
MSCI EAFE Index3		-46.62%	-5.26%	3.60%	0.91%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	-0.87%
Principal LifeTime 2050 Blended Index3		-35.45%	-4.40%	1.40%	–
Morningstar Target-Date 2030+		-38.53%	-6.33%	0.18%	-0.41%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.86%		1.26%
Class B Shares		3.79%		2.01%
Class C Shares		6.07%		2.01%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -28.53% (1-year); 3.96% (5-year); 1.36% (since inception) Class B Shares: -28.54% (1-year); 4.53% (5-year); 2.02% (since inception) Class C Shares: -25.67% (1-year); 4.87% (5-year); 2.03% (since inception)

2

Net asset value is not adjusted for sales charge.

3

Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/28/01. Principal LifeTime Blended Indices only have historical data to 4/30/01. Indices are unmanaged, and individuals cannot invest directly in an index. The Principal LifeTime 2050 Blended Index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy.

23

Principal LifeTime Strategic Income Fund

Portfolio Managers:

Dirk Laschanzky, CFA David Blake, CFA Tim Dunbar Principal Global Investors, LLC James Fennessey, CFA Michael Finnegan, CFA Randy Welch Principal Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

A majority of this Fund is invested in fixed income, which contributed positively to performance on a relative basis as fixed-income securities significantly outperformed equities for the 12-month period. Other positives for the period included the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperforming the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperforming the MSCI EAFE Index.

On the negative side, despite outperforming the Merrill Lynch Hybrid Preferred Securities Index, the Preferred Securities Fund detracted from performance. The High Yield Fund I also hurt performance, although historically both of these underlying funds have added value and diversification to the Principal LifeTime Funds. As a whole, the fixed-income funds struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral during the fiscal year. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind during the period. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime Strategic Income Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital. Additionally, we are currently evaluating our options regarding the management of the Inflation Protection Fund used within the Fund.

See glossary on page 26 for definitions of indices and terms.

1      Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.

24

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Gross and net expense ratios reflect the total annual fund operating expenses of the investment option and its underlying funds. Returns displayed are based on net total investment expense.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-23.06%	-4.01%	0.27%	1.16%	6/28/05	3/1/01
	Including Sales Charge	-26.52%	-5.46%	-0.65%	0.56%
Class B Shares	Excluding Sales Charge	-23.73%	-4.70%	-0.14%	0.91%	3/15/06	3/1/01
	Including Sales Charge	-27.36%	-5.85%	-0.49%	0.91%
Class C Shares	Excluding Sales Charge	-23.63%	-4.62%	-0.09%	0.94%	1/16/07	3/1/01
	Including Sales Charge	-24.36%	-4.62%	-0.09%	0.94%
S&P 5003		-36.10%	-5.21%	0.26%	-1.43%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.71%
MSCI EAFE Index3		-46.62%	-5.26%	3.60%	0.91%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	-0.87%
Principal LifeTime Strategic Income Blended Index3		-10.34%	1.73%	3.54%	–
Morningstar Target-Date 2000–2014		-23.56%	-2.37%	1.26%	1.17%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.22%		1.05%
Class B Shares		6.12%		1.80%
Class C Shares		4.03%		1.80%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -17.72% (1-year); 1.79% (5-year); 1.93% (since inception) Class B Shares: -18.57% (1-year); 2.00% (5-year); 2.32% (since inception) Class C Shares: -15.34% (1-year); 2.38% (5-year); 2.34% (since inception)

2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/28/01. Principal LifeTime Blended Indices only have historical data to 4/30/01. Indices are unmanaged, and individuals cannot invest directly in an index. The Principal LifeTime Strategic Income Blended Index is now the benchmark against which the Fund measures its performance.
	The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy.

25

Glossary

Capital Market Benchmark:

A benchmark intended to represent a relevant proxy for market and Portfolio performance. It is allocated as follows: SAM Flexible Income Portfolio: 20% S&P 500 and 80% Barclays Capital Aggregate Bond Index; SAM Conservative Balanced Portfolio: 40% S&P 500 and 60% Barclays Capital Aggregate Bond Index; SAM Balanced Portfolio: 60% S&P 500 and 40% Barclays Capital Aggregate Bond Index; and SAM Conservative Growth Portfolio: 80% S&P 500 and 20% Barclays Capital Aggregate Bond Index.

Barclays Capital Aggregate Bond Index:

(Formerly known as Lehman Brothers Aggregate Bond Index.)

A broad-based index intended to represent the U.S. fixed-income market.

Morgan Stanley Capital International (MSCI) EAFE Index:

A broad-based, capitalization-weighted index of equity markets representing 21 countries in Europe, Australasia, and the Far East.

Morningstar Conservative Allocation Category Average:

An average of the net asset value (NAV) returns of domestic mutual funds with 20–50% invested in equities and 50–80% invested in fixed income and cash.

Morningstar Large Blend Category Average:

An average of the net asset value (NAV) returns of domestic mutual funds that focus on large companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries.

Morningstar Moderate Allocation Category Average:

An average of the net asset value (NAV) returns of domestic mutual funds with 50–70% invested in equities and the remainder invested in fixed income and cash.

Morningstar Target-Date Categories:

Portfolios in these categories provide diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind for retirement or another goal. These portfolios aim to provide investors with an optimal level of return and risk, based solely on the target date. These portfolios get more conservative as the goal date approaches by investing more in bonds and cash. Investment managers structure these portfolios differently; two funds with the same goal year may have different allocations to equities and therefore different levels of return and risk.

26

Glossary

Principal LifeTime 2010 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2010 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2020 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2020 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2030 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2030 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2040 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2040 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2050 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2050 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime Strategic Income Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime Strategic Income Fund.

Russell 3000^® Index:

Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

S&P 500:

A broad-based index intended to represent the U.S. equity market.

27

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)

As a shareholder of Principal Funds, Inc., you incur two types of costs: (1) transaction costs, including sales charges on purchase payments, contingent deferred sales charges; and under certain limited circumstances redemption fees or exchange fees; and (2) ongoing costs, including management fees; distribution fees; and other fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in Principal Funds, Inc. and to compare these costs with the ongoing costs of investing in other mutual funds. As a shareholder of Principal LifeTime 2010 Fund, Principal LifeTime 2020 Fund, Principal LifeTime 2030 Fund, Principal LifeTime 2040 Fund, Principal LifeTime 2050 Fund, Principal LifeTime Strategic Income Fund, SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, or SAM Strategic Growth Portfolio, your fund will indirectly bear its pro rata share of the expenses incurred by the investment companies in which the fund invests. These expenses are not included in the fund’s annualized expense ratio used to calculate the expenses paid in this example. If they were, the expenses paid would be higher.

The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (May 1, 2008 to October 31, 2008), unless otherwise noted.

Actual Expenses

The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. An annual fee of $15.00 or $30.00 may apply to IRA accounts and 403(b) accounts, respectively. These fees are not included in the table below. If they were, the estimate of expenses you paid during the period would be higher, and your ending account value lower, by this amount.

Hypothetical Example for Comparison Purposes

The second section of the table below provides information about hypothetical account values and hypothetical expenses based on each funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in Principal Funds, Inc. and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as sales charges on purchase payments, contingent deferred sales charges, redemption fees or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008 to	Beginning	Account Value	May 1, 2008 to
	Account Value	October 31,	October 31,	Account Value	October 31,	October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008(a)	Expense Ratio
Principal LifeTime 2010 Fund
Class A	$1,000.00	$738.61	$2.19	$1,000.00	$1,022.62	$2.54	0.50%
Class C	1,000.00	736.38	5.46	1,000.00	1,018.85	6.34	1.25
Principal LifeTime 2020 Fund
Class A	1,000.00	708.33	2.15	1,000.00	1,022.62	2.54	0.50
Class B	1,000.00	705.75	5.36	1,000.00	1,018.85	6.34	1.25
Class C	1,000.00	705.93	5.36	1,000.00	1,018.85	6.34	1.25
Principal LifeTime 2030 Fund
Class A	1,000.00	687.88	2.12	1,000.00	1,022.62	2.54	0.50
Class B	1,000.00	686.32	5.30	1,000.00	1,018.85	6.34	1.25
Class C	1,000.00	685.37	5.30	1,000.00	1,018.85	6.34	1.25
Principal LifeTime 2040 Fund
Class A	1,000.00	673.41	2.10	1,000.00	1,022.62	2.54	0.50
Class B	1,000.00	671.95	5.25	1,000.00	1,018.85	6.34	1.25
Class C	1,000.00	671.42	5.25	1,000.00	1,018.85	6.34	1.25
Principal LifeTime 2050 Fund
Class A	1,000.00	666.67	2.09	1,000.00	1,022.62	2.54	0.50
Class B	1,000.00	664.36	5.23	1,000.00	1,018.85	6.34	1.25
Class C	1,000.00	664.62	5.23	1,000.00	1,018.85	6.34	1.25
Principal LifeTime Strategic Income
Fund
Class A	1,000.00	810.83	2.28	1,000.00	1,022.62	2.54	0.50
Class B	1,000.00	807.63	5.68	1,000.00	1,018.85	6.34	1.25
Class C	1,000.00	807.76	5.68	1,000.00	1,018.85	6.34	1.25

28

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008 to	Beginning	Account Value	May 1, 2008 to
	Account Value	October 31,	October 31,	Account Value	October 31,	October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008(a)	Expense Ratio
SAM Balanced Portfolio
Class A	$1,000.00	$774.79	$3.03	$1,000.00	$1,021.72	$3.46	0.68%
Class B	1,000.00	771.90	6.37	1,000.00	1,017.95	7.25	1.43
Class C	1,000.00	772.69	6.33	1,000.00	1,018.00	7.20	1.42
SAM Conservative Balanced Portfolio
Class A	1,000.00	824.21	3.16	1,000.00	1,021.67	3.51	0.69
Class B	1,000.00	820.68	6.54	1,000.00	1,017.95	7.25	1.43
Class C	1,000.00	820.97	6.50	1,000.00	1,018.00	7.20	1.42
SAM Conservative Growth Portfolio
Class A	1,000.00	724.66	3.03	1,000.00	1,021.62	3.56	0.70
Class B	1,000.00	721.79	6.23	1,000.00	1,017.90	7.30	1.44
Class C	1,000.00	721.39	6.27	1,000.00	1,017.85	7.35	1.45
SAM Flexible Income Portfolio
Class A	1,000.00	856.53	3.22	1,000.00	1,021.67	3.51	0.69
Class B	1,000.00	852.98	6.66	1,000.00	1,017.95	7.25	1.43
Class C	1,000.00	853.17	6.61	1,000.00	1,018.00	7.20	1.42
SAM Strategic Growth Portfolio
Class A	1,000.00	695.01	3.15	1,000.00	1,021.42	3.76	0.74
Class B	1,000.00	692.45	6.25	1,000.00	1,017.75	7.46	1.47
Class C	1,000.00	691.99	6.29	1,000.00	1,017.70	7.51	1.48

^(a) Expenses are equal to a fund's annualized expense ratio multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).

29

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Principal LifeTime		Principal LifeTime	Principal LifeTime
Amounts in thousands, except per share amounts	2010 Fund		2020 Fund	2030 Fund
Investment in affiliated securities--at cost	$ 1,956,015		$ 4,364,804	$ 3,792,246
Assets
Investment in affiliated securities--at value	$ 1,379,064		$ 3,024,590	$ 2,594,004
Receivables:
Capital Shares sold		1,554	4,052	5,183
Dividends and interest		2,198	3,502	2,017
Expense reimbursement from Manager		10	13	3
Expense reimbursement from Underwriter		8	18	15
Total Assets	1,382,834		3,032,175	2,601,222
Liabilities
Accrued management and investment advisory fees		149	319	273
Accrued administrative service fees		39	80	68
Accrued distribution fees		120	258	215
Accrued service fees		48	96	81
Accrued transfer agent fees		31	92	113
Accrued directors' expenses		5	7	6
Accrued other expenses		39	58	58
Payables:
Capital Shares reacquired		452	310	344
Total Liabilities		883	1,220	1,158
Net Assets Applicable to Outstanding Shares	$ 1,381,951		$ 3,030,955	$ 2,600,064
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,884,057		$ 4,221,233	$ 3,678,960
Accumulated undistributed (overdistributed) net investment income (operating loss)		32,591	40,575	19,951
Accumulated undistributed (overdistributed) net realized gain (loss)		42,254	109,361	99,395
Net unrealized appreciation (depreciation) of investments		(576,951 )	(1,340,214)	(1,198,242 )
Total Net Assets	$ 1,381,951		$ 3,030,955	$ 2,600,064
Capital Stock (par value: $.01 a share):
Shares authorized		585,000	760,000	760,000
Net Asset Value Per Share:
Class A: Net Assets	$ 27,444		$ 49,723	$ 33,002
Shares Issued and Outstanding		2,969	5,317	3,636
Net Asset Value per share	$ 9.24		$ 9.35	$ 9.08
Maximum Offering Price	$ 9.78 (a)		$ 9.89 (a)	$ 9.61 (a)
Class B: Net Assets		N/A	$ 7,264	$ 6,193
Shares Issued and Outstanding			779	682
Net Asset Value per share			$ 9.33 (b)	$ 9.08 (b)
Class C: Net Assets	$ 3,856		$ 5,572	$ 5,689
Shares Issued and Outstanding		420	600	629
Net Asset Value per share	$ 9.19 (b)		$ 9.29 (b)	$ 9.04 (b)
Class J: Net Assets	$ 185,729		$ 412,169	$ 344,061
Shares Issued and Outstanding		20,262	44,480	38,113
Net Asset Value per share	$ 9.17 (b)		$ 9.27 (b)	$ 9.03 (b)
Institutional: Net Assets	$ 846,470		$ 1,904,751	$ 1,659,024
Shares Issued and Outstanding		91,760	204,334	183,012
Net Asset Value per share	$ 9.22		$ 9.32	$ 9.07
R-1: Net Assets	$ 16,907		$ 35,642	$ 27,323
Shares Issued and Outstanding		1,850	3,855	3,039
Net Asset Value per share	$ 9.14		$ 9.25	$ 8.99
R-2: Net Assets	$ 37,240		$ 78,445	$ 67,038
Shares Issued and Outstanding		4,092	8,523	7,470
Net Asset Value per share	$ 9.10		$ 9.20	$ 8.97
R-3: Net Assets	$ 75,999		$ 159,254	$ 141,078
Shares Issued and Outstanding		8,324	17,234	15,643
Net Asset Value per share	$ 9.13		$ 9.24	$ 9.02
R-4: Net Assets	$ 47,919		$ 110,340	$ 103,030
Shares Issued and Outstanding		5,234	11,916	11,173
Net Asset Value per share	$ 9.16		$ 9.26	$ 9.22
R-5: Net Assets	$ 140,387		$ 267,795	$ 213,626
Shares Issued and Outstanding		15,300	28,857	23,604
Net Asset Value per share	$ 9.18		$ 9.28	$ 9.05

(a)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(b)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

30

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
				Principal LifeTime
	Principal LifeTime		Principal LifeTime	Strategic Income
Amounts in thousands, except per share amounts	2040 Fund		2050 Fund	Fund
Investment in affiliated securities--at cost	$ 2,022,584		$ 822,591	$ 618,989
Assets
Investment in affiliated securities--at value	$ 1,362,070		$ 550,500	$ 466,786
Receivables:
Capital Shares sold		3,769	2,099	586
Dividends and interest		641	169	1,083
Expense reimbursement from Manager		4	4	14
Expense reimbursement from Underwriter		6	1	3
Total Assets	1,366,490		552,773	468,472
Liabilities
Accrued management and investment advisory fees		142	57	51
Accrued administrative service fees		32	12	13
Accrued distribution fees		100	28	45
Accrued service fees		39	14	16
Accrued transfer agent fees		88	37	17
Accrued directors' expenses		2	–	–
Accrued other expenses		46	30	29
Payables:
Capital Shares reacquired		121	37	203
Total Liabilities		570	215	374
Net Assets Applicable to Outstanding Shares	$ 1,365,920		$ 552,558	$ 468,098
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,970,191		$ 801,328	$ 594,852
Accumulated undistributed (overdistributed) net investment income (operating loss)		4,682	944	19,968
Accumulated undistributed (overdistributed) net realized gain (loss)		51,561	22,377	5,481
Net unrealized appreciation (depreciation) of investments		(660,514 )	(272,091)	(152,203 )
Total Net Assets	$ 1,365,920		$ 552,558	$ 468,098
Capital Stock (par value: $.01 a share):
Shares authorized		575,000	500,000	500,000
Net Asset Value Per Share:
Class A: Net Assets	$ 19,918		$ 11,391	$ 17,473
Shares Issued and Outstanding		2,217	1,306	1,854
Net Asset Value per share	$ 8.99		$ 8.72	$ 9.43
Maximum Offering Price	$ 9.51 (a)		$ 9.23 (a)	$ 9.87 (b)
Class B: Net Assets	$ 4,794		$ 1,496	$ 816
Shares Issued and Outstanding		538	173	87
Net Asset Value per share	$ 8.91 (c)		$ 8.63 (c)	$ 9.32 (c)
Class C: Net Assets	$ 2,380		$ 1,260	$ 3,044
Shares Issued and Outstanding		266	145	325
Net Asset Value per share	$ 8.95 (c)		$ 8.68 (c)	$ 9.37 (c)
Class J: Net Assets	$ 152,176		$ 30,460	$ 60,289
Shares Issued and Outstanding		16,860	3,571	6,464
Net Asset Value per share	$ 9.03 (c)		$ 8.53 (c)	$ 9.33 (c)
Institutional: Net Assets	$ 921,180		$ 415,945	$ 287,888
Shares Issued and Outstanding		101,293	47,820	30,636
Net Asset Value per share	$ 9.09		$ 8.70	$ 9.40
R-1: Net Assets	$ 15,457		$ 5,320	$ 6,026
Shares Issued and Outstanding		1,716	617	647
Net Asset Value per share	$ 9.01		$ 8.62	$ 9.32
R-2: Net Assets	$ 32,121		$ 13,857	$ 17,792
Shares Issued and Outstanding		3,571	1,610	1,913
Net Asset Value per share	$ 8.99		$ 8.61	$ 9.30
R-3: Net Assets	$ 69,607		$ 22,153	$ 24,573
Shares Issued and Outstanding		7,727	2,566	2,642
Net Asset Value per share	$ 9.01		$ 8.63	$ 9.30
R-4: Net Assets	$ 49,106		$ 18,841	$ 16,933
Shares Issued and Outstanding		5,442	2,176	1,814
Net Asset Value per share	$ 9.02		$ 8.66	$ 9.33
R-5: Net Assets	$ 99,181		$ 31,835	$ 33,264
Shares Issued and Outstanding		10,945	3,670	3,547
Net Asset Value per share	$ 9.06		$ 8.67	$ 9.38

(a)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(c)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

31

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	SAM Balanced		SAM Conservative	SAM Conservative
Amounts in thousands, except per share amounts	Portfolio		Balanced Portfolio	Growth Portfolio
Investment in affiliated securities--at cost	$ 3,718,307		$ 637,941	$ 2,926,958
Assets
Investment in affiliated securities--at value	$ 3,162,301		$ 552,882	$ 2,407,426
Receivables:
Capital Shares sold		5,136	601	2,173
Dividends and interest		7,083	1,807	2,579
Expense reimbursement from Manager		32	11	16
Expense reimbursement from Underwriter		2	1	1
Total Assets	3,174,554		555,302	2,412,195
Liabilities
Accrued management and investment advisory fees		931	162	706
Accrued administrative service fees		1	–	1
Accrued distribution fees		1,605	289	1,269
Accrued service fees		1	1	1
Accrued transfer agent fees		948	138	878
Accrued directors' expenses		9	–	7
Accrued other expenses		262	62	225
Payables:
Capital Shares reacquired		7,142	1,733	4,068
Total Liabilities		10,899	2,385	7,155
Net Assets Applicable to Outstanding Shares	$ 3,163,655		$ 552,917	$ 2,405,040
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 3,517,767		$ 622,371	$ 2,702,988
Accumulated undistributed (overdistributed) net investment income (operating loss)		5,129	1,303	15,627
Accumulated undistributed (overdistributed) net realized gain (loss)		196,765	14,302	205,957
Net unrealized appreciation (depreciation) of investments		(556,006 )	(85,059)	(519,532 )
Total Net Assets	$ 3,163,655		$ 552,917	$ 2,405,040
Capital Stock (par value: $.01 a share):
Shares authorized	1,255,000		855,000	1,255,000
Net Asset Value Per Share:
Class A: Net Assets	$ 1,685,305		$ 247,297	$ 1,204,478
Shares Issued and Outstanding		155,460	27,989	104,058
Net Asset Value per share	$ 10.84		$ 8.84	$ 11.58
Maximum Offering Price	$ 11.47 (a)		$ 9.35 (a)	$ 12.25 (a)
Class B: Net Assets	$ 748,701		$ 107,873	$ 545,926
Shares Issued and Outstanding		69,254	12,232	49,072
Net Asset Value per share	$ 10.81 (b)		$ 8.82 (b)	$ 11.13 (b)
Class C: Net Assets	$ 639,449		$ 149,913	$ 590,888
Shares Issued and Outstanding		59,499	17,079	53,565
Net Asset Value per share	$ 10.75 (b)		$ 8.78 (b)	$ 11.03 (b)
Class J: Net Assets	$ 58,350		$ 26,828	$ 37,408
Shares Issued and Outstanding		5,486	3,059	3,286
Net Asset Value per share	$ 10.64 (b)		$ 8.77 (b)	$ 11.39 (b)
Institutional: Net Assets	$ 21,448		$ 16,825	$ 16,776
Shares Issued and Outstanding		1,998	1,916	1,465
Net Asset Value per share	$ 10.74		$ 8.78	$ 11.45
R-1: Net Assets	$ 1,064		$ 285	$ 1,078
Shares Issued and Outstanding		99	32	95
Net Asset Value per share	$ 10.73		$ 8.78	$ 11.36
R-2: Net Assets	$ 146		$ 545	$ 939
Shares Issued and Outstanding		14	62	83
Net Asset Value per share	$ 10.73		$ 8.78	$ 11.37
R-3: Net Assets	$ 3,627		$ 1,059	$ 1,487
Shares Issued and Outstanding		338	121	130
Net Asset Value per share	$ 10.73		$ 8.78	$ 11.40
R-4: Net Assets	$ 1,874		$ 1,413	$ 2,352
Shares Issued and Outstanding		174	161	206
Net Asset Value per share	$ 10.74		$ 8.78	$ 11.41
R-5: Net Assets	$ 3,691		$ 879	$ 3,708
Shares Issued and Outstanding		344	100	325
Net Asset Value per share	$ 10.74		$ 8.78	$ 11.42

(a)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(b)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

32

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	SAM Flexible		SAM Strategic
Amounts in thousands, except per share amounts	Income Portfolio		Growth Portfolio
Investment in affiliated securities--at cost	$ 765,280		$ 1,862,169
Assets
Investment in affiliated securities--at value	$ 680,200		$ 1,474,245
Receivables:
Capital Shares sold		975	1,759
Dividends and interest		2,742	574
Expense reimbursement from Manager		4	16
Expense reimbursement from Underwriter		–	2
Total Assets		683,921	1,476,596
Liabilities
Accrued management and investment advisory fees		201	430
Accrued distribution fees		355	773
Accrued service fees		1	1
Accrued transfer agent fees		183	715
Accrued directors' expenses		–	4
Accrued other expenses		68	180
Payables:
Capital Shares reacquired		2,235	3,055
Total Liabilities		3,043	5,158
Net Assets Applicable to Outstanding Shares	$ 680,878		$ 1,471,438
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 759,560		$ 1,745,329
Accumulated undistributed (overdistributed) net investment income (operating loss)		2,106	196
Accumulated undistributed (overdistributed) net realized gain (loss)		4,292	113,837
Net unrealized appreciation (depreciation) of investments		(85,080 )	(387,924 )
Total Net Assets	$ 680,878		$ 1,471,438
Capital Stock (par value: $.01 a share):
Shares authorized		955,000	1,055,000
Net Asset Value Per Share:
Class A: Net Assets	$ 349,745		$ 729,591
Shares Issued and Outstanding		36,821	59,523
Net Asset Value per share	$ 9.50		$ 12.26
Maximum Offering Price	$ 9.95 (a)		$ 12.97 (b)
Class B: Net Assets	$ 175,763		$ 343,364
Shares Issued and Outstanding		18,531	29,732
Net Asset Value per share	$ 9.48 (c)		$ 11.55 (c)
Class C: Net Assets	$ 139,041		$ 344,700
Shares Issued and Outstanding		14,739	29,785
Net Asset Value per share	$ 9.43 (c)		$ 11.57 (c)
Class J: Net Assets	$ 9,523		$ 40,275
Shares Issued and Outstanding		1,007	3,342
Net Asset Value per share	$ 9.46 (c)		$ 12.05 (c)
Institutional: Net Assets	$ 4,929		$ 9,008
Shares Issued and Outstanding		520	743
Net Asset Value per share	$ 9.48		$ 12.12
R-1: Net Assets	$ 104		$ 988
Shares Issued and Outstanding		11	82
Net Asset Value per share	$ 9.47		$ 12.02
R-2: Net Assets	$ 114		$ 290
Shares Issued and Outstanding		12	24
Net Asset Value per share	$ 9.48		$ 12.03
R-3: Net Assets	$ 569		$ 1,011
Shares Issued and Outstanding		60	84
Net Asset Value per share	$ 9.47		$ 12.06
R-4: Net Assets	$ 528		$ 1,134
Shares Issued and Outstanding		56	94
Net Asset Value per share	$ 9.47		$ 12.07
R-5: Net Assets	$ 562		$ 1,077
Shares Issued and Outstanding		59	89
Net Asset Value per share	$ 9.47		$ 12.09

(a)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

33

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Principal LifeTime		Principal LifeTime	Principal LifeTime
Amounts in thousands	2010 Fund		2020 Fund	2030 Fund
Net Investment Income (Operating Loss)
Income:
Dividends from affiliates	$ 75,530		$ 136,259	$ 108,433
Total Income		75,530	136,259	108,433
Expenses:
Management and investment advisory fees		2,190	4,497	3,905
Distribution fees - Class A		89	153	103
Distribution fees - Class B		N/A	102	86
Distribution fees - Class C		57	77	75
Distribution fees - Class J		1,207	2,506	2,067
Distribution fees - R-1		59	135	110
Distribution fees - R-2		154	309	275
Distribution fees - R-3		223	459	414
Distribution fees - R-4		59	129	125
Administrative service fees - R-1		48	108	87
Administrative service fees - R-2		102	206	183
Administrative service fees - R-3		134	275	249
Administrative service fees - R-4		76	169	163
Administrative service fees - R-5		186	354	279
Registration fees - Class A		14	16	18
Registration fees - Class B		N/A	14	14
Registration fees - Class C		16	16	15
Registration fees - Class J		31	44	43
Service fees - R-1		43	97	78
Service fees - R-2		128	257	229
Service fees - R-3		152	312	282
Service fees - R-4		88	194	188
Service fees - R-5		253	483	381
Shareholder reports - Class A		2	3	4
Shareholder reports - Class B		N/A	1	1
Shareholder reports - Class C		–	1	1
Shareholder reports - Class J		8	22	27
Transfer agent fees - Class A		41	85	85
Transfer agent fees - Class B		N/A	19	20
Transfer agent fees - Class C		9	14	16
Transfer agent fees - Class J		80	242	321
Directors' expenses		42	81	70
Professional fees		14	14	14
Other expenses		27	53	45
Total Gross Expenses		5,532	11,447	9,973
Less: Reimbursement from Manager - Class A		14	28	57
Less: Reimbursement from Manager - Class B		N/A	21	24
Less: Reimbursement from Manager - Class C		18	21	22
Less: Reimbursement from Underwriter - Class J		131	273	225
Total Net Expenses		5,369	11,104	9,645
Net Investment Income (Operating Loss)		70,161	125,155	98,788
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions in affiliates		(34,452 )	(68,548 )	(62,203 )
Other investment companies - affiliated		76,887	178,148	161,820
Change in unrealized appreciation/depreciation of:
Investments in affiliates		(755,873 )	(1,787,703)	(1,643,609 )
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(713,438 )	(1,678,103 )	(1,543,992 )
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (643,277 )		$ (1,552,948 )	$ (1,445,204 )

See accompanying notes.

34

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
				Principal LifeTime
	Principal LifeTime		Principal LifeTime	Strategic Income
Amounts in thousands	2040 Fund		2050 Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends from affiliates	$ 51,480		$ 20,828	$ 30,282
Total Income		51,480	20,828	30,282
Expenses:
Management and investment advisory fees		2,007	825	706
Distribution fees - Class A		63	36	52
Distribution fees - Class B		61	20	8
Distribution fees - Class C		34	18	31
Distribution fees - Class J		885	186	390
Distribution fees - R-1		59	21	30
Distribution fees - R-2		128	54	71
Distribution fees - R-3		196	64	71
Distribution fees - R-4		53	21	17
Administrative service fees - R-1		48	17	24
Administrative service fees - R-2		85	36	47
Administrative service fees - R-3		117	39	43
Administrative service fees - R-4		69	27	21
Administrative service fees - R-5		127	41	44
Registration fees - Class A		15	14	14
Registration fees - Class B		14	16	15
Registration fees - Class C		16	16	16
Registration fees - Class J		34	15	16
Service fees - R-1		42	15	21
Service fees - R-2		107	45	59
Service fees - R-3		133	44	48
Service fees - R-4		80	31	25
Service fees - R-5		173	56	60
Shareholder reports - Class A		3	3	1
Shareholder reports - Class B		1	1	–
Shareholder reports - Class J		18	5	3
Transfer agent fees - Class A		75	58	29
Transfer agent fees - Class B		18	10	6
Transfer agent fees - Class C		12	11	7
Transfer agent fees - Class J		243	75	33
Directors' expenses		37	17	15
Professional fees		14	14	14
Other expenses		23	9	9
Total Gross Expenses		4,990	1,860	1,946
Less: Reimbursement from Manager - Class A		63	57	19
Less: Reimbursement from Manager - Class B		26	24	20
Less: Reimbursement from Manager - Class C		24	25	19
Less: Reimbursement from Manager - Class J		–	1	–
Less: Reimbursement from Underwriter - Class J		96	20	43
Total Net Expenses		4,781	1,733	1,845
Net Investment Income (Operating Loss)		46,699	19,095	28,437
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions in affiliates		(32,237 )	(13,826 )	(6,911 )
Other investment companies - affiliated		83,936	36,321	12,628
Change in unrealized appreciation/depreciation of:
Investments in affiliates		(884,754 )	(372,036)	(176,685 )
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(833,055 )	(349,541 )	(170,968 )
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (786,356 )		$ (330,446 )	$ (142,531 )

See accompanying notes.

35

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	SAM Balanced		SAM Conservative	SAM Conservative
Amounts in thousands	Portfolio		Balanced Portfolio	Growth Portfolio
Net Investment Income (Operating Loss)
Income:
Dividends from affiliates	$ 175,019		$ 29,144	$ 123,857
Total Income		175,019	29,144	123,857
Expenses:
Management and investment advisory fees		13,693	2,067	10,951
Distribution fees - Class A		5,707	757	4,262
Distribution fees - Class B		11,218	1,421	8,581
Distribution fees - Class C		8,528	1,775	8,411
Distribution fees - Class J		129	58	107
Distribution fees - R-1		2	1	2
Distribution fees - R-2		–	1	2
Distribution fees - R-3		7	2	3
Distribution fees - R-4		2	2	3
Administrative service fees - R-1		2	1	2
Administrative service fees - R-2		–	1	1
Administrative service fees - R-3		4	1	2
Administrative service fees - R-4		2	2	4
Administrative service fees - R-5		1	–	–
Registration fees - Class A		48	22	38
Registration fees - Class B		14	14	14
Registration fees - Class C		27	17	39
Registration fees - Class J		19	18	18
Service fees - R-1		2	1	2
Service fees - R-2		–	1	2
Service fees - R-3		5	2	2
Service fees - R-4		2	2	4
Service fees - R-5		1	–	–
Shareholder reports - Class A		195	23	138
Shareholder reports - Class B		133	14	95
Shareholder reports - Class C		57	12	71
Shareholder reports - Class J		2	1	2
Transfer agent fees - Class A		1,879	276	1,634
Transfer agent fees - Class B		1,008	136	864
Transfer agent fees - Class C		626	136	784
Transfer agent fees - Class J		91	40	74
Directors' expenses		127	21	103
Professional fees		15	15	15
Other expenses		76	18	62
Total Gross Expenses		43,622	6,858	36,292
Less: Reimbursement from Manager - Class J		49	31	41
Less: Reimbursement from Underwriter - Class J		14	6	12
Total Net Expenses		43,559	6,821	36,239
Net Investment Income (Operating Loss)		131,460	22,323	87,618
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions in affiliates		35,052	(5 )	(6,119 )
Other investment companies - affiliated		203,710	19,734	234,276
Change in unrealized appreciation/depreciation of:
Investments in affiliates		(1,644,920 )	(184,901)	(1,631,559 )
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(1,406,158 )	(165,172 )	(1,403,402 )
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (1,274,698 )		$ (142,849 )	$ (1,315,784 )

See accompanying notes.

36

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	SAM Flexible		SAM Strategic
Amounts in thousands	Income Portfolio		Growth Portfolio
Net Investment Income (Operating Loss)
Income:
Dividends from affiliates	$ 38,437		$ 71,480
Total Income		38,437	71,480
Expenses:
Management and investment advisory fees		2,561	6,816
Distribution fees - Class A		1,021	2,609
Distribution fees - Class B		2,333	5,572
Distribution fees - Class C		1,526	5,087
Distribution fees - Class J		16	118
Distribution fees - R-1		–	2
Distribution fees - R-2		–	1
Distribution fees - R-3		1	3
Distribution fees - R-4		–	1
Administrative service fees - R-1		–	2
Administrative service fees - R-3		1	2
Administrative service fees - R-4		1	2
Registration fees - Class A		22	28
Registration fees - Class B		19	20
Registration fees - Class C		23	28
Registration fees - Class J		17	23
Service fees - R-1		–	2
Service fees - R-3		1	2
Service fees - R-4		1	2
Shareholder reports - Class A		38	113
Shareholder reports - Class B		30	74
Shareholder reports - Class C		11	56
Shareholder reports - Class J		–	3
Transfer agent fees - Class A		345	1,355
Transfer agent fees - Class B		207	705
Transfer agent fees - Class C		114	623
Transfer agent fees - Class J		21	101
Directors' expenses		25	65
Professional fees		15	15
Other expenses		13	39
Total Gross Expenses		8,362	23,469
Less: Reimbursement from Manager - Class J		30	69
Less: Reimbursement from Underwriter - Class J		2	13
Total Net Expenses		8,330	23,387
Net Investment Income (Operating Loss)		30,107	48,093
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions in affiliates		(2,194 )	(25,560 )
Other investment companies - affiliated		16,361	164,178
Change in unrealized appreciation/depreciation of:
Investments in affiliates		(171,395 )	(1,121,431)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(157,228 )	(982,813 )
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (127,121 )		$ (934,720 )

See accompanying notes.

37

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Principal LifeTime 2010 Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 70,161				$ 42,330
Net realized gain (loss) from investment transactions and foreign currency transactions																42,435			30,078
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(755,873 )			76,638
				Net Increase (Decrease) in Net Assets Resulting from Operations												(643,277)			149,046
Dividends and Distributions to Shareholders
From net investment income																(63,007 )			(34,147 )
From net realized gain on investments																(30,198 )			(6,044 )
								Total Dividends and Distributions								(93,205 )			(40,191 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																309,601			620,817
Redemption fees - Class C																1			–
Redemption fees - Class J																7			2
								Total increase (decrease) in net assets								(426,873)			729,674
Net Assets
Beginning of period																1,808,824			1,079,150
End of period (including undistributed net investment income as set forth below)														$ 1,381,951				$ 1,808,824
Undistributed (overdistributed) net investment income (operating loss)														$ 32,591				$ 25,438
		Class A		Class C		Class J            Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 19,908		$ 2,971		$ 73,172		$ 259,325		$ 12,661		$ 13,170		$ 41,284		$ 31,654		$ 92,487
Reinvested		1,597		237		13,667		59,216		649		2,456		4,215		2,867		8,262
Redeemed		(13,200 )		(2,574 )		(80,497 )		(136,316)		(3,231 )		(11,459 )		(19,440 )		(21,373 )		(42,107 )
Net Increase (Decrease)	$ 8,305		$ 634		$ 6,342		$ 182,225		$ 10,079		$ 4,167		$ 26,059		$ 13,148		$ 58,642
Shares:
Sold		1,638		239		5,977		20,862		1,055		1,065		3,438		2,606		7,572
Reinvested		121		18		1,046		4,525		50		189		324		220		633
Redeemed		(1,128 )		(225 )		(7,046 )		(12,204 )		(285 )		(995 )		(1,666 )		(1,792 )		(3,681 )
Net Increase (Decrease)		631		32		(23 )		13,183		820		259		2,096		1,034		4,524
Year Ended October 31, 2007
Dollars:
Sold	$ 17,247		$ 5,619		$ 106,022		$ 376,536		$ 9,983		$ 21,624		$ 57,134		$ 41,949		$ 83,120
Reinvested		600		–		6,325		26,202		216		1,162		1,654		977		3,051
Redeemed		(4,058 )		(371 )		(35,349 )		(22,171 )		(2,673 )		(8,907 )		(26,748 )		(13,880 )		(24,447 )
Net Increase (Decrease)	$ 13,789		$ 5,248		$ 76,998		$ 380,567		$ 7,526		$ 13,879		$ 32,040		$ 29,046		$ 61,724
Shares:
Sold		1,277		416		7,877		27,839		741		1,616		4,232		3,130		6,175
Reinvested		45		–		482		1,992		16		89		127		74		233
Redeemed		(299 )		(28 )		(2,625 )		(1,631 )		(201 )		(672 )		(1,975 )		(1,036 )		(1,812 )
Net Increase (Decrease)		1,023		388		5,734		28,200		556		1,033		2,384		2,168		4,596
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,064) $		(150) $		(8,936) $		(40,726) $		(407) $		(1,567) $		(2,747) $		(1,896) $		(5,514)
From net realized gain on
investments		(550 )		(93 )		(4,747 )		(18,490 )		(242 )		(889 )		(1,468 )		(971 )		(2,748 )
Total Dividends and Distributions $		(1,614) $		(243) $		(13,683) $		(59,216) $		(649) $		(2,456) $		(4,215) $		(2,867) $		(8,262)
Year Ended October 31, 2007
From net investment income $		(504) $		–	$ (5,252) $			(22,463) $		(181) $		(954) $		(1,369) $		(822) $		(2,602)
From net realized gain on
investments		(98 )		–		(1,075 )		(3,739 )		(35 )		(208 )		(285 )		(155 )		(449 )
Total Dividends and Distributions $		(602) $		–	$ (6,327) $			(26,202) $		(216) $		(1,162) $		(1,654) $		(977) $		(3,051)

See accompanying notes.

38

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Principal LifeTime 2020 Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 125,155				$ 68,255
Net realized gain (loss) from investment transactions and foreign currency transactions																109,600				71,838
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(1,787,703 )					227,663
				Net Increase (Decrease) in Net Assets Resulting from Operations											(1,552,948)					367,756
Dividends and Distributions to Shareholders
From net investment income																(112,290 )				(59,997 )
From net realized gain on investments																(72,000 )				(13,155 )
								Total Dividends and Distributions								(184,290 )				(73,152 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																1,112,129			1,369,868
Redemption fees - Class A																1				1
Redemption fees - Class J																11				4
								Total increase (decrease) in net assets								(625,097)			1,664,477
Net Assets
Beginning of period																3,656,052			1,991,575
End of period (including undistributed net investment income as set forth below)														$ 3,030,955				$ 3,656,052
Undistributed (overdistributed) net investment income (operating loss)														$ 40,575				$ 27,710
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 36,565		$ 2,838		$ 4,152		$ 172,017		$ 702,962		$ 20,177		$ 23,813		$ 84,687		$ 63,863		$ 151,820
Reinvested		2,545		427		285		27,089		117,974		1,537		4,681		8,348		5,927		15,396
Redeemed		(14,704 )		(2,421 )		(2,415 )		(116,078)		(94,982 )		(2,829 )		(11,113 )		(21,883 )		(19,883 )		(48,666 )
Net Increase (Decrease)	$ 24,406		$ 844		$ 2,022		$ 83,028		$ 725,954		$ 18,885		$ 17,381		$ 71,152		$ 49,907		$ 118,550
Shares:
Sold		2,872		223		323		13,646		54,466		1,618		1,897		6,747		5,012		11,814
Reinvested		182		30		21		1,954		8,496		111		339		604		428		1,111
Redeemed		(1,228 )		(204 )		(211 )		(9,702 )		(8,546 )		(243 )		(929 )		(1,798 )		(1,593 )		(3,962)
Net Increase (Decrease)		1,826		49		133		5,898		54,416		1,486		1,307		5,553		3,847		8,963
Year Ended October 31, 2007
Dollars:
Sold	$ 28,998		$ 5,689		$ 6,894		$ 219,804		$ 805,720		$ 21,007		$ 35,124		$ 85,545		$ 69,751		$ 168,406
Reinvested		842		149		–		11,650		48,056		469		2,194		3,009		1,914		4,862
Redeemed		(4,753 )		(1,371 )		(219 )		(55,899 )		(14,938 )		(2,962 )		(10,347 )		(20,413 )		(12,766 )		(26,547 )
Net Increase (Decrease)	$ 25,087		$ 4,467		$ 6,675		$ 175,555		$ 838,838		$ 18,514		$ 26,971		$ 68,141		$ 58,899		$ 146,721
Shares:
Sold		2,038		401		482		15,548		56,917		1,487		2,503		6,035		4,950		11,932
Reinvested		61		11		–		852		3,509		34		161		220		140		356
Redeemed		(333 )		(96 )		(15 )		(3,948 )		(1,073 )		(210 )		(750 )		(1,438 )		(922 )		(1,876)
Net Increase (Decrease)		1,766		316		467		12,452		59,353		1,311		1,914		4,817		4,168		10,412
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,549) $		(225) $		(151) $		(15,734) $		(73,532) $		(841) $		(2,620) $		(4,837) $		(3,520) $		(9,281 )
From net realized gain on
investments		(1,039 )		(211 )		(144 )		(11,371 )		(44,443 )		(696 )		(2,061 )		(3,511 )		(2,408 )		(6,116 )
Total Dividends and Distributions $		(2,588) $		(436) $		(295) $		(27,105) $ (117,975) $				(1,537) $		(4,681) $		(8,348) $		(5,928) $		(15,397 )
Year Ended October 31, 2007
From net investment income $		(684) $		(110) $		–	$ (9,282) $			(39,882) $		(369) $		(1,712) $		(2,398) $		(1,553) $		(4,007 )
From net realized gain on
investments		(161 )		(39 )		–		(2,371 )		(8,174 )		(100 )		(483 )		(611 )		(361 )		(855 )
Total Dividends and Distributions $		(845) $		(149) $		–	$ (11,653) $			(48,056) $		(469) $		(2,195) $		(3,009) $		(1,914) $		(4,862 )

See accompanying notes.

39

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Principal LifeTime 2030 Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 98,788				$ 48,968
Net realized gain (loss) from investment transactions and foreign currency transactions																99,617				66,707
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(1,643,609 )					236,343
				Net Increase (Decrease) in Net Assets Resulting from Operations											(1,445,204)					352,018
Dividends and Distributions to Shareholders
From net investment income																(92,166 )				(45,795 )
From net realized gain on investments																(66,899 )				(12,543 )
								Total Dividends and Distributions								(159,065 )				(58,338 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																1,080,497			1,180,400
Redemption fees - Class J																5				1
								Total increase (decrease) in net assets								(523,767)			1,474,081
Net Assets
Beginning of period																3,123,831			1,649,750
End of period (including undistributed net investment income as set forth below)														$ 2,600,064				$ 3,123,831
Undistributed (overdistributed) net investment income (operating loss)														$ 19,951				$ 13,334
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 21,116		$ 2,916		$ 2,608		$ 159,652		$ 677,900		$ 15,552		$ 19,863		$ 79,904		$ 65,150		$ 126,058
Reinvested		1,910		376		309		22,337		102,812		1,282		4,344		7,619		5,732		12,304
Redeemed		(9,215 )		(1,902 )		(1,210 )		(87,292 )		(60,082 )		(2,283 )		(10,652 )		(23,794 )		(22,498 )		(30,319 )
Net Increase (Decrease)	$ 13,811		$ 1,390		$ 1,707		$ 94,697		$ 720,630		$ 14,551		$ 13,555		$ 63,729		$ 48,384		$ 108,043
Shares:
Sold		1,674		224		201		12,663		52,997		1,235		1,561		6,392		5,045		9,834
Reinvested		136		26		22		1,596		7,350		92		312		545		402		878
Redeemed		(779 )		(161 )		(97 )		(7,248 )		(5,254 )		(191 )		(899 )		(1,920 )		(1,836 )		(2,470)
Net Increase (Decrease)		1,031		89		126		7,011		55,093		1,136		974		5,017		3,611		8,242
Year Ended October 31, 2007
Dollars:
Sold	$ 21,246		$ 4,859		$ 7,463		$ 172,063		$ 719,343		$ 15,885		$ 32,570		$ 82,347		$ 55,649		$ 122,529
Reinvested		603		102		–		8,995		38,118		340		1,784		2,564		1,931		3,890
Redeemed		(3,142 )		(901 )		(274 )		(46,903 )		(4,507 )		(1,364 )		(5,667 )		(16,713 )		(9,467 )		(22,943 )
Net Increase (Decrease)	$ 18,707		$ 4,060		$ 7,189		$ 134,155		$ 752,954		$ 14,861		$ 28,687		$ 68,198		$ 48,113		$ 103,476
Shares:
Sold		1,498		342		522		12,143		50,733		1,126		2,324		5,766		3,859		8,679
Reinvested		44		7		–		659		2,792		25		131		188		139		285
Redeemed		(221 )		(63 )		(19 )		(3,306 )		(317 )		(98 )		(410 )		(1,166 )		(673 )		(1,599)
Net Increase (Decrease)		1,321		286		503		9,496		53,208		1,053		2,045		4,788		3,325		7,365
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,088) $		(185) $		(156) $		(12,244) $		(61,143) $		(659) $		(2,285) $		(4,176) $		(3,215) $		(7,015 )
From net realized gain on
investments		(844 )		(196 )		(166 )		(10,093 )		(41,669 )		(623 )		(2,059 )		(3,443 )		(2,517 )		(5,289 )
Total Dividends and Distributions $		(1,932) $		(381) $		(322)     $		(22,337)                  $ (102,812) $				(1,282) $		(4,344) $		(7,619) $		(5,732) $		(12,304 )
Year Ended October 31, 2007
From net investment income $		(469) $		(70) $		–	$ (6,777) $			(30,412) $		(248) $		(1,317) $		(1,949) $		(1,489) $		(3,064 )
From net realized gain on
investments		(142 )		(33 )		–		(2,220 )		(7,706 )		(92 )		(467 )		(615 )		(442 )		(826 )
Total Dividends and Distributions $		(611) $		(103) $		–	$ (8,997) $			(38,118) $		(340) $		(1,784) $		(2,564) $		(1,931) $		(3,890 )

See accompanying notes.

40

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Principal LifeTime 2040 Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 46,699				$ 20,462
Net realized gain (loss) from investment transactions and foreign currency transactions																51,699				32,072
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(884,754 )				133,266
				Net Increase (Decrease) in Net Assets Resulting from Operations												(786,356)				185,800
Dividends and Distributions to Shareholders
From net investment income																(45,241 )				(20,326 )
From net realized gain on investments																(32,146 )				(5,628 )
								Total Dividends and Distributions								(77,387 )				(25,954 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																672,087				641,626
Redemption fees - Class A																1				–
Redemption fees - Class J																3				1
								Total increase (decrease) in net assets								(191,652)				801,473
Net Assets
Beginning of period																1,557,572				756,099
End of period (including undistributed net investment income as set forth below)														$ 1,365,920				$ 1,557,572
Undistributed (overdistributed) net investment income (operating loss)														$ 4,682				$ 3,224
		Class A		Class B		Class C		Class J             Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 13,329		$ 2,498		$ 1,784		$ 85,442		$ 430,896		$ 9,705		$ 12,473		$ 42,336		$ 35,127		$ 60,230
Reinvested		1,174		245		137		8,870		53,262		648		1,904		3,477		2,221		5,435
Redeemed		(5,848 )		(936 )		(1,014 )		(35,355 )		(21,148 )		(818 )		(4,794 )		(10,392 )		(6,268 )		(12,533 )
Net Increase (Decrease)	$ 8,655		$ 1,807		$ 907		$ 58,957		$ 463,010		$ 9,535		$ 9,583		$ 35,421		$ 31,080		$ 53,132
Shares:
Sold		1,051		198		136		6,655		33,322		771		974		3,466		2,773		4,663
Reinvested		82		17		10		619		3,705		45		133		243		155		379
Redeemed		(485 )		(77 )		(84 )		(2,886 )		(1,799 )		(66 )		(392 )		(838 )		(483 )		(987 )
Net Increase (Decrease)		648		138		62		4,388		35,228		750		715		2,871		2,445		4,055
Year Ended October 31, 2007
Dollars:
Sold	$ 14,035		$ 2,905		$ 3,038		$ 83,153		$ 411,471		$ 8,797		$ 15,912		$ 39,804		$ 31,205		$ 60,382
Reinvested		340		70		–		3,240		18,165		155		719		1,115		516		1,629
Redeemed		(1,740 )		(524 )		(98 )		(22,409 )		(1,259 )		(601 )		(2,893 )		(9,283 )		(4,025 )		(12,193 )
Net Increase (Decrease)	$ 12,635		$ 2,451		$ 2,940		$ 63,984		$ 428,377		$ 8,351		$ 13,738		$ 31,636		$ 27,696		$ 49,818
Shares:
Sold		981		204		211		5,731		28,461		613		1,104		2,744		2,160		4,167
Reinvested		24		5		–		234		1,306		11		52		81		37		117
Redeemed		(120 )		(37 )		(7 )		(1,546 )		(89 )		(42 )		(204 )		(635 )		(285 )		(829 )
Net Increase (Decrease)		885		172		204		4,419		29,678		582		952		2,190		1,912		3,455
Distributions:
Year Ended October 31, 2008
From net investment income $		(666) $		(120) $		(67) $		(4,855) $		(31,889) $		(336) $		(1,000) $		(1,911) $		(1,255) $		(3,142 )
From net realized gain on
investments		(515 )		(127 )		(71 )		(4,018 )		(21,373 )		(312 )		(904 )		(1,567 )		(966 )		(2,293 )
Total Dividends and Distributions $		(1,181) $		(247) $		(138) $		(8,873) $		(53,262) $		(648) $		(1,904) $		(3,478) $		(2,221) $		(5,435 )
Year Ended October 31, 2007
From net investment income $		(266) $		(47) $		–	$ (2,409) $			(14,452) $		(113) $		(525) $		(841) $		(398) $		(1,275 )
From net realized gain on
investments		(77 )		(23 )		–		(831 )		(3,713 )		(42 )		(195 )		(274 )		(119 )		(354 )
Total Dividends and Distributions $		(343) $		(70) $		–	$ (3,240) $			(18,165) $		(155) $		(720) $		(1,115) $		(517) $		(1,629 )

See accompanying notes.

41

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Principal LifeTime 2050 Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 19,095				$ 9,123
Net realized gain (loss) from investment transactions and foreign currency transactions																22,495				16,186
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(372,036 )				56,642
				Net Increase (Decrease) in Net Assets Resulting from Operations												(330,446)				81,951
Dividends and Distributions to Shareholders
From net investment income																(19,198 )				(8,710 )
From net realized gain on investments																(16,262 )				(2,938 )
								Total Dividends and Distributions								(35,460 )				(11,648 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																265,480				240,237
Redemption fees - Class J																–				1
								Total increase (decrease) in net assets								(100,426)				310,541
Net Assets
Beginning of period																652,984				342,443
End of period (including undistributed net investment income as set forth below)														$ 552,558				$ 652,984
Undistributed (overdistributed) net investment income (operating loss)														$ 944				$ 1,047
	Class A			Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 6,525		$ 720		$ 1,027		$ 17,235		$ 191,812		$ 4,248		$ 6,340		$ 13,767		$ 13,603		$ 20,837
Reinvested		739		93		65		2,083		27,103		240		888		1,272		968		1,991
Redeemed		(2,891 )		(361 )		(491 )		(9,370 )		(15,232 )		(828 )		(2,697 )		(4,707 )		(3,222 )		(6,277 )
Net Increase (Decrease)	$ 4,373		$ 452		$ 601		$ 9,948		$ 203,683		$ 3,660		$ 4,531		$ 10,332		$ 11,349		$ 16,551
Shares:
Sold		533		58		82		1,390		15,415		347		512		1,158		1,128		1,676
Reinvested		53		7		5		151		1,941		17		64		92		69		143
Redeemed		(252 )		(30 )		(44 )		(780 )		(1,346 )		(74 )		(220 )		(390 )		(261 )		(508 )
Net Increase (Decrease)		334		35		43		761		16,010		290		356		860		936		1,311
Year Ended October 31, 2007
Dollars:
Sold	$ 8,400		$ 1,748		$ 2,229		$ 20,796		$ 162,738		$ 3,281		$ 6,378		$ 15,175		$ 10,774		$ 23,533
Reinvested		180		11		–		630		9,335		49		337		423		243		439
Redeemed		(886 )		(308 )		(741 )		(5,615 )		(4,610 )		(539 )		(2,389 )		(5,114 )		(1,792 )		(4,468 )
Net Increase (Decrease)	$ 7,694		$ 1,451		$ 1,488		$ 15,811		$ 167,463		$ 2,791		$ 4,326		$ 10,484		$ 9,225		$ 19,504
Shares:
Sold		597		125		156		1,488		11,528		234		455		1,089		762		1,673
Reinvested		13		1		–		47		691		4		25		32		18		32
Redeemed		(62 )		(22 )		(54 )		(402 )		(331 )		(40 )		(171 )		(359 )		(128 )		(314 )
Net Increase (Decrease)		548		104		102		1,133		11,888		198		309		762		652		1,391
Distributions:
Year Ended October 31, 2008
From net investment income $		(390) $		(41) $		(31) $		(1,033) $		(14,966) $		(113) $		(428) $		(635) $		(501) $		(1,060 )
From net realized gain on
investments		(361 )		(52 )		(39 )		(1,051 )		(12,137 )		(127 )		(460 )		(637 )		(467 )		(931 )
Total Dividends and Distributions $		(751) $		(93) $		(70) $		(2,084) $		(27,103) $		(240) $		(888) $		(1,272) $		(968) $		(1,991 )
Year Ended October 31, 2007
From net investment income $		(130) $		(7) $		–	$ (437) $			(7,072) $		(33) $		(229) $		(302) $		(176) $		(324 )
From net realized gain on
investments		(50 )		(4 )		–		(193 )		(2,264 )		(16 )		(108 )		(121 )		(67 )		(115 )
Total Dividends and Distributions $		(180) $		(11) $		–	$ (630) $			(9,336) $		(49) $		(337) $		(423) $		(243) $		(439 )

See accompanying notes.

42

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
														Principal LifeTime Strategic Income
Amounts in thousands																Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 28,437				$ 20,766
Net realized gain (loss) from investment transactions and foreign currency transactions																5,717				7,416
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(176,685 )				(2,647 )
				Net Increase (Decrease) in Net Assets Resulting from Operations												(142,531)				25,535
Dividends and Distributions to Shareholders
From net investment income																(24,669 )				(14,191 )
From net realized gain on investments																(7,537 )				(1,849 )
								Total Dividends and Distributions								(32,206 )				(16,040 )
Capital Share Transactions
Net increase (decrease) in capital share transactions																79,697				149,226
Redemption fees - Class C																–				2
Redemption fees - Class J																2				2
								Total increase (decrease) in net assets								(95,038)				158,725
Net Assets
Beginning of period																563,136				404,411
End of period (including undistributed net investment income as set forth below)														$ 468,098				$ 563,136
Undistributed (overdistributed) net investment income (operating loss)														$ 19,968				$ 16,200
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 14,524		$ 633		$ 2,314		$ 16,729		$ 141,616		$ 10,937		$ 15,097		$ 20,541		$ 18,039		$ 34,580
Reinvested		787		35		119		4,917		20,188		237		1,437		1,615		657		2,134
Redeemed		(7,501 )		(370 )		(1,051 )		(31,394 )		(109,035)		(7,760 )		(16,904 )		(18,017 )		(8,142 )		(27,265 )
Net Increase (Decrease)	$ 7,810		$ 298		$ 1,382		$ (9,748) $			52,769	$ 3,414		$ (370) $			4,139	$ 10,554		$ 9,449
Shares:
Sold		1,256		58		210		1,463		12,076		931		1,285		1,767		1,581		2,963
Reinvested		65		3		10		409		1,675		20		120		135		54		177
Redeemed		(677 )		(33 )		(95 )		(2,847 )		(9,562 )		(677 )		(1,483 )		(1,561 )		(736 )		(2,371 )
Net Increase (Decrease)		644		28		125		(975 )		4,189		274		(78 )		341		899		769
Year Ended October 31, 2007
Dollars:
Sold	$ 10,566		$ 732		$ 2,905		$ 29,337		$ 116,879		$ 8,494		$ 8,272		$ 29,385		$ 11,872		$ 40,879
Reinvested		255		4		–		2,874		10,371		105		707		694		188		820
Redeemed		(2,073 )		(104 )		(374 )		(19,533 )		(42,111 )		(6,441 )		(4,421 )		(20,259 )		(5,015 )		(25,782 )
Net Increase (Decrease)	$ 8,748		$ 632		$ 2,531		$ 12,678		$ 85,139		$ 2,158		$ 4,558		$ 9,820		$ 7,045		$ 15,917
Shares:
Sold		832		58		230		2,335		9,272		673		658		2,329		946		3,253
Reinvested		20		–		–		231		832		8		57		56		15		66
Redeemed		(163 )		(8 )		(30 )		(1,557 )		(3,330 )		(509 )		(355 )		(1,619 )		(399 )		(2,055 )
Net Increase (Decrease)		689		50		200		1,009		6,774		172		360		766		562		1,264
Distributions:
Year Ended October 31, 2008
From net investment income $		(625) $		(25) $		(91) $		(3,719) $		(15,608) $		(176) $		(1,102) $		(1,190) $		(500) $		(1,633 )
From net realized gain on
investments		(197 )		(10 )		(35 )		(1,235 )		(4,581 )		(61 )		(335 )		(425 )		(157 )		(501 )
Total Dividends and Distributions $		(822) $		(35) $		(126 ) $		(4,954) $		(20,189) $		(237) $		(1,437) $		(1,615) $		(657) $		(2,134 )
Year Ended October 31, 2007
From net investment income $		(237) $		(3) $		–	$ (2,512) $			(9,247) $		(80) $		(611) $		(606) $		(168) $		(727 )
From net realized gain on
investments		(33 )		(1 )		–		(369 )		(1,124 )		(25 )		(96 )		(88 )		(20 )		(93 )
Total Dividends and Distributions $		(270) $		(4) $		–	$ (2,881) $			(10,371) $		(105) $		(707) $		(694) $		(188) $		(820 )

See accompanying notes.

43

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands														SAM Balanced Portfolio
												Year Ended				Year Ended
												October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)												$ 131,460				$ 97,866
Net realized gain (loss) from investment transactions and foreign currency transactions														238,762				231,383
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies													(1,644,920 )					298,868
			Net Increase (Decrease) in Net Assets Resulting from Operations										(1,274,698)					628,117
Dividends and Distributions to Shareholders
From net investment income														(144,893 )				(82,911 )
From net realized gain on investments														(235,184 )				(24,656 )
						Total Dividends and Distributions								(380,077 )			(107,567 )
Capital Share Transactions
Net increase (decrease) in capital share transactions														(126,831 )			(262,928 )
Redemption fees - Class A														39				21
Redemption fees - Class B														8				3
Redemption fees - Class C														4				3
Redemption fees - Class J														5				–
						Total increase (decrease) in net assets							(1,781,550)					257,649
Net Assets
Beginning of period														4,945,205			4,687,556
End of period (including undistributed net investment income as set forth below)												$ 3,163,655				$ 4,945,205
Undistributed (overdistributed) net investment income (operating loss)												$ 5,129				$ 18,570
		Class A	Class B	Class C		Class J           Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 428,074 $		76,306 $	135,728	$ 76,965		$ 30,199		$ 1,414		$ 234		$ 3,789		$ 1,415		$ 4,464
Reinvested		191,464	90,907	66,000		845		1,044		12		5		120		129		18
Redeemed		(650,780)	(370,680 )	(201,187)		(8,093 )		(4,073 )		(58 )		(54 )		(361 )		(450 )		(227 )
Net Increase (Decrease)	$ (31,242) $ (203,467 ) $			541	$ 69,717		$ 27,170		$ 1,368		$ 185		$ 3,548		$ 1,094		$ 4,255
Shares:
Sold		31,261	5,590	9,965		5,936		2,163		101		17		283		106		361
Reinvested		13,062	6,167	4,511		63		74		1		1		8		9		1
Redeemed		(49,190 )	(27,869 )	(15,207 )		(676 )		(325 )		(4 )		(5 )		(27 )		(34 )		(19 )
Net Increase (Decrease)		(4,867 )	(16,112 )	(731 )		5,323		1,912		98		13		264		81		343
Periods Ended October 31, 2007
Dollars:
Sold	$ 407,827 $		78,092 $	143,604	$ 2,630		$ 1,400		$ 16		$ 16		$ 1,127		$ 1,647		$ 10
Reinvested		58,445	23,931	15,754		8		6		–		–		4		6		–
Redeemed		(530,058)	(289,746 )	(177,187)		(144 )		(66 )		–		–		(3 )		(247 )		–
Net Increase (Decrease)	$ (63,786)          $ (187,723 ) $			(17,829) $		2,494	$ 1,340		$ 16		$ 16		$ 1,128		$ 1,406		$ 10
Shares:
Sold		26,884	5,185	9,574		172		90		1		1		74		109		1
Reinvested		3,898	1,607	1,063		–		–		–		–		–		–		–
Redeemed		(35,129 )	(19,178 )	(11,795 )		(9 )		(4 )		–		–		–		(16 )		–
Net Increase (Decrease)		(4,347 )	(12,386 )	(1,158 )		163		86		1		1		74		93		1
Distributions:
Year Ended October 31, 2008
From net investment income $		(84,233) $	(33,886) $	(25,413) $		(621) $		(598) $		(10) $		(3) $		(63) $		(57) $		(9 )
From net realized gain on
investments		(123,252)	(64,696 )	(46,422 )		(225 )		(447 )		(2 )		(2 )		(57 )		(72 )		(9 )
Total Dividends and Distributions $ (207,485) $			(98,582) $	(71,835) $		(846) $		(1,045) $		(12) $		(5) $		(120) $		(129) $		(18 )
Periods Ended October 31, 2007
From net investment income $		(51,513) $	(18,811) $	(12,562) $		(8) $		(6) $		–	$ –		$ (4) $			(7) $		–
From net realized gain on
investments		(12,543 )	(7,405 )	(4,708 )		–		–		–		–		–		–		–
Total Dividends and Distributions $		(64,056) $	(26,216) $	(17,270) $		(8) $		(6) $		–	$ –		$ (4) $			(7) $		–

See accompanying notes.

44

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands													SAM Conservative Balanced Portfolio
													Year Ended				Year Ended
													October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)													$ 22,323				$ 18,042
Net realized gain (loss) from investment transactions and foreign currency transactions															19,729				21,470
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(184,901 )				26,879
				Net Increase (Decrease) in Net Assets Resulting from Operations											(142,849)				66,391
Dividends and Distributions to Shareholders
From net investment income															(24,102 )				(16,049 )
From net realized gain on investments															(22,823 )				(4,480 )
							Total Dividends and Distributions								(46,925 )				(20,529 )
Capital Share Transactions
Net increase (decrease) in capital share transactions															81,842				(32,649 )
Redemption fees - Class A															26				4
Redemption fees - Class B															6				–
Redemption fees - Class C															7				–
Redemption fees - Class J															1				–
							Total increase (decrease) in net assets								(107,892)				13,217
Net Assets
Beginning of period															660,809				647,592
End of period (including undistributed net investment income as set forth below)													$ 552,917				$ 660,809
Undistributed (overdistributed) net investment income (operating loss)													$ 1,303				$ 3,082
		Class A		Class B	Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 100,556		$ 25,406 $		57,820	$ 35,733		$ 22,937		$ 550		$ 742		$ 795		$ 1,960		$ 1,041
Reinvested		20,996		9,142	10,868		454		427		9		15		56		126		6
Redeemed		(104,187)		(45,507)	(48,406 )		(5,193 )		(3,371 )		(198 )		(110 )		(208 )		(549 )		(68 )
Net Increase (Decrease)	$ 17,365		$ (10,959) $		20,282	$ 30,994		$ 19,993		$ 361		$ 647		$ 643		$ 1,537		$ 979
Shares:
Sold		9,605		2,444	5,536		3,463		2,147		50		70		79		171		106
Reinvested		1,909		827	991		44		41		1		1		5		12		–
Redeemed		(10,133 )		(4,408 )	(4,740 )		(524 )		(334 )		(20 )		(11 )		(21 )		(51 )		(7 )
Net Increase (Decrease)		1,381		(1,137 )	1,787		2,983		1,854		31		60		63		132		99
Periods Ended October 31, 2007
Dollars:
Sold	$ 58,266		$ 11,985 $		34,191	$ 913		$ 810		$ 10		$ 27		$ 932		$ 484		$ 10
Reinvested		9,807		3,996	4,326		5		4		–		–		4		3		–
Redeemed		(82,635 )		(34,921 )	(40,305 )		(40 )		(103 )		–		(3 )		(260 )		(155 )		–
Net Increase (Decrease)	$ (14,562) $			(18,940) $	(1,788) $		878	$ 711		$ 10		$ 24		$ 676		$ 332		$ 10
Shares:
Sold		5,109		1,056	3,018		79		70		1		2		80		42		1
Reinvested		865		354	384		–		1		–		–		–		–		–
Redeemed		(7,230 )		(3,068 )	(3,555 )		(3 )		(9 )		–		–		(22 )		(13 )		–
Net Increase (Decrease)		(1,256 )		(1,658 )	(153 )		76		62		1		2		58		29		1
Distributions:
Year Ended October 31, 2008
From net investment income $		(12,379) $		(4,807) $	(5,982) $		(412) $		(400) $		(7) $		(13) $		(32) $		(66) $		(4 )
From net realized gain on
investments		(10,919 )		(5,458 )	(6,287 )		(42 )		(27 )		(2 )		(2 )		(24 )		(60 )		(2 )
Total Dividends and Distributions $		(23,298) $		(10,265) $	(12,269) $		(454) $		(427) $		(9) $		(15) $		(56) $		(126) $		(6 )
Periods Ended October 31, 2007
From net investment income $		(8,920) $		(3,406) $	(3,707) $		(5) $		(4) $		–	$ –		$ (4) $			(3) $		–
From net realized gain on
investments		(2,143 )		(1,148 )	(1,189 )		–		–		–		–		–		–		–
Total Dividends and Distributions $		(11,063) $		(4,554) $	(4,896) $		(5) $		(4) $		–	$ –		$ (4) $			(3) $		–

See accompanying notes.

45

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands												SAM Conservative Growth Portfolio
												Year Ended				Year Ended
												October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)												$ 87,618				$ 50,867
Net realized gain (loss) from investment transactions and foreign currency transactions														228,157				238,770
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies													(1,631,559 )					320,702
				Net Increase (Decrease) in Net Assets Resulting from Operations									(1,315,784)					610,339
Dividends and Distributions to Shareholders
From net investment income														(93,305 )				(34,083 )
From net realized gain on investments														(235,742 )				–
						Total Dividends and Distributions								(329,047 )				(34,083 )
Capital Share Transactions
Net increase (decrease) in capital share transactions														(51,093 )			(298,126 )
Redemption fees - Class A														11				18
Redemption fees - Class B														1				2
Redemption fees - Class C														3				7
Redemption fees - Class J														1				–
						Total increase (decrease) in net assets							(1,695,908)					278,157
Net Assets
Beginning of period														4,100,948			3,822,791
End of period (including undistributed net investment income as set forth below)												$ 2,405,040				$ 4,100,948
Undistributed (overdistributed) net investment income (operating loss)												$ 15,627				$ 21,316
		Class A		Class B	Class C	Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 279,110		$ 53,081 $		103,114 $	53,721	$ 28,079		$ 1,513		$ 1,494		$ 1,459		$ 735		$ 4,555
Reinvested		156,241		79,647	72,567	562		315		7		44		61		260		2
Redeemed		(420,537)		(269,204 )	(182,239)	(8,079 )		(6,722 )		(77 )		(233 )		(131 )		(280 )		(158 )
Net Increase (Decrease)	$ 14,814		$ (136,476) $		(6,558) $	46,204	$ 21,672		$ 1,443		$ 1,305		$ 1,389		$ 715		$ 4,399
Shares:
Sold		18,060		3,529	6,957	3,638		1,824		98		94		98		48		337
Reinvested		9,067		4,788	4,398	33		19		1		3		3		15		–
Redeemed		(28,243 )		(18,566 )	(12,697 )	(579 )		(455 )		(5 )		(16 )		(9 )		(19 )		(13 )
Net Increase (Decrease)		(1,116 )		(10,249 )	(1,342 )	3,092		1,388		94		81		92		44		324
Periods Ended October 31, 2007
Dollars:
Sold	$ 265,545		$ 58,116 $		135,019 $	3,602	$ 1,358		$ 22		$ 32		$ 692		$ 3,021		$ 13
Reinvested		21,503		5,309	5,114	–		–		–		–		–		–		–
Redeemed		(385,977)		(226,528 )	(184,617)	(140 )		(1 )		–		(3 )		(6 )		(200 )		–
Net Increase (Decrease)	$ (98,929) $ (163,103) $				(44,484) $	3,462	$ 1,357		$ 22		$ 29		$ 686		$ 2,821		$ 13
Shares:
Sold		15,200		3,455	8,080	202		77		1		2		39		173		1
Reinvested		1,281		326	316	–		–		–		–		–		–		–
Redeemed		(22,181 )		(13,418 )	(11,041 )	(8 )		–		–		–		(1 )		(11 )		–
Net Increase (Decrease)		(5,700 )		(9,637 )	(2,645 )	194		77		1		2		38		162		1
Distributions:
Year Ended October 31, 2008
From net investment income $		(51,780) $		(21,025) $	(20,046) $	(203) $		(134) $		(3) $		(13) $		(19) $		(81) $		(1 )
From net realized gain on
investments		(113,250)		(62,904 )	(58,790 )	(359 )		(181 )		(4 )		(32 )		(42 )		(179 )		(1 )
Total Dividends and Distributions $ (165,030) $				(83,929) $	(78,836) $	(562) $		(315) $		(7) $		(45) $		(61) $		(260) $		(2 )
Periods Ended October 31, 2007
From net investment income $		(22,880) $		(5,623) $	(5,580) $	–	$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		–		–	–	–		–		–		–		–		–		–
Total Dividends and Distributions $		(22,880) $		(5,623) $	(5,580) $	–	$ –		$ –		$ –		$ –		$ –		$ –

See accompanying notes.

46

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands													SAM Flexible Income Portfolio
													Year Ended				Year Ended
													October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)													$ 30,107				$ 27,576
Net realized gain (loss) from investment transactions and foreign currency transactions															14,167				16,583
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(171,395 )				12,426
				Net Increase (Decrease) in Net Assets Resulting from Operations											(127,121)				56,585
Dividends and Distributions to Shareholders
From net investment income															(30,696 )				(27,064 )
From net realized gain on investments															(18,079 )				(2,757 )
							Total Dividends and Distributions								(48,775 )				(29,821 )
Capital Share Transactions
Net increase (decrease) in capital share transactions															59,838				(97,204 )
Redemption fees - Class A															27				6
Redemption fees - Class B															8				2
Redemption fees - Class C															15				2
Redemption fees - Class J															2				–
							Total increase (decrease) in net assets								(116,006)				(70,430 )
Net Assets
Beginning of period															796,884				867,314
End of period (including undistributed net investment income as set forth below)													$ 680,878				$ 796,884
Undistributed (overdistributed) net investment income (operating loss)													$ 2,106				$ 2,695
		Class A		Class B	Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 194,859		$ 58,052 $		72,086	$ 12,844		$ 19,909		$ 116		$ 34		$ 502		$ 566		$ 682
Reinvested		22,899		12,070	7,621		145		256		2		6		21		26		10
Redeemed		(171,339)		(103,880 )	(50,315 )		(2,749 )		(13,994 )		(7 )		(2 )		(158 )		(356 )		(68 )
Net Increase (Decrease)	$ 46,419		$ (33,758) $		29,392	$ 10,240		$ 6,171		$ 111		$ 38		$ 365		$ 236		$ 624
Shares:
Sold		17,811		5,353	6,614		1,221		1,780		11		3		47		54		63
Reinvested		2,041		1,069	682		14		24		–		1		2		2		1
Redeemed		(16,052 )		(9,572 )	(4,679 )		(270 )		(1,292 )		(1 )		–		(14 )		(32 )		(6 )
Net Increase (Decrease)		3,800		(3,150 )	2,617		965		512		10		4		35		24		58
Periods Ended October 31, 2007
Dollars:
Sold	$ 82,035		$ 18,257 $		38,621	$ 522		$ 111		$ 10		$ 99		$ 296		$ 406		$ 10
Reinvested		13,627		8,075	4,092		1		1		–		–		3		4		–
Redeemed		(116,583)		(94,480 )	(52,225 )		(25 )		(21 )		–		–		–		(40 )		–
Net Increase (Decrease)	$ (20,921) $			(68,148) $	(9,512) $		498	$ 91		$ 10		$ 99		$ 299		$ 370		$ 10
Shares:
Sold		7,022		1,567	3,326		44		10		1		8		25		35		1
Reinvested		1,171		695	354		–		–		–		–		–		–		–
Redeemed		(9,974 )		(8,089 )	(4,493 )		(2 )		(2 )		–		–		–		(3 )		–
Net Increase (Decrease)		(1,781 )		(5,827 )	(813 )		42		8		1		8		25		32		1
Distributions:
Year Ended October 31, 2008
From net investment income $		(17,049) $		(7,991) $	(5,225) $		(130) $		(257) $		(2) $		(4 ) $		(14) $		(16) $		(8 )
From net realized gain on
investments		(8,932 )		(5,760 )	(3,348 )		(15 )		(3 )		–		(2 )		(7 )		(10 )		(2 )
Total Dividends and Distributions $		(25,981) $		(13,751) $	(8,573) $		(145) $		(260) $		(2) $		(6 ) $		(21) $		(26) $		(10 )
Periods Ended October 31, 2007
From net investment income $		(14,465) $		(8,367) $	(4,223) $		(1) $		(1) $		–	$ –		$ (3) $			(4) $		–
From net realized gain on
investments		(1,285 )		(1,004 )	(468 )		–		–		–		–		–		–		–
Total Dividends and Distributions $		(15,750) $		(9,371) $	(4,691) $		(1) $		(1) $		–	$ –		$ (3) $			(4) $		–

See accompanying notes.

47

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands												SAM Strategic Growth Portfolio
												Year Ended				Year Ended
												October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)												$ 48,093				$ 22,266
Net realized gain (loss) from investment transactions and foreign currency transactions														138,618				141,625
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies													(1,121,431 )					246,017
				Net Increase (Decrease) in Net Assets Resulting from Operations										(934,720)				409,908
Dividends and Distributions to Shareholders
From net investment income														(52,103 )				(19,484 )
From net realized gain on investments														(143,018 )				–
						Total Dividends and Distributions								(195,121 )				(19,484 )
Capital Share Transactions
Net increase (decrease) in capital share transactions														13,574			(141,294 )
Redemption fees - Class A														11				7
Redemption fees - Class B														2				1
Redemption fees - Class C														3				9
Redemption fees - Class J														2				–
						Total increase (decrease) in net assets							(1,116,249)					249,147
Net Assets
Beginning of period														2,587,687			2,338,540
End of period (including undistributed net investment income as set forth below)												$ 1,471,438				$ 2,587,687
Undistributed (overdistributed) net investment income (operating loss)												$ 196				$ 4,206
		Class A		Class B	Class C	Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 191,379		$ 29,195 $		61,875 $	58,149	$ 14,918		$ 1,532		$ 379		$ 1,017		$ 696		$ 1,442
Reinvested		89,543		50,383	42,038	599		264		17		6		62		103		3
Redeemed		(237,070)		(174,437 )	(107,435)	(6,501 )		(3,795 )		(151 )		(17 )		(245 )		(251 )		(124 )
Net Increase (Decrease)	$ 43,852		$ (94,859) $		(3,522) $	52,247	$ 11,387		$ 1,398		$ 368		$ 834		$ 548		$ 1,321
Shares:
Sold		11,362		1,832	3,856	3,554		889		88		23		61		41		97
Reinvested		4,658		2,767	2,304	32		14		1		–		3		6		–
Redeemed		(14,440 )		(11,137 )	(6,915 )	(427 )		(230 )		(9 )		(1 )		(17 )		(15 )		(9 )
Net Increase (Decrease)		1,580		(6,538 )	(755 )	3,159		673		80		22		47		32		88
Periods Ended October 31, 2007
Dollars:
Sold	$ 195,805		$ 44,755 $		91,254 $	3,744	$ 1,505		$ 48		$ 46		$ 754		$ 1,266		$ 10
Reinvested		12,022		3,319	2,830	–		–		–		–		–		–		–
Redeemed		(232,834)		(151,100 )	(114,425)	(121 )		(92 )		(8 )		(3 )		(8 )		(61 )		–
Net Increase (Decrease)	$ (25,007) $ (103,026 ) $				(20,341) $	3,623	$ 1,413		$ 40		$ 43		$ 746		$ 1,205		$ 10
Shares:
Sold		10,059		2,417	4,927	189		75		2		2		38		65		1
Reinvested		647		188	159	–		–		–		–		–		–		–
Redeemed		(12,031 )		(8,177 )	(6,200 )	(6 )		(5 )		–		–		(1 )		(3 )		–
Net Increase (Decrease)		(1,325 )		(5,572 )	(1,114 )	183		70		2		2		37		62		1
Distributions:
Year Ended October 31, 2008
From net investment income $		(28,508) $		(12,490) $	(10,736) $	(218) $		(91) $		(7) $		(2) $		(19) $		(31) $		(1 )
From net realized gain on
investments		(66,459 )		(41,008 )	(34,865 )	(381 )		(173 )		(10 )		(5 )		(43 )		(72 )		(2 )
Total Dividends and Distributions $		(94,967) $		(53,498) $	(45,601) $	(599) $		(264) $		(17) $		(7) $		(62) $		(103) $		(3 )
Periods Ended October 31, 2007
From net investment income $		(12,863) $		(3,534) $	(3,087) $	–	$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		–		–	–	–		–		–		–		–		–		–
Total Dividends and Distributions $		(12,863) $		(3,534) $	(3,087) $	–	$ –		$ –		$ –		$ –		$ –		$ –

See accompanying notes.

48

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

1. Organization

Principal Funds, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company and operates as a series fund in the mutual fund industry. At October 31, 2008, the Fund consists of 74 separate funds. The financial statements for Principal LifeTime 2010 Fund, Principal LifeTime 2020 Fund, Principal LifeTime 2030 Fund, Principal LifeTime 2040 Fund, Principal LifeTime 2050 Fund, Principal LifeTime Strategic Income Fund, SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, and SAM Strategic Growth Portfolio (known as the "Funds") are presented herein. The Funds may offer up to ten classes of shares: Class A, Class B, Class C, Class J, Institutional, R-1, R-2, R-3, R-4, and R-5. Information presented in these financial statements pertains to the Class A, Class B, and Class C shares. Certain detailed financial information for the Class J, Institutional, R-1, R-2, R-3, R-4, and R-5 classes of shares is provided separately.

On December 31, 2006, Principal Financial Services, Inc. and its subsidiary, Principal Management Corporation (the “Manager”) acquired all of the outstanding stock of WM Advisors, Inc., WM Shareholder Services, Inc., and WM Funds Distributor, Inc. (the “Transaction”). Immediately following the Transaction, WM Advisors, Inc., WM Shareholder Services, Inc., and WM Funds Distributor, Inc. were renamed, Edge Asset Management, Inc., Principal Shareholder Services, Inc., and Principal Funds Distributor, Inc., respectively.

Effective January 10, 2007, the initial purchases of $10,000 of Class C shares of Principal LifeTime 2010 Fund, Principal LifeTime 2020 Fund, Principal LifeTime 2030 Fund, Principal LifeTime 2040 Fund, Principal LifeTime 2050 Fund, and Principal LifeTime Strategic Income Fund (collectively, the “Principal LifeTime Funds”), respectively, were made by Principal Life Insurance Company.

Effective January 12, 2007, SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, and SAM Strategic Growth Portfolio (the “Acquiring Funds”) acquired all the assets and assumed all the liabilities in a tax-free reorganization of a corresponding series of WM Strategic Asset Management Portfolios, LLC (the “Acquired Funds”) pursuant to an Agreement and Plan of Reorganization (the “Reorganization”) approved by shareholders of the Acquired Funds on December 15, 2006. In each Reorganization, the Acquired Fund is the survivor for accounting and performance reporting purposes. Approximate conversion ratios, net assets of the Acquired Fund immediately prior to the acquisition (including accumulated net investment income, accumulated realized gains and unrealized appreciation) and net assets of the Acquiring Fund immediately prior to and immediately following the acquisition were as follows:

										Net Assets
								Net	Net	of
					Accumulated			Assets	Assets	Acquiring
		Conversion			Net	Accumulated		of	of	Fund
			Ratio		Investment	Realized	Unrealized	Acquired	Acquiring following
Acquired	Acquiring		Class		Income	Gains	Appreciation	Fund	Fund	acquisition
Fund	Fund		A B	C	(000s)	(000s)	(000s)	(000s)	(000s)	(000s)
Balanced Portfolio	SAM Balanced Portfolio	1.0	1.0	1.0	$19,523	$165,685	$690,642	$4,754,130	$—	$4,754,130
Conservative Balanced	SAM Conservative Balanced
Portfolio	Portfolio	1.0	1.0	1.0	2,123	15,101	63,214	649,021	—	649,021
Conservative Growth	SAM Conservative Growth
Portfolio	Portfolio	1.0	1.0	1.0	18,484	185,608	691,794	3,924,790	—	3,925,790
	SAM Flexible Income
Flexible Income Portfolio	Portfolio	1.0	1.0	1.0	1,405	4,809	68,863	844,683	—	844,683
	SAM Strategic Growth
Strategic Growth Portfolio	Portfolio	1.0	1.0	1.0	12,204	116,619	424,530	2,419,549	—	2,419,549

Effective January 12, 2007, the initial purchases of $10,000 of Class J, Institutional, R-1, R-2, R-3, R-4, and R-5 Classes of shares of SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, and SAM Strategic Growth Portfolio (collectively, the “SAM Portfolios”), respectively, were made by Principal Life Insurance Company.

All classes of shares for each of the Funds represent interests in the same portfolio of investments, and will vote together as a single class except where otherwise required by law or as determined by the Fund’s Board of Directors. In addition, the Board of Directors declares separate dividends on each class of shares.

49

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

2. 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. The following summarizes the significant accounting policies of the Funds:

Security Valuation. The Funds invest in Institutional Class shares of other series of Principal Funds, Inc. (the "Underlying Funds"). Investments in the Underlying Funds are valued at the closing net asset value per share of each Underlying Fund on the day of valuation.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31,2008, the Funds do not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

Income and Investment Transactions. The Funds record investment transactions on a trade date basis. The identified cost basis has been used in determining the net realized gain or loss from investment transactions and unrealized appreciation or depreciation of investments. The Funds record dividend income on the ex-dividend date. Interest income is recognized on an accrual basis. The Funds allocate daily all income and realized and unrealized gains or losses to each class of shares based upon the relative proportion of the value of shares outstanding of each class.

Expenses. Expenses directly attributed to one of the Funds are charged to that Fund. Other expenses not directly attributed to one of the Funds are apportioned among the registered investment companies managed by Principal Management Corporation.

Management fees are allocated daily to each class of shares based upon the relative proportion of the value of shares outstanding of each class. Expenses specifically attributable to a particular class are charged directly to such class and are included separately in the statements of operations. Expenses included in the statements of operations of the Funds reflect the expenses of each of the Funds and do not include any expenses associated with the Underlying Funds.

Distributions to Shareholders. Dividends and distributions to shareholders of the Funds are recorded on the ex-dividend date. Dividends and distributions to shareholders from net investment income and net realized gain from investments are determined in accordance with federal tax regulations, which may differ from U.S. generally accepted accounting principles. These differences are primarily due to differing treatments for losses deferred due to wash sales. Permanent book and tax basis differences are reclassified within the capital accounts based on federal tax-basis treatment; temporary differences do not require reclassification. To the extent dividends and distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as return of capital distributions.

Federal Income Taxes. No provision for federal income taxes is considered necessary because each of the Funds 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.

On July 13^th, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 became effective for the Funds on November 1, 2007. Management has evaluated the implications of FIN 48 and has determined there was no material impact on the Funds’ financial statements.

50

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

2. Significant Accounting Policies (Continued)

Redemption and Exchange Fees. Each of the Funds will impose a redemption or exchange fee on redemptions or exchanges of $30,000 or more of Class A, Class B, or Class C shares redeemed or exchanged within 30 days after they are purchased. 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 movements in and out of the Funds.

3. Operating Policies

Indemnification. Under the Fund’s by-laws, present and past officers, directors and employees are indemnified against certain liabilities arising out of the performance of their duties. In addition, in the normal course of business, the Fund may enter into a variety of contracts that may contain representations and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund.

Line of Credit. The Funds participate with other registered investment companies managed by Principal Management Corporation in an unsecured joint line of credit with two banks which allow the participants to borrow up to $150 million, collectively. Borrowings are made solely to facilitate the handling of unusual and/or unanticipated short-term cash requirements. Interest is charged to each participant, based on its borrowings, at a rate equal to the Fed Funds Rate plus .4%. The Funds did not borrow from the line of credit during the year ended October 31, 2008.

4. Management Agreement and Transactions with Affiliates

Management Services. The Funds have agreed to pay investment advisory and management fees to Principal Management Corporation (wholly owned by Principal Financial Services, Inc.). The annual rate paid by Principal LifeTime Funds is .1225% of each of the Principal LifeTime Funds’ average daily net assets up to $3 billion and .1125% of each of the Principal LifeTime Funds’ average daily net assets over $3 billion. The annual rate paid by the SAM Portfolios is based upon the aggregate average daily net assets (“aggregate net assets”) of the SAM Portfolios. The investment advisory and management fee schedule for the SAM Portfolios is .55% of aggregate net assets up to $500 million, .50% of the next $500 million of aggregate net assets, .45% of the next $1 billion of aggregate net assets, .40% of the next $1 billion of aggregate net assets, .35% of the next $1 billion of aggregate net assets, .30% of the next $1 billion of aggregate net assets and .25% of aggregate net assets over $5 billion.

In addition to the management fee, R-1, R-2, R-3, R-4, and R-5 classes of shares of the Funds pay the Manager a service fee and an administrative service fee computed at an annual percentage rate of each class’s average daily net assets. The annual rates for the service fee are .25%, .25%, .17%, .15%, and .15% and the annual rates for the administrative service fee are .28%, .20%, .15%, .13%, and .11% for R-1, R-2, R-3, R-4, and R-5, respectively. Class A, Class B, Class C, and Class J shares of the Funds reimburse Principal Shareholder Services, Inc. (the “Transfer Agent”) (wholly owned by Principal Management Corporation) for transfer agent services.

51

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates (Continued)

The Manager has contractually agreed to limit the expenses (excluding interest the Funds incur in connection with investments they make) for Class A, Class B, Class C, and Class J shares of the Funds. The reductions and reimbursements are in amounts that maintain total operating expenses at or below certain limits. The limits are expressed as a percentage of average daily net assets attributable to Class A, Class B, Class C, and Class J shares on an annualized basis during the reporting period. The operating expense limits are as follows:

	Class A	Class B	Class C	Class J
	Period from	Period from	Period from	Period from
	November 1, 2007	November 1, 2007	November 1, 2007	November 1, 2007
	through	through	through	through
	October 31, 2008	October 31, 2008	October 31, 2008	February 28, 2008*	Expiration Date
Principal LifeTime 2010 Fund	.50%	N/A	1.25%	.75%	February 28, 2009
Principal LifeTime 2020 Fund	.50	1.25%	1.25	.75	February 28, 2009
Principal LifeTime 2030 Fund	.50	1.25	1.25	.75	February 28, 2009
Principal LifeTime 2040 Fund	.50	1.25	1.25	.75	February 28, 2009
Principal LifeTime 2050 Fund	.50	1.25	1.25	.75	February 28, 2009
Principal LifeTime Strategic Income Fund	.50	1.25	1.25	.75	February 28, 2009
	Class A	Class B	Class C	Class J
	Period from	Period from	Period from	Period from
	November 1, 2007	November 1, 2007	November 1, 2007	November 1, 2007
	through	through	through	through
	February 28, 2008*	February 28, 2008*	February 28, 2008*	October 31, 2008	Expiration Date
SAM Balanced Portfolio	.66%	1.43%	1.42%	.95%	February 28, 2009
SAM Conservative Balanced Portfolio	.68	1.45	1.43	.95	February 28, 2009
SAM Conservative Growth Portfolio	.68	1.45	1.44	.95	February 28, 2009
SAM Flexible Income Portfolio	.67	1.44	1.43	.95	February 28, 2009
SAM Strategic Growth Portfolio	.70	1.47	1.46	.95	February 28, 2009
*The operating expense limits expired on February 28, 2008.

Distribution Fees. The Class A, Class B, Class C, Class J, R-1, R-2, R-3, and R-4 shares of the Funds bear distribution fees. The fee is computed at an annual rate of the average daily net assets attributable to each class of each of the Funds. Distribution fees are paid to Principal Funds Distributor, Inc. or Princor Financial Services Corporation, the principal underwriters, a portion may be paid to other selling dealers for providing certain services. The annual rates are .25%, 1.00%, 1.00%, .35%, .30%, .25%, and .10% for Class A, Class B, Class C, R-1, R-2, R-3 and R-4 classes of shares, respectively. From November 1, 2007 through December 31, 2007, the annual rate for Class J shares was .50%. From January 1, 2007 through October 21, 2008, the annual rate for Class J shares was 0.45%

Princor Financial Services Corporation has contractually agreed to limit the distribution fees attributable to Class J shares through December 31, 2008. The limit will maintain the level of distribution fees (expressed as a percent of average net assets on an annualized basis) not to exceed .40% for Class J shares. From November 1, 2007 through December 31, 2007 the limit was .45%.

52

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates (Continued)

Sales Charges. Principal Funds Distributor, Inc. or Princor Financial Services Corporation, as principal underwriters, receive proceeds of any CDSC on certain Class A, Class B, Class C, and Class J share redemptions. The charge for Class A shares is 1.00% the lesser of current market value or the cost of shares redeemed. The charge for Class B shares is based on declining rates which begin at 5.00% of the lesser of current market value or the cost of shares being redeemed. The charge for Class C shares is 1.00% of the lesser of current market value or the cost of shares redeemed within 12 months of purchase. The charge for Class J shares is 1.00% of the lesser of current market value or the cost of shares redeemed within 18 months of purchase. Principal Funds Distributor, Inc. or Princor Financial Services Corporation also retain sales charges on sales of Class A shares based on declining rates which begin at 4.50% for Principal LifeTime Strategic Income Fund and SAM Flexible Income Portfolio, and 5.50% for all other Funds. The aggregate amounts of these charges retained by Principal Funds Distributor, Inc. and Princor Financial Services Corporation for the year ended October 31, 2008, were as follows (in thousands):

	Class A	Class B	Class C	Class J
Principal LifeTime 2010 Fund	$ 113	N/A	$ 4	$153
Principal LifeTime 2020 Fund	361	$ 32	6	312
Principal LifeTime 2030 Fund	411	27	6	279
Principal LifeTime 2040 Fund	355	16	2	148
Principal LifeTime 2050 Fund	183	3	—	38
Principal LifeTime Strategic Income Fund	36	2	2	24
SAM Balanced Portfolio	2,143	1,887	87	26
SAM Conservative Balanced Portfolio	564	269	23	16
SAM Conservative Growth Portfolio	1,504	1,313	78	34
SAM Flexible Income Portfolio	668	452	41	6
SAM Strategic Growth Portfolio	1,108	967	55	33

Class B shares automatically convert into Class A shares, based on relative net asset value (without a sales charge), eight years after purchase.

At October 31, 2008, Principal Life Insurance Company (an affiliate of the Manager), Princor Financial Services Corporation, and benefit plans sponsored on behalf of Principal Life Insurance Company owned shares of the Funds as follows (amounts in thousands):

	R-1	R-2	R-5
SAM Balanced Portfolio	—	1	—
SAM Conservative Balanced Portfolio	—	—	1
SAM Conservative Growth Portfolio	—	—	1
SAM Flexible Income Portfolio	1	1	1
SAM Strategic Growth Portfolio	—	—	1
5. Capital Share Transactions

For the year ended October 31, 2008, the following table reflects the conversion of Class B shares into Class A shares. The amounts are also shown in the statement of changes in net assets as shares sold and dollars sold for Class A and shares redeemed and dollars redeemed for Class B (amounts in thousands).

	Year Ended
	October 31, 2008
	Shares	Dollars
Principal LifeTime 2020 Fund	32	$ 383
Principal LifeTime 2030 Fund	17	201
Principal LifeTime 2040 Fund	8	103
Principal LifeTime 2050 Fund	3	40
Principal LifeTime Strategic Income Fund	2	21
SAM Balanced Portfolio	6,728	91,514
SAM Conservative Balanced Portfolio	311	3,284
SAM Conservative Growth Portfolio	5,412	80,187
SAM Flexible Income Portfolio	1,481	16,281
SAM Strategic Growth Portfolio	3,412	54,019

53

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

6. Investment Transactions

For the year ended October 31, 2008, the cost of investment securities purchased and proceeds from investment securities sold (not including short-term investments and U.S. government securities) by the Funds were as follows (amounts in thousands):

	Purchases	Sales		Purchases	Sales
Principal LifeTime 2010 Fund	$ 592,148	$225,479	SAM Balanced Portfolio	$1,501,467	$1,674,215
Principal LifeTime 2020 Fund	1,495,368	264,157	SAM Conservative Balanced Portfolio	257,223	179,569
Principal LifeTime 2030 Fund	1,390,111	210,748	SAM Conservative Growth Portfolio	1,120,814	1,180,545
Principal LifeTime 2040 Fund	821,871	98,139	SAM Flexible Income Portfolio	339,437	281,650
Principal LifeTime 2050 Fund	330,128	45,582	SAM Strategic Growth Portfolio	731,750	701,150
Principal LifeTime Strategic Income Fund	262,659	174,625
7. Federal Tax Information

Distributions to Shareholders. The federal income tax character of distributions paid for years ended October 31, 2008 and October 31, 2007 were as follows (amounts in thousands):

	Ordinary Income		Long-Term Capital Gain*
	2008	2007	2008	2007
Principal LifeTime 2010 Fund	$ 65,599	$35,041	$27,606	$ 5,150
Principal LifeTime 2020 Fund	122,073	61,719	62,217	11,433
Principal LifeTime 2030 Fund	99,896	47,383	59,169	10,955
Principal LifeTime 2040 Fund	49,671	21,154	27,716	4,800
Principal LifeTime 2050 Fund	21,640	9,155	13,820	2,493
Principal LifeTime Strategic Income Fund	25,557	14,518	6,649	1,522
SAM Balanced Portfolio	152,287	82,911	227,790	24,656
SAM Conservative Balanced Portfolio	25,804	17,023	21,121	3,506
SAM Conservative Growth Portfolio	98,623	34,083	230,424	—
SAM Flexible Income Portfolio	31,280	28,005	17,495	1,816
SAM Strategic Growth Portfolio	52,103	19,484	143,018	—

*The funds designate these distributions as long-term capital gain dividends per IRC code Sec. 852(b)(3)(C).

The Reorganization constitutes a reorganization under Internal Revenue Code Section 368(a)(1)(F). Distributions shown for 2007 include the respective Acquired Fund distributions prior to the Reorganization.

For U.S. federal income tax purposes, short-term capital gain distributions are considered ordinary income distributions.

Distributable Earnings. As of October 31, 2008, the components of distributable earnings on a federal tax basis were as follows (amounts in thousands):

	Undistributed	Undistributed
	Ordinary Income	Long-Term Capital Gains
Principal LifeTime 2010 Fund	$32,591	$ 45,037
Principal LifeTime 2020 Fund	40,575	119,088
Principal LifeTime 2030 Fund	19,951	105,574
Principal LifeTime 2040 Fund	4,682	53,690
Principal LifeTime 2050 Fund	944	23,630
Principal LifeTime Strategic Income Fund	19,968	6,744
SAM Balanced Portfolio	5,129	254,586
SAM Conservative Balanced Portfolio	1,303	23,454
SAM Conservative Growth Portfolio	15,627	234,944
SAM Flexible Income Portfolio	2,106	16,972
SAM Strategic Growth Portfolio	196	138,630

Capital Loss Carryforwards. Capital loss carryforwards are losses that can be used to offset future capital gain of the Funds. At October 31, 2008, the Funds had no capital loss carryforwards.

54

Schedule of Investments
Principal LifeTime 2010 Fund
October 31, 2008
			Portfolio Summary (unaudited)
			Fund Type	Percent
	Shares	Value
	Held	(000's)	Fixed Income Funds	49.07%
			Domestic Equity Funds	38.54%
INVESTMENT COMPANIES (99.79%)			International Equity Funds	12.18%
Principal Funds, Inc. Institutional Class (99.79%)			Other Assets in Excess of Liabilities, Net	0.21%
Bond & Mortgage Securities Fund (a)	50,234,063 $	427,492	TOTAL NET ASSETS	100.00%
Core Plus Bond Fund I (a)	613,773	6,107
Disciplined LargeCap Blend Fund (a)	11,984,691	119,248
High Yield Fund I (a)	5,264,718	43,118
Inflation Protection Fund (a)	7,998,693	56,631
International Emerging Markets Fund (a)	1,713,188	23,608
International Fund I (a)	2,621,497	23,095
International Growth Fund (a)	12,426,357	86,363
International Value Fund I (a)(b)	4,090,171	35,257
LargeCap Blend Fund I (a)	9,754,682	63,015
LargeCap Growth Fund (a)	8,636,745	52,943
LargeCap Growth Fund I (a)	9,299,796	50,684
LargeCap Value Fund (a)	4,170,945	33,159
LargeCap Value Fund I (a)	3,573,597	31,341
LargeCap Value Fund III (a)	3,402,381	28,886
MidCap Growth Fund III (a)(b)	461,239	2,938
MidCap Value Fund I (a)	390,820	3,345
Money Market Fund (a)	1,892,286	1,892
Preferred Securities Fund (a)	13,171,121	87,720
Real Estate Securities Fund (a)	6,693,925	79,189
SmallCap Growth Fund I (a)(b)	311,929	1,922
SmallCap Growth Fund III (a)(b)	2,434,092	16,503
SmallCap S&P 600 Index Fund (a)	2,319,512	27,625
SmallCap Value Fund (a)	1,592,868	19,704
SmallCap Value Fund I (a)	190,488	2,126
Ultra Short Bond Fund (a)	7,144,188	55,153
		1,379,064
TOTAL INVESTMENT COMPANIES	$ 1,379,064
Total Investments	$ 1,379,064
Other Assets in Excess of Liabilities, Net - 0.21%		2,887
TOTAL NET ASSETS - 100.00%	$ 1,381,951

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 2,438
Unrealized Depreciation	(582,173)
Net Unrealized Appreciation (Depreciation)	(579,735)
Cost for federal income tax purposes	1,958,799
All dollar amounts are shown in thousands (000's)

See accompanying notes

55

Schedule of Investments
Principal LifeTime 2010 Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Bond & Mortgage Securities Fund	44,003,740 $	469,385	11,076,369	$ 112,131		4,846,046	$ 45,913		50,234,063 $	533,899
Core Plus Bond Fund I	-	-	1,279,235		12,781	665,462		6,642	613,773	6,132
Disciplined LargeCap Blend Fund	9,501,410	139,735	3,671,278		54,452	1,187,997		14,132	11,984,691	178,644
High Yield Fund	1,331,393	11,784	107,011		886	1,438,404		11,708	-	-
High Yield Fund I	3,418,884	35,680	2,507,119		25,522	661,285		6,229	5,264,718	54,628
Inflation Protection Fund	6,478,059	61,593	2,266,356		20,461	745,722		6,203	7,998,693	75,616
International Emerging Markets Fund	1,332,522	34,876	572,491		16,815	191,825		3,754	1,713,188	47,050
International Fund I	4,976,091	78,524	2,555,861		38,798	4,910,455		50,619	2,621,497	43,553
International Growth Fund	10,596,718	126,100	2,468,787		32,299	639,148		5,894	12,426,357	152,503
International Value Fund I	-	-	4,336,021		39,281	245,850		2,125	4,090,171	36,992
LargeCap Blend Fund I	8,399,650	82,576	2,345,628		21,630	990,596		7,576	9,754,682	95,603
LargeCap Growth Fund	7,703,817	54,901	1,745,842		15,615	812,914		6,014	8,636,745	64,500
LargeCap Growth Fund I	8,011,988	67,632	2,185,882		18,031	898,074		6,016	9,299,796	78,712
LargeCap Value Fund	3,375,854	38,815	1,223,739		13,987	428,648		4,010	4,170,945	48,699
LargeCap Value Fund I	3,088,338	43,156	863,654		11,202	378,395		4,011	3,573,597	49,756
LargeCap Value Fund III	2,797,387	35,298	997,778		13,130	392,784		4,010	3,402,381	44,312
MidCap Growth Fund III	-	-	689,681		6,881	228,442		1,774	461,239	4,743
MidCap Value Fund I	-	-	566,325		6,881	175,505		1,774	390,820	4,854
Money Market Fund	-	-	7,267,786		7,268	5,375,500		5,376	1,892,286	1,892
Preferred Securities Fund	11,121,143	118,480	3,475,943		32,506	1,425,965		10,786	13,171,121	138,336
Real Estate Securities Fund	4,202,589	79,973	3,226,524		55,507	735,188		10,787	6,693,925	124,646
SmallCap Growth Fund I	-	-	380,558		3,335	68,629		507	311,929	2,764
SmallCap Growth Fund III	2,065,493	25,192	479,907		5,368	111,308		993	2,434,092	29,439
SmallCap S&P 600 Index Fund	2,201,971	32,996	548,775		9,013	431,234		6,298	2,319,512	35,697
SmallCap Value Fund	1,333,242	25,266	328,403		5,342	68,777		993	1,592,868	29,564
SmallCap Value Fund I	-	-	230,411		3,335	39,923		507	190,488	2,783
Ultra Short Bond Fund	6,177,431	61,836	1,055,198		9,691	88,441		828	7,144,188	70,698
	$ 1,623,798			$ 592,148			$ 225,479		$ 1,956,015
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Bond & Mortgage Securities Fund	$ 25,940			$ (1,704)				$ -
Core Plus Bond Fund I			-			(7)				-
Disciplined LargeCap Blend Fund			1,996			(1,411)				18,823
High Yield Fund			555			(962)				281
High Yield Fund I		1,159				(345)				1
Inflation Protection Fund		6,485				(235)				-
International Emerging Markets Fund			6,360			(887)				1,947
International Fund I		3,853				(23,150)				5,934
International Growth Fund		6,129				(2)				8,520
International Value Fund I			-			(164)				-
LargeCap Blend Fund I		1,225				(1,027)				2,256
LargeCap Growth Fund			336			(2)				1,342
LargeCap Growth Fund I			788			(935)				2,603
LargeCap Value Fund			1,384			(93)				3,078
LargeCap Value Fund I			957			(591)				719
LargeCap Value Fund III			1,313			(106)				2,291
MidCap Growth Fund III			-			(364)				-
MidCap Value Fund I			-			(253)				-
Money Market Fund			48			-				-
Preferred Securities Fund		7,506				(1,864)				-
Real Estate Securities Fund			3,868			(47)				23,732
SmallCap Growth Fund I			-			(64)				-
SmallCap Growth Fund III			1,015			(128)				1,125
SmallCap S&P 600 Index Fund			866			(14)				2,982
SmallCap Value Fund			860			(51)				1,253
SmallCap Value Fund I			-			(45)				-
Ultra Short Bond Fund		2,887				(1)				-
	$ 75,530			$ (34,452)				$ 76,887

See accompanying notes

56

Schedule of Investments
Principal LifeTime 2020 Fund
October 31, 2008
			Portfolio Summary (unaudited)
			Fund Type	Percent
	Shares	Value
	Held	(000's)	Domestic Equity Funds	49.36%
			Fixed Income Funds	34.34%
INVESTMENT COMPANIES (99.79%)			International Equity Funds	16.09%
Principal Funds, Inc. Institutional Class (99.79%)			Other Assets in Excess of Liabilities, Net	0.21%
Bond & Mortgage Securities Fund (a)	83,370,396 $	709,482	TOTAL NET ASSETS	100.00%
Core Plus Bond Fund I (a)	2,012,707	20,026
Disciplined LargeCap Blend Fund (a)	33,932,265	337,626
High Yield Fund I (a)	17,077,353	139,863
International Emerging Markets Fund (a)	5,151,195	70,983
International Fund I (a)	8,718,196	76,807
International Growth Fund (a)	33,562,863	233,262
International Value Fund I (a)(b)	12,357,203	106,519
LargeCap Blend Fund I (a)	26,580,563	171,710
LargeCap Growth Fund (a)	24,025,377	147,276
LargeCap Growth Fund I (a)	28,408,467	154,826
LargeCap Value Fund (a)	11,908,776	94,675
LargeCap Value Fund I (a)	10,560,523	92,616
LargeCap Value Fund III (a)	10,295,416	87,408
MidCap Growth Fund III (a)(b)	6,268,564	39,931
MidCap Value Fund I (a)	4,458,827	38,168
Preferred Securities Fund (a)	25,758,812	171,554
Real Estate Securities Fund (a)	13,143,000	155,482
SmallCap Growth Fund I (a)(b)	1,261,877	7,773
SmallCap Growth Fund III (a)(b)	6,536,716	44,319
SmallCap S&P 600 Index Fund (a)	5,297,374	63,092
SmallCap Value Fund (a)	4,250,007	52,573
SmallCap Value Fund I (a)	772,322	8,619
		3,024,590
TOTAL INVESTMENT COMPANIES	$ 3,024,590
Total Investments	$ 3,024,590
Other Assets in Excess of Liabilities, Net - 0.21%		6,365
TOTAL NET ASSETS - 100.00%	$ 3,030,955

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 3,761
Unrealized Depreciation	(1,353,701)
Net Unrealized Appreciation (Depreciation)	(1,349,940)
Cost for federal income tax purposes	4,374,530
All dollar amounts are shown in thousands (000's)

See accompanying notes

57

Schedule of Investments
Principal LifeTime 2020 Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Bond & Mortgage Securities Fund	65,301,064 $	696,153	21,731,306	$ 219,270		3,661,974	$ 34,066		83,370,396 $	880,310
Core Plus Bond Fund I	-	-	2,527,811		25,242	515,104		5,139	2,012,707	20,092
Disciplined LargeCap Blend Fund	23,245,105	341,412	11,688,956		170,029	1,001,796		11,288	33,932,265	498,476
High Yield Fund	3,450,904	30,526	277,366		2,297	3,728,270		30,348	-	-
High Yield Fund I	9,842,633	102,673	7,766,754		78,730	532,034		4,890	17,077,353	176,164
International Emerging Markets Fund	3,628,689	94,821	1,700,965		48,414	178,459		3,209	5,151,195	139,172
International Fund I	12,149,528	191,778	8,673,455		128,281	12,104,787		120,038	8,718,196	142,739
International Growth Fund	27,235,907	325,073	7,010,231		90,882	683,275		5,994	33,562,863	409,966
International Value Fund I	-	-	12,676,647		114,806	319,444		2,779	12,357,203	111,821
LargeCap Blend Fund I	19,912,447	194,821	7,496,331		67,839	828,215		6,003	26,580,563	255,715
LargeCap Growth Fund	18,732,649	134,913	6,019,969		52,784	727,241		5,090	24,025,377	182,605
LargeCap Growth Fund I	21,496,413	182,719	7,749,396		62,709	837,342		5,265	28,408,467	239,187
LargeCap Value Fund	8,314,797	96,740	3,980,602		44,594	386,623		3,433	11,908,776	137,773
LargeCap Value Fund I	7,882,867	110,118	3,021,539		38,383	343,883		3,452	10,560,523	144,475
LargeCap Value Fund III	7,225,587	94,336	3,429,389		43,998	359,560		3,471	10,295,416	134,720
MidCap Growth Fund III	4,277,576	42,599	2,222,573		22,719	231,585		1,740	6,268,564	63,211
MidCap Value Fund I	2,724,443	39,133	1,910,734		23,583	176,350		1,721	4,458,827	60,690
Preferred Securities Fund	18,907,441	200,860	7,686,953		71,403	835,582		5,902	25,758,812	265,440
Real Estate Securities Fund	7,039,662	136,687	6,519,480		110,793	416,142		5,903	13,143,000	241,559
SmallCap Growth Fund I	-	-	1,333,617		11,894	71,740		496	1,261,877	11,300
SmallCap Growth Fund III	5,185,924	60,684	1,453,193		15,879	102,401		866	6,536,716	75,587
SmallCap S&P 600 Index Fund	3,970,482	66,719	1,450,882		23,313	123,990		1,702	5,297,374	88,330
SmallCap Value Fund	3,341,152	59,376	970,989		15,632	62,134		866	4,250,007	74,141
SmallCap Value Fund I	-	-	813,330		11,894	41,008		496	772,322	11,331
	$ 3,202,141			$ 1,495,368			$ 264,157		$ 4,364,804
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Bond & Mortgage Securities Fund	$ 40,486			$ (1,047)				$ -
Core Plus Bond Fund I			-			(11)				-
Disciplined LargeCap Blend Fund			4,945			(1,677)				46,415
High Yield Fund			1,439			(2,475)				729
High Yield Fund I		3,365				(349)				3
International Emerging Markets Fund		17,224				(854)				5,275
International Fund I			9,461			(57,282)				14,559
International Growth Fund		15,803				5				21,960
International Value Fund I			-			(206)				-
LargeCap Blend Fund I			2,924			(942)				5,383
LargeCap Growth Fund			823			(2)				3,285
LargeCap Growth Fund I			2,127			(976)				7,028
LargeCap Value Fund			3,434			(128)				7,625
LargeCap Value Fund I			2,459			(574)				1,847
LargeCap Value Fund III			3,423			(143)				5,956
MidCap Growth Fund III			86			(367)				3,352
MidCap Value Fund I		1,589				(305)				3,255
Preferred Securities Fund		13,565				(921)				-
Real Estate Securities Fund			6,797			(18)				40,062
SmallCap Growth Fund I			-			(98)				-
SmallCap Growth Fund III			2,563			(110)				2,841
SmallCap S&P 600 Index Fund		1,573				-				5,412
SmallCap Value Fund		2,173				(1)				3,161
SmallCap Value Fund I			-			(67)				-
	$ 136,259			$ (68,548)				$ 178,148

See accompanying notes

58

Schedule of Investments
Principal LifeTime 2030 Fund
October 31, 2008
			Portfolio Summary (unaudited)
			Fund Type	Percent
	Shares	Value
	Held	(000's)	Domestic Equity Funds	56.39%
			Fixed Income Funds	24.16%
INVESTMENT COMPANIES (99.77%)			International Equity Funds	19.22%
Principal Funds, Inc. Institutional Class (99.77%)			Other Assets in Excess of Liabilities, Net	0.23%
Bond & Mortgage Securities Fund (a)	41,368,360 $	352,045	TOTAL NET ASSETS	100.00%
Core Plus Bond Fund I (a)	1,292,255	12,858
Disciplined LargeCap Blend Fund (a)	32,957,147	327,924
High Yield Fund I (a)	16,995,689	139,195
International Emerging Markets Fund (a)	5,276,189	72,706
International Fund I (a)	9,146,256	80,578
International Growth Fund (a)	34,083,294	236,879
International Value Fund I (a)(b)	12,693,853	109,421
LargeCap Blend Fund I (a)	25,624,835	165,536
LargeCap Growth Fund (a)	25,908,112	158,817
LargeCap Growth Fund I (a)	29,248,069	159,402
LargeCap Value Fund (a)	13,044,281	103,702
LargeCap Value Fund I (a)	11,141,619	97,712
LargeCap Value Fund III (a)	10,549,351	89,564
MidCap Growth Fund III (a)(b)	6,672,676	42,505
MidCap Value Fund I (a)	5,111,801	43,757
Preferred Securities Fund (a)	18,635,074	124,109
Real Estate Securities Fund (a)	9,703,517	114,793
SmallCap Growth Fund I (a)(b)	4,280,458	26,368
SmallCap Growth Fund III (a)(b)	4,945,660	33,531
SmallCap S&P 600 Index Fund (a)	3,027,613	36,059
SmallCap Value Fund (a)	3,232,531	39,986
SmallCap Value Fund I (a)	2,379,677	26,557
		2,594,004
TOTAL INVESTMENT COMPANIES	$ 2,594,004
Total Investments	$ 2,594,004
Other Assets in Excess of Liabilities, Net - 0.23%		6,060
TOTAL NET ASSETS - 100.00%	$ 2,600,064

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 4,646
Unrealized Depreciation	(1,209,067)
Net Unrealized Appreciation (Depreciation)	(1,204,421)
Cost for federal income tax purposes	3,798,425
All dollar amounts are shown in thousands (000's)

See accompanying notes

59

Schedule of Investments
Principal LifeTime 2030 Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Bond & Mortgage Securities Fund	30,675,038 $	327,373	12,257,652	$ 123,468		1,564,330	$ 14,578		41,368,360 $	435,871
Core Plus Bond Fund I	-	-	1,429,791		14,281	137,536		1,371	1,292,255	12,905
Disciplined LargeCap Blend Fund	21,631,814	317,065	11,950,787		172,626	625,454		7,332	32,957,147	481,530
High Yield Fund	3,264,200	28,867	262,360		2,173	3,526,560		28,706	-	-
High Yield Fund I	9,661,618	100,779	7,644,756		77,350	310,685		2,901	16,995,689	175,066
International Emerging Markets Fund	3,559,209	93,737	1,829,955		51,499	112,975		2,171	5,276,189	142,697
International Fund I	11,972,365	188,733	9,143,654		133,975	11,969,763		118,593	9,146,256	148,233
International Growth Fund	26,708,452	316,010	7,800,845		100,690	426,003		3,970	34,083,294	412,726
International Value Fund I	-	-	12,868,203		116,474	174,350		1,517	12,693,853	114,850
LargeCap Blend Fund I	18,398,551	179,585	7,740,866		69,614	514,582		3,865	25,624,835	244,876
LargeCap Growth Fund	19,342,718	139,604	7,069,669		61,584	504,275		3,665	25,908,112	197,522
LargeCap Growth Fund I	21,142,593	179,444	8,675,184		69,628	569,708		3,731	29,248,069	244,827
LargeCap Value Fund	8,710,901	101,262	4,603,684		51,234	270,304		2,486	13,044,281	149,947
LargeCap Value Fund I	7,963,665	111,412	3,410,787		43,018	232,833		2,425	11,141,619	151,697
LargeCap Value Fund III	6,997,746	90,150	3,797,864		48,198	246,259		2,470	10,549,351	135,814
MidCap Growth Fund III	4,501,613	44,790	2,320,585		23,518	149,522		1,179	6,672,676	66,951
MidCap Value Fund I	3,150,266	45,202	2,077,815		25,491	116,280		1,179	5,111,801	69,356
Preferred Securities Fund	13,121,802	139,113	5,902,052		54,724	388,780		2,861	18,635,074	190,757
Real Estate Securities Fund	4,914,626	94,007	4,984,478		84,138	195,587		2,861	9,703,517	175,289
SmallCap Growth Fund I	3,063,792	30,139	1,284,732		12,087	68,066		527	4,280,458	41,646
SmallCap Growth Fund III	3,747,500	42,910	1,268,658		13,697	70,498		607	4,945,660	55,931
SmallCap S&P 600 Index Fund	2,123,658	33,229	948,192		15,108	44,237		619	3,027,613	47,718
SmallCap Value Fund	2,419,998	41,331	855,494		13,657	42,961		607	3,232,531	54,381
SmallCap Value Fund I	1,627,751	30,344	792,472		11,879	40,546		527	2,379,677	41,656
	$ 2,675,086			$ 1,390,111			$ 210,748		$ 3,792,246
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Bond & Mortgage Securities Fund	$ 19,554			$ (392)				$ -
Core Plus Bond Fund I			-			(5)				-
Disciplined LargeCap Blend Fund			4,627			(829)				43,213
High Yield Fund			1,361			(2,334)				690
High Yield Fund I		3,317				(162)				3
International Emerging Markets Fund		16,962				(368)				5,194
International Fund I		9,308				(55,882)				14,311
International Growth Fund		15,545				(4)				21,577
International Value Fund I			-			(107)				-
LargeCap Blend Fund I			2,714			(458)				4,988
LargeCap Growth Fund			854			(1)				3,404
LargeCap Growth Fund I			2,099			(514)				6,934
LargeCap Value Fund			3,610			(63)				7,993
LargeCap Value Fund I			2,492			(308)				1,865
LargeCap Value Fund III			3,328			(64)				5,770
MidCap Growth Fund III			90			(178)				3,536
MidCap Value Fund I		1,838				(158)				3,762
Preferred Securities Fund		9,638				(219)				-
Real Estate Securities Fund			4,847			5				28,021
SmallCap Growth Fund I			844			(53)				1,904
SmallCap Growth Fund III			1,852			(69)				2,052
SmallCap S&P 600 Index Fund			844			-				2,896
SmallCap Value Fund		1,576				-				2,288
SmallCap Value Fund I			1,133			(40)				1,406
	$ 108,433			$ (62,203)				$ 161,807

See accompanying notes

60

Schedule of Investments
Principal LifeTime 2040 Fund
October 31, 2008
			Portfolio Summary (unaudited)
			Fund Type	Percent
	Shares	Value
	Held	(000's)	Domestic Equity Funds	62.07%
			International Equity Funds	21.57%
INVESTMENT COMPANIES (99.72%)			Fixed Income Funds	16.08%
Principal Funds, Inc. Institutional Class (99.72%)			Other Assets in Excess of Liabilities, Net	0.28%
Bond & Mortgage Securities Fund (a)	9,965,538 $	84,807	TOTAL NET ASSETS	100.00%
Core Plus Bond Fund I (a)	413,816	4,117
Disciplined LargeCap Blend Fund (a)	18,043,681	179,535
High Yield Fund I (a)	9,687,508	79,341
International Emerging Markets Fund (a)	3,171,707	43,706
International Fund I (a)	6,154,104	54,218
International Growth Fund (a)	18,912,442	131,441
International Value Fund I (a)(b)	7,567,921	65,236
LargeCap Blend Fund I (a)	14,614,096	94,407
LargeCap Growth Fund (a)	15,259,020	93,538
LargeCap Growth Fund I (a)	18,524,515	100,959
LargeCap Value Fund (a)	7,933,433	63,071
LargeCap Value Fund I (a)	6,776,445	59,429
LargeCap Value Fund III (a)	6,737,677	57,203
MidCap Growth Fund III (a)(b)	4,017,069	25,589
MidCap Value Fund I (a)	3,103,078	26,562
Preferred Securities Fund (a)	7,719,117	51,409
Real Estate Securities Fund (a)	4,546,861	53,789
SmallCap Growth Fund I (a)(b)	2,739,334	16,874
SmallCap Growth Fund III (a)(b)	2,727,831	18,495
SmallCap S&P 600 Index Fund (a)	1,564,839	18,637
SmallCap Value Fund (a)	1,783,065	22,057
SmallCap Value Fund I (a)	1,581,572	17,650
		1,362,070
TOTAL INVESTMENT COMPANIES	$ 1,362,070
Total Investments	$ 1,362,070
Other Assets in Excess of Liabilities, Net - 0.28%		3,850
TOTAL NET ASSETS - 100.00%	$ 1,365,920

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 2,200
Unrealized Depreciation	(664,843)
Net Unrealized Appreciation (Depreciation)	(662,643)
Cost for federal income tax purposes	2,024,713
All dollar amounts are shown in thousands (000's)

See accompanying notes

61

Schedule of Investments
Principal LifeTime 2040 Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Bond & Mortgage Securities Fund	6,881,693 $	73,507	3,395,869	$ 34,106		312,024	$ 2,899		9,965,538 $	104,646
Core Plus Bond Fund I	-	-	428,577		4,281	14,761		148	413,816	4,133
Disciplined LargeCap Blend Fund	10,956,904	161,920	7,251,627		103,014	164,850		1,973	18,043,681	262,845
High Yield Fund	1,682,748	14,880	135,251		1,120	1,817,999		14,799	-	-
High Yield Fund I	5,214,371	54,392	4,552,988		45,901	79,851		750	9,687,508	99,519
International Emerging Markets Fund	1,991,821	52,686	1,210,596		33,278	30,710		611	3,171,707	85,303
International Fund I	6,501,116	103,256	6,455,827		93,160	6,802,839		67,028	6,154,104	98,958
International Growth Fund	14,356,690	173,583	4,700,760		60,058	145,008		1,446	18,912,442	232,195
International Value Fund I	-	-	7,611,808		68,849	43,887		385	7,567,921	68,430
LargeCap Blend Fund I	9,699,711	94,998	5,050,082		44,833	135,697		1,042	14,614,096	138,722
LargeCap Growth Fund	10,458,590	76,524	4,940,859		42,395	140,429		1,036	15,259,020	117,883
LargeCap Growth Fund I	12,409,583	105,624	6,283,808		49,726	168,876		1,130	18,524,515	154,149
LargeCap Value Fund	4,859,107	57,442	3,151,050		34,556	76,724		720	7,933,433	91,270
LargeCap Value Fund I	4,412,985	61,888	2,430,420		30,174	66,960		713	6,776,445	91,297
LargeCap Value Fund III	4,104,731	54,841	2,703,082		33,725	70,136		727	6,737,677	87,827
MidCap Growth Fund III	2,348,024	23,468	1,708,345		16,898	39,300		315	4,017,069	40,030
MidCap Value Fund I	1,647,866	23,674	1,485,939		17,936	30,727		314	3,103,078	41,274
Preferred Securities Fund	4,987,053	52,914	2,808,314		25,896	76,250		580	7,719,117	78,204
Real Estate Securities Fund	2,107,526	45,248	2,481,415		41,462	42,080		616	4,546,861	86,094
SmallCap Growth Fund I	1,959,889	19,265	801,642		7,570	22,197		179	2,739,334	26,644
SmallCap Growth Fund III	1,950,444	22,485	799,047		8,458	21,660		192	2,727,831	30,737
SmallCap S&P 600 Index Fund	1,037,150	16,321	539,217		8,513	11,528		164	1,564,839	24,670
SmallCap Value Fund	1,262,514	21,759	534,069		8,444	13,518		193	1,783,065	30,010
SmallCap Value Fund I	1,094,727	20,414	500,354		7,518	13,509		179	1,581,572	27,744
	$ 1,331,089			$ 821,871			$ 98,139		$ 2,022,584
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Bond & Mortgage Securities Fund	$ 4,545			$ (68)				$ -
Core Plus Bond Fund I			-			-				-
Disciplined LargeCap Blend Fund			2,360			(116)				21,933
High Yield Fund			702			(1,201)				356
High Yield Fund I			1,808			(24)				2
International Emerging Markets Fund			9,522			(50)				2,915
International Fund I			5,100			(30,430)				7,820
International Growth Fund			8,390			-				11,632
International Value Fund I			-			(34)				-
LargeCap Blend Fund I			1,443			(67)				2,646
LargeCap Growth Fund			465			-				1,850
LargeCap Growth Fund I			1,240			(71)				4,096
LargeCap Value Fund			2,028			(8)				4,474
LargeCap Value Fund I			1,391			(52)				1,037
LargeCap Value Fund III			1,967			(12)				3,396
MidCap Growth Fund III			48			(21)				1,856
MidCap Value Fund I			966			(22)				1,975
Preferred Securities Fund			3,836			(26)				-
Real Estate Securities Fund			2,151			-				12,084
SmallCap Growth Fund I			543			(12)				1,224
SmallCap Growth Fund III			967			(14)				1,072
SmallCap S&P 600 Index Fund			415			-				1,420
SmallCap Value Fund			827			-				1,199
SmallCap Value Fund I			766			(9)				949
	$ 51,480			$ (32,237)				$ 83,936

See accompanying notes

62

Schedule of Investments
Principal LifeTime 2050 Fund
October 31, 2008
			Portfolio Summary (unaudited)
			Fund Type	Percent
	Shares	Value
	Held	(000's)	Domestic Equity Funds	65.12%
			International Equity Funds	22.65%
INVESTMENT COMPANIES (99.63%)			Fixed Income Funds	11.86%
Principal Funds, Inc. Institutional Class (99.63%)			Other Assets in Excess of Liabilities, Net	0.37%
Bond & Mortgage Securities Fund (a)	1,654,674 $	14,082	TOTAL NET ASSETS	100.00%
Core Plus Bond Fund I (a)	78,014	776
Disciplined LargeCap Blend Fund (a)	7,318,717	72,821
High Yield Fund I (a)	4,084,795	33,454
International Emerging Markets Fund (a)	1,329,433	18,320
International Fund I (a)	2,519,326	22,195
International Growth Fund (a)	8,198,822	56,982
International Value Fund I (a)(b)	3,207,225	27,646
LargeCap Blend Fund I (a)	5,915,392	38,213
LargeCap Growth Fund (a)	6,755,870	41,414
LargeCap Growth Fund I (a)	7,941,620	43,282
LargeCap Value Fund (a)	3,436,244	27,318
LargeCap Value Fund I (a)	3,017,396	26,463
LargeCap Value Fund III (a)	2,895,911	24,586
MidCap Growth Fund III (a)(b)	1,736,473	11,061
MidCap Value Fund I (a)	1,335,626	11,433
Preferred Securities Fund (a)	2,586,984	17,229
Real Estate Securities Fund (a)	1,815,051	21,472
SmallCap Growth Fund I (a)(b)	1,401,902	8,636
SmallCap Growth Fund III (a)(b)	1,188,327	8,057
SmallCap S&P 600 Index Fund (a)	542,733	6,464
SmallCap Value Fund (a)	774,343	9,579
SmallCap Value Fund I (a)	807,951	9,017
		550,500
TOTAL INVESTMENT COMPANIES	$ 550,500
Total Investments	$ 550,500
Other Assets in Excess of Liabilities, Net - 0.37%		2,058
TOTAL NET ASSETS - 100.00%	$ 552,558

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 1,082
Unrealized Depreciation	(274,425)
Net Unrealized Appreciation (Depreciation)	(273,343)
Cost for federal income tax purposes	823,843
All dollar amounts are shown in thousands (000's)

See accompanying notes

63

Schedule of Investments
Principal LifeTime 2050 Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Bond & Mortgage Securities Fund	1,181,248 $	12,707	532,123	$ 5,351		58,697	$ 551		1,654,674 $	17,495
Core Plus Bond Fund I	-	-	80,745		806	2,731		27	78,014	779
Disciplined LargeCap Blend Fund	4,550,391	66,174	2,881,726		41,047	113,400		1,413	7,318,717	105,744
High Yield Fund	743,677	6,576	59,773		495	803,450		6,540	-	-
High Yield Fund I	2,242,527	23,401	1,900,109		19,151	57,841		555	4,084,795	41,985
International Emerging Markets Fund	838,611	22,337	512,763		14,107	21,941		466	1,329,433	35,945
International Fund I	2,738,525	43,473	2,669,852		38,652	2,889,051		28,606	2,519,326	40,567
International Growth Fund	6,338,695	74,926	1,965,770		25,364	105,643		1,098	8,198,822	99,192
International Value Fund I	-	-	3,229,424		29,203	22,199		194	3,207,225	28,987
LargeCap Blend Fund I	4,003,696	39,012	2,006,619		17,809	94,923		757	5,915,392	56,021
LargeCap Growth Fund	4,729,498	34,334	2,131,662		18,259	105,290		809	6,755,870	51,784
LargeCap Growth Fund I	5,416,242	46,072	2,651,001		20,957	125,623		875	7,941,620	66,102
LargeCap Value Fund	2,142,878	25,081	1,351,084		14,833	57,718		562	3,436,244	39,344
LargeCap Value Fund I	2,016,280	28,220	1,051,620		13,057	50,504		562	3,017,396	40,682
LargeCap Value Fund III	1,800,675	23,616	1,147,186		14,312	51,950		563	2,895,911	37,359
MidCap Growth Fund III	1,045,781	10,352	718,672		7,092	27,980		237	1,736,473	17,196
MidCap Value Fund I	731,525	10,451	626,232		7,556	22,131		237	1,335,626	17,757
Preferred Securities Fund	1,729,719	18,382	899,461		8,283	42,196		337	2,586,984	26,316
Real Estate Securities Fund	886,867	21,328	958,211		16,128	30,027		450	1,815,051	37,006
SmallCap Growth Fund I	1,035,972	10,152	384,497		3,656	18,567		156	1,401,902	13,645
SmallCap Growth Fund III	852,347	9,677	353,658		3,738	17,678		162	1,188,327	13,244
SmallCap S&P 600 Index Fund	366,327	5,479	183,703		2,911	7,297		106	542,733	8,284
SmallCap Value Fund	550,271	9,377	235,228		3,730	11,156		163	774,343	12,944
SmallCap Value Fund I	579,475	10,744	239,934		3,631	11,458		156	807,951	14,213
	$ 551,871			$ 330,128			$ 45,582		$ 822,591
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Bond & Mortgage Securities Fund	$ 767			$ (12)				$ -
Core Plus Bond Fund I			-			-				-
Disciplined LargeCap Blend Fund			986			(64)				9,198
High Yield Fund			310			(531)				157
High Yield Fund I			783			(12)				1
International Emerging Markets Fund			4,042			(33)				1,238
International Fund I			2,164			(12,952)				3,323
International Growth Fund			3,736			-				5,184
International Value Fund I			-			(22)				-
LargeCap Blend Fund I			599			(43)				1,102
LargeCap Growth Fund			212			-				843
LargeCap Growth Fund I			545			(52)				1,801
LargeCap Value Fund			902			(8)				1,993
LargeCap Value Fund I			640			(33)				478
LargeCap Value Fund III			869			(6)				1,504
MidCap Growth Fund III			21			(11)				832
MidCap Value Fund I			433			(13)				885
Preferred Securities Fund			1,301			(12)				-
Real Estate Securities Fund			882			-				5,116
SmallCap Growth Fund I			289			(7)				651
SmallCap Growth Fund III			427			(9)				473
SmallCap S&P 600 Index Fund			148			-				507
SmallCap Value Fund			364			-				528
SmallCap Value Fund I			408			(6)				507
	$ 20,828			$ (13,826)				$ 36,321

See accompanying notes

64

     Schedule of Investments

Principal LifeTime Strategic Income Fund

October 31, 2008

	Shares	Value
	Held	(000's)
INVESTMENT COMPANIES (99.72%)
Principal Funds, Inc. Institutional Class (99.72%)
Bond & Mortgage Securities Fund (a)	24,060,962 $	204,759
Core Plus Bond Fund I (a)	440,324	4,381
Disciplined LargeCap Blend Fund (a)	1,440,229	14,330
High Yield Fund I (a)	195,907	1,605
Inflation Protection Fund (a)	8,889,165	62,935
International Emerging Markets Fund (a)	75,470	1,040
International Fund I (a)	366,052	3,225
International Growth Fund (a)	1,730,544	12,027
International Value Fund I (a)(b)	537,567	4,634
LargeCap Blend Fund I (a)	1,284,851	8,300
LargeCap Growth Fund (a)	1,233,481	7,561
LargeCap Growth Fund I (a)	1,076,894	5,869
LargeCap Value Fund (a)	779,151	6,194
LargeCap Value Fund I (a)	59,405	521
LargeCap Value Fund III (a)	812,964	6,902
MidCap Growth Fund III (a)(b)	217,986	1,389
MidCap Value Fund I (a)	180,088	1,542
Money Market Fund (a)	1,115,312	1,115
Preferred Securities Fund (a)	4,189,968	27,905
Real Estate Securities Fund (a)	1,629,291	19,275
SmallCap S&P 600 Index Fund (a)	579,889	6,906
Ultra Short Bond Fund (a)	8,338,181	64,371
		466,786
TOTAL INVESTMENT COMPANIES	$ 466,786
Total Investments	$ 466,786
Other Assets in Excess of Liabilities, Net - 0.28%		1,312
TOTAL NET ASSETS - 100.00%	$ 468,098

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 885
Unrealized Depreciation		(154,351)
Net Unrealized Appreciation (Depreciation)		(153,466)
Cost for federal income tax purposes		620,252
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Fund Type		Percent
Fixed Income Funds		78.42%
Domestic Equity Funds		16.83%
International Equity Funds		4.47%
Other Assets in Excess of Liabilities, Net		0.28%
TOTAL NET ASSETS		100.00%

See accompanying notes

65

Schedule of Investments
Principal LifeTime Strategic Income Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Bond & Mortgage Securities Fund	22,944,458 $	245,548	8,843,163	$ 90,467		7,726,659	$ 76,443		24,060,962 $	257,259
Core Plus Bond Fund I	-	-	718,227		7,163	277,903		2,778	440,324	4,385
Disciplined LargeCap Blend Fund	1,191,068	16,326	672,978		9,824	423,817		5,635	1,440,229	20,372
High Yield Fund I	-	-	408,659		4,074	212,752		2,063	195,907	1,960
Inflation Protection Fund	7,733,409	73,809	3,326,907		30,543	2,171,151		19,327	8,889,165	84,725
International Emerging Markets Fund	-	-	107,887		2,746	32,417		688	75,470	1,991
International Fund I	744,410	11,663	477,850		7,179	856,208		9,791	366,052	6,015
International Growth Fund	1,499,535	15,584	545,579		6,976	314,570		3,586	1,730,544	18,991
International Value Fund I	-	-	563,169		5,106	25,602		222	537,567	4,870
LargeCap Blend Fund I	1,233,522	11,960	423,697		3,864	372,368		3,177	1,284,851	12,494
LargeCap Growth Fund	1,135,574	7,353	397,897		3,538	299,990		2,491	1,233,481	8,403
LargeCap Growth Fund I	960,708	8,103	436,202		3,543	320,016		2,404	1,076,894	9,125
LargeCap Value Fund	643,546	7,163	331,426		3,763	195,821		2,061	779,151	8,854
LargeCap Value Fund I	-	-	121,566		1,456	62,161		689	59,405	718
LargeCap Value Fund III	590,376	7,168	401,627		5,115	179,039		2,148	812,964	10,120
MidCap Growth Fund III	-	-	265,440		2,563	47,454		412	217,986	2,124
MidCap Value Fund I	-	-	217,478		2,563	37,390		412	180,088	2,128
Money Market Fund	-	-	13,561,564		13,562	12,446,252		12,447	1,115,312	1,115
Preferred Securities Fund	3,679,648	39,593	1,742,971		16,357	1,232,651		10,823	4,189,968	44,531
Real Estate Securities Fund	982,146	15,999	1,145,000		19,212	497,855		7,731	1,629,291	27,473
SmallCap S&P 600 Index Fund	480,182	7,061	247,799		3,952	148,092		2,217	579,889	8,795
Ultra Short Bond Fund	7,030,429	70,536	2,067,220		19,093	759,468		7,080	8,338,181	82,541
	$ 537,866			$ 262,659			$ 174,625		$ 618,989
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Bond & Mortgage Securities Fund	$ 13,213			$ (2,313)				$ -
Core Plus Bond Fund I			-			-				-
Disciplined LargeCap Blend Fund			248			(143)				2,365
High Yield Fund I			-			(51)				-
Inflation Protection Fund		7,609				(300)				-
International Emerging Markets Fund			-			(67)				-
International Fund I			576			(3,036)				891
International Growth Fund			862			17				1,203
International Value Fund I			-			(14)				-
LargeCap Blend Fund I			175			(153)				323
LargeCap Growth Fund			49			3				197
LargeCap Growth Fund I			94			(117)				310
LargeCap Value Fund			263			(11)				589
LargeCap Value Fund I			-			(49)				-
LargeCap Value Fund III			276			(15)				485
MidCap Growth Fund III			-			(27)				-
MidCap Value Fund I			-			(23)				-
Money Market Fund			13			-				-
Preferred Securities Fund		2,437				(596)				-
Real Estate Securities Fund			929			(7)				5,612
SmallCap S&P 600 Index Fund			189			(1)				653
Ultra Short Bond Fund		3,349				(8)				-
	$ 30,282			$ (6,911)				$ 12,628

See accompanying notes

66

Schedule of Investments
SAM Balanced Portfolio
October 31, 2008

	Shares	Value
	Held	(000's)
INVESTMENT COMPANIES (99.96%)
Principal Funds, Inc. Institutional Class (99.96%)
Disciplined LargeCap Blend Fund (a)	19,308,881 $	192,123
Diversified International Fund (a)	24,384,063	181,417
Equity Income Fund (a)	28,285,889	390,911
High Yield Fund (a)	22,951,355	139,085
Income Fund (a)	43,896,352	344,586
International Emerging Markets Fund (a)	3,816,721	52,594
LargeCap Growth Fund (a)	46,001,459	281,989
LargeCap Growth Fund II (a)(b)	46,174,007	277,506
LargeCap Value Fund III (a)	19,114,245	162,280
MidCap Stock Fund (a)	8,728,233	102,120
Money Market Fund (a)	146,750	147
Mortgage Securities Fund (a)	48,339,182	500,311
Preferred Securities Fund (a)	17,698,875	117,874
Real Estate Securities Fund (a)	6,786,067	80,279
Short Term Income Fund (a)	8,894,620	99,353
SmallCap Growth Fund (a)(b)	9,534,651	52,441
SmallCap Value Fund (a)	4,417,437	54,644
West Coast Equity Fund (a)	4,262,229	132,641
		3,162,301
TOTAL INVESTMENT COMPANIES	$ 3,162,301
Total Investments	$ 3,162,301
Other Assets in Excess of Liabilities, Net - 0.04%		1,354
TOTAL NET ASSETS - 100.00%	$ 3,163,655

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 48,337
Unrealized Depreciation		(661,556)
Net Unrealized Appreciation (Depreciation)		(613,219)
Cost for federal income tax purposes		3,775,520
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Fund Type		Percent
Domestic Equity Funds		54.59%
Fixed Income Funds		37.97%
International Equity Funds		7.40%
Other Assets in Excess of Liabilities, Net		0.04%
TOTAL NET ASSETS		100.00%

See accompanying notes

67

Schedule of Investments
SAM Balanced Portfolio
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Disciplined LargeCap Blend Fund	30,213,300 $	411,746	4,059,750	$ 61,324		14,964,169	$ 211,637		19,308,881 $	247,497
Diversified International Fund	22,541,978	244,408	4,945,668		58,784	3,103,583		45,847	24,384,063	261,201
Equity Income Fund	28,989,689	496,473	4,340,195		84,446	5,043,995		94,696	28,285,889	469,942
High Yield Fund	24,894,467	196,251	3,969,952		30,789	5,913,064		47,185	22,951,355	176,432
Income Fund	53,730,288	489,287	4,298,967		38,518	14,132,903		121,661	43,896,352	395,509
International Emerging Markets Fund	2,736,657	70,791	1,301,655		27,595	221,591		7,803	3,816,721	92,295
LargeCap Growth Fund	92,645,724	604,721	2,413,298		20,470	49,057,563		432,289	46,001,459	272,026
LargeCap Growth Fund II	-	-	47,300,742		393,640	1,126,735		9,397	46,174,007	382,760
LargeCap Value Fund III	-	-	19,114,245		184,510	-		-	19,114,245	184,510
MidCap Stock Fund	8,367,725	101,772	2,002,424		31,292	1,641,916		29,882	8,728,233	106,643
Money Market Fund	24,764,421	24,765	48,480,830		48,481	73,098,501		73,099	146,750	147
Mortgage Securities Fund	76,279,192	816,724	3,645,156		38,698	31,585,166		333,532	48,339,182	512,190
Preferred Securities Fund	-	-	19,074,506		172,334	1,375,631		12,631	17,698,875	159,008
Real Estate Securities Fund	4,578,577	75,651	3,003,056		46,788	795,566		15,603	6,786,067	106,288
Short Term Income Fund	3,567,322	41,401	16,946,664		196,586	11,619,366		133,245	8,894,620	102,719
SmallCap Growth Fund	9,331,987	49,383	2,501,503		16,848	2,298,839		21,573	9,534,651	50,107
SmallCap Value Fund	4,294,667	74,526	2,024,048		28,593	1,901,278		31,974	4,417,437	69,901
West Coast Equity Fund	5,013,322	158,104	524,459		21,771	1,275,552		52,161	4,262,229	129,132
	$ 3,856,003			$ 1,501,467			$ 1,674,215		$ 3,718,307
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Disciplined LargeCap Blend Fund	$ 4,476			$ (13,936)				$ 50,797
Diversified International Fund		13,835				3,856				30,510
Equity Income Fund		31,502				(16,281)				37,477
High Yield Fund		15,098				(3,423)				4,622
Income Fund		27,229				(10,635)				-
International Emerging Markets Fund		11,789				1,712				3,611
LargeCap Growth Fund		2,617				79,124				10,523
LargeCap Growth Fund II		3,879				(1,483)				3,678
LargeCap Value Fund III			-			-				-
MidCap Stock Fund		3,312				3,461				18,374
Money Market Fund		1,398				-				-
Mortgage Securities Fund		36,507				(9,700)				-
Preferred Securities Fund		8,044				(695)				-
Real Estate Securities Fund			3,385			(548)				22,186
Short Term Income Fund		8,088				(2,023)				-
SmallCap Growth Fund			-			5,449				4,201
SmallCap Value Fund		1,989				(1,244)				3,148
West Coast Equity Fund		1,871				1,418				14,583
	$ 175,019			$ 35,052				$ 203,710

See accompanying notes

68

Schedule of Investments
SAM Conservative Balanced Portfolio

October 31, 2008

	Shares	Value
	Held	(000's)
INVESTMENT COMPANIES (99.99%)
Principal Funds, Inc. Institutional Class (99.99%)
Disciplined LargeCap Blend Fund (a)	2,202,770 $	21,918
Diversified International Fund (a)	2,870,496	21,356
Equity Income Fund (a)	3,193,505	44,134
High Yield Fund (a)	5,350,639	32,425
Income Fund (a)	12,098,462	94,973
International Emerging Markets Fund (a)	484,678	6,679
LargeCap Growth Fund (a)	5,225,424	32,032
LargeCap Growth Fund II (a)(b)	5,183,169	31,151
LargeCap Value Fund III (a)	1,982,521	16,832
MidCap Stock Fund (a)	1,131,862	13,243
Money Market Fund (a)	2,224,964	2,225
Mortgage Securities Fund (a)	13,339,826	138,067
Preferred Securities Fund (a)	3,389,482	22,574
Real Estate Securities Fund (a)	777,966	9,203
Short Term Income Fund (a)	3,350,516	37,425
SmallCap Growth Fund (a)(b)	1,179,103	6,485
SmallCap Value Fund (a)	484,840	5,997
West Coast Equity Fund (a)	519,383	16,163
		552,882
TOTAL INVESTMENT COMPANIES	$ 552,882
Total Investments	$ 552,882
Other Assets in Excess of Liabilities, Net - 0.01%		35
TOTAL NET ASSETS - 100.00%	$ 552,917

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 5,617
Unrealized Depreciation		(99,828)
Net Unrealized Appreciation (Depreciation)		(94,211)
Cost for federal income tax purposes		647,093
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Fund Type		Percent
Fixed Income Funds		59.26%
Domestic Equity Funds		35.66%
International Equity Funds		5.07%
Other Assets in Excess of Liabilities, Net		0.01%
TOTAL NET ASSETS		100.00%

See accompanying notes

69

Schedule of Investments
SAM Conservative Balanced Portfolio
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Disciplined LargeCap Blend Fund	2,764,103 $	36,651	835,248	$ 11,699		1,396,581	$ 20,126		2,202,770 $	27,501
Diversified International Fund	2,044,558	21,303	1,041,890		11,760	215,952		3,169	2,870,496	30,256
Equity Income Fund	2,660,908	44,711	969,035		17,981	436,438		8,778	3,193,505	53,509
High Yield Fund	4,288,079	33,018	1,418,638		10,992	356,078		2,671	5,350,639	41,009
Income Fund	12,522,870	115,003	1,946,898		17,465	2,371,306		20,492	12,098,462	110,202
International Emerging Markets Fund	244,691	6,248	257,671		5,455	17,684		550	484,678	11,157
LargeCap Growth Fund	8,296,270	53,715	1,251,247		10,167	4,322,093		38,757	5,225,424	30,903
LargeCap Growth Fund II	-	-	5,325,991		43,568	142,822		1,137	5,183,169	42,190
LargeCap Value Fund III	-	-	1,982,521		19,775	-		-	1,982,521	19,775
MidCap Stock Fund	808,101	11,338	418,387		6,290	94,626		1,741	1,131,862	15,971
Money Market Fund	26,690	27	10,265,810		10,266	8,067,536		8,068	2,224,964	2,225
Mortgage Securities Fund	15,861,519	170,632	2,166,847		23,051	4,688,540		49,446	13,339,826	142,430
Preferred Securities Fund	-	-	3,486,073		30,893	96,591		826	3,389,482	29,954
Real Estate Securities Fund	446,133	7,724	405,584		6,220	73,751		1,540	777,966	12,341
Short Term Income Fund	3,003,445	35,288	1,515,048		17,609	1,167,977		13,376	3,350,516	39,004
SmallCap Growth Fund	800,508	3,925	549,588		3,793	170,993		1,597	1,179,103	6,482
SmallCap Value Fund	397,669	6,941	335,725		4,778	248,554		4,002	484,840	7,332
West Coast Equity Fund	462,514	13,768	138,678		5,461	81,809		3,293	519,383	15,700
	$ 560,292			$ 257,223			$ 179,569		$ 637,941
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Disciplined LargeCap Blend Fund	$ 384			$ (723)				$ 4,946
Diversified International Fund			1,297			362				2,858
Equity Income Fund		2,941				(405)				3,330
High Yield Fund		3,149				(330)				902
Income Fund		6,675				(1,774)				-
International Emerging Markets Fund			1,123			4				345
LargeCap Growth Fund			228			5,778				914
LargeCap Growth Fund II			296			(241)				281
LargeCap Value Fund III			-			-				-
MidCap Stock Fund			344			84				1,908
Money Market Fund			181			-				-
Mortgage Securities Fund		8,462				(1,807)				-
Preferred Securities Fund		1,406				(113)				-
Real Estate Securities Fund			341			(63)				2,112
Short Term Income Fund		1,935				(517)				-
SmallCap Growth Fund			-			361				376
SmallCap Value Fund			202			(385)				358
West Coast Equity Fund			180			(236)				1,404
	$ 29,144			$ (5)				$ 19,734

See accompanying notes

70

Schedule of Investments
SAM Conservative Growth Portfolio

October 31, 2008

	Shares	Value
	Held	(000's)
INVESTMENT COMPANIES (100.10%)
Principal Funds, Inc. Institutional Class (100.10%)
Disciplined LargeCap Blend Fund (a)	18,425,073 $	183,329
Diversified International Fund (a)	25,557,262	190,146
Equity Income Fund (a)	28,464,488	393,379
High Yield Fund (a)	11,351,105	68,788
Income Fund (a)	13,907,794	109,176
International Emerging Markets Fund (a)	3,526,948	48,601
LargeCap Growth Fund (a)	47,449,962	290,868
LargeCap Growth Fund II (a)(b)	40,413,852	242,887
LargeCap Value Fund III (a)	16,130,076	136,944
MidCap Stock Fund (a)	10,538,515	123,301
Money Market Fund (a)	16,628,501	16,629
Mortgage Securities Fund (a)	19,463,616	201,448
Preferred Securities Fund (a)	6,645,119	44,257
Real Estate Securities Fund (a)	6,785,392	80,271
Short Term Income Fund (a)	2,560,304	28,599
SmallCap Growth Fund (a)(b)	9,038,196	49,710
SmallCap Value Fund (a)	4,251,543	52,592
West Coast Equity Fund (a)	4,707,606	146,501
		2,407,426
TOTAL INVESTMENT COMPANIES	$ 2,407,426
Total Investments	$ 2,407,426
Liabilities in Excess of Other Assets, Net - (0.10)%		(2,386)
TOTAL NET ASSETS - 100.00%	$ 2,405,040

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 33,923
Unrealized Depreciation		(581,880)
Net Unrealized Appreciation (Depreciation)		(547,957)
Cost for federal income tax purposes		2,955,383
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Fund Type		Percent
Domestic Equity Funds		70.67%
Fixed Income Funds		19.50%
International Equity Funds		9.93%
Liabilities in Excess of Other Assets, Net		(0.10%)
TOTAL NET ASSETS		100.00%

See accompanying notes

71

Schedule of Investments
SAM Conservative Growth Portfolio
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Disciplined LargeCap Blend Fund	31,893,539 $	436,915	4,364,864	$ 67,525		17,833,330	$ 242,971		18,425,073 $	238,053
Diversified International Fund	23,782,759	265,178	4,625,097		64,592	2,850,594		34,578	25,557,262	289,344
Equity Income Fund	30,622,780	536,948	4,067,295		83,263	6,225,587		113,617	28,464,488	484,630
High Yield Fund	11,502,756	87,214	1,750,756		13,795	1,902,407		14,529	11,351,105	85,164
Income Fund	18,330,402	164,451	2,040,865		18,359	6,463,473		55,533	13,907,794	123,890
International Emerging Markets Fund	2,912,083	75,188	825,602		24,090	210,737		6,239	3,526,948	92,555
LargeCap Growth Fund	95,620,382	641,172	2,091,003		19,646	50,261,423		429,140	47,449,962	291,130
LargeCap Growth Fund II	-	-	42,092,279		351,676	1,678,427		13,834	40,413,852	335,479
LargeCap Value Fund III	-	-	16,130,076		159,663	-		-	16,130,076	159,663
MidCap Stock Fund	9,576,542	118,439	2,011,474		34,297	1,049,501		16,285	10,538,515	134,285
Money Market Fund	148,284	148	32,577,704		32,578	16,097,487		16,097	16,628,501	16,629
Mortgage Securities Fund	26,040,632	278,573	1,334,866		14,175	7,911,882		83,935	19,463,616	206,585
Preferred Securities Fund	-	-	7,378,261		67,137	733,142		6,752	6,645,119	60,083
Real Estate Securities Fund	4,853,568	80,880	2,459,506		43,529	527,682		8,288	6,785,392	112,844
Short Term Income Fund	-	-	6,212,852		72,055	3,652,548		41,917	2,560,304	29,655
SmallCap Growth Fund	10,417,503	58,117	1,264,291		10,054	2,643,598		25,036	9,038,196	49,018
SmallCap Value Fund	4,610,932	79,930	1,235,721		18,518	1,595,110		26,906	4,251,543	70,592
West Coast Equity Fund	5,315,965	169,655	574,716		25,862	1,183,075		44,888	4,707,606	147,359
	$ 2,992,808			$ 1,120,814			$ 1,180,545		$ 2,926,958
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Disciplined LargeCap Blend Fund	$ 4,899			$ (23,416)				$ 58,989
Diversified International Fund		16,245				(5,848)				35,820
Equity Income Fund		33,562				(21,964)				40,195
High Yield Fund		7,611				(1,316)				2,371
Income Fund		9,394				(3,387)				-
International Emerging Markets Fund		13,663				(484)				4,185
LargeCap Growth Fund			2,985			59,452				12,009
LargeCap Growth Fund II			3,209			(2,363)				3,044
LargeCap Value Fund III			-			-				-
MidCap Stock Fund		4,453				(2,166)				24,643
Money Market Fund			809			-				-
Mortgage Securities Fund		12,813				(2,228)				-
Preferred Securities Fund		3,189				(302)				-
Real Estate Securities Fund			4,141			(3,277)				27,521
Short Term Income Fund		2,372				(483)				-
SmallCap Growth Fund			-			5,883				4,746
SmallCap Value Fund		2,313				(950)				3,551
West Coast Equity Fund		2,199				(3,270)				17,202
	$ 123,857			$ (6,119)				$ 234,276

See accompanying notes

72

Schedule of Investments
SAM Flexible Income Portfolio

October 31, 2008

	Shares	Value
	Held	(000's)
INVESTMENT COMPANIES (99.90%)
Principal Funds, Inc. Institutional Class (99.90%)
Disciplined LargeCap Blend Fund (a)	1,755,164 $	17,465
Diversified International Fund (a)	2,260,187	16,816
Equity Income Fund (a)	2,204,152	30,461
High Yield Fund (a)	8,027,397	48,646
Income Fund (a)	18,750,801	147,194
International Emerging Markets Fund (a)	308,389	4,250
LargeCap Growth Fund (a)	4,241,819	26,002
LargeCap Growth Fund II (a)(b)	4,285,060	25,753
LargeCap Value Fund III (a)	2,810,590	23,862
MidCap Stock Fund (a)	1,240,145	14,510
Money Market Fund (a)	755,211	755
Mortgage Securities Fund (a)	18,712,637	193,676
Preferred Securities Fund (a)	5,662,180	37,710
Real Estate Securities Fund (a)	632,872	7,487
Short Term Income Fund (a)	6,267,411	70,007
SmallCap Growth Fund (a)(b)	795,331	4,374
SmallCap Value Fund (a)	378,509	4,682
West Coast Equity Fund (a)	210,487	6,550
		680,200
TOTAL INVESTMENT COMPANIES	$ 680,200
Total Investments	$ 680,200
Other Assets in Excess of Liabilities, Net - 0.10%		678
TOTAL NET ASSETS - 100.00%	$ 680,878

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 8,896
Unrealized Depreciation		(107,608)
Net Unrealized Appreciation (Depreciation)		(98,712)
Cost for federal income tax purposes		778,912
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Fund Type		Percent
Fixed Income Funds		73.14%
Domestic Equity Funds		23.67%
International Equity Funds		3.09%
Other Assets in Excess of Liabilities, Net		0.10%
TOTAL NET ASSETS		100.00%

See accompanying notes

73

Schedule of Investments
SAM Flexible Income Portfolio
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Disciplined LargeCap Blend Fund	2,601,096 $	29,929	988,210	$ 14,046		1,834,142	$ 22,928		1,755,164 $	18,926
Diversified International Fund	-	-	2,382,722		33,663	122,535		1,576	2,260,187	31,722
Equity Income Fund	1,821,286	26,481	823,990		15,087	441,124		7,854	2,204,152	32,336
High Yield Fund	6,036,864	44,440	3,036,261		22,716	1,045,728		8,636	8,027,397	58,567
Income Fund	21,581,549	196,131	3,733,313		33,543	6,564,061		57,703	18,750,801	169,320
International Emerging Markets Fund	-	-	322,402		9,456	14,013		395	308,389	8,964
LargeCap Growth Fund	6,710,263	38,774	1,047,492		8,536	3,515,936		32,481	4,241,819	22,521
LargeCap Growth Fund II	-	-	4,442,902		36,967	157,842		1,347	4,285,060	35,444
LargeCap Value Fund III	-	-	2,810,590		27,058	-		-	2,810,590	27,058
MidCap Stock Fund	863,755	9,670	502,056		7,535	125,666		2,276	1,240,145	15,187
Money Market Fund	-	-	9,370,473		9,370	8,615,262		8,615	755,211	755
Mortgage Securities Fund	23,247,856	249,005	3,596,376		38,285	8,131,595		85,906	18,712,637	198,725
Preferred Securities Fund	-	-	5,904,865		51,412	242,685		2,157	5,662,180	49,047
Real Estate Securities Fund	380,504	6,868	438,184		6,467	185,816		3,477	632,872	9,155
Short Term Income Fund	7,913,033	92,420	1,511,787		17,638	3,157,409		36,202	6,267,411	72,738
SmallCap Growth Fund	832,642	3,446	299,638		2,169	336,949		3,081	795,331	3,833
SmallCap Value Fund	416,710	7,224	203,603		2,939	241,804		3,999	378,509	5,944
West Coast Equity Fund	220,588	5,299	65,356		2,550	75,457		3,017	210,487	5,038
	$ 709,687			$ 339,437			$ 281,650		$ 765,280
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Disciplined LargeCap Blend Fund	$ 466			$ (2,121)				$ 4,527
Diversified International Fund			1,017			(365)				2,238
Equity Income Fund		2,134				(1,378)				2,415
High Yield Fund		4,162				47				1,159
Income Fund		10,651				(2,651)				-
International Emerging Markets Fund			833			(97)				255
LargeCap Growth Fund			177			7,692				711
LargeCap Growth Fund II			296			(176)				281
LargeCap Value Fund III			-			-				-
MidCap Stock Fund			372			258				2,054
Money Market Fund			204			-				-
Mortgage Securities Fund		11,603				(2,659)				-
Preferred Securities Fund		2,008				(208)				-
Real Estate Securities Fund			241			(703)				1,466
Short Term Income Fund		4,013				(1,118)				-
SmallCap Growth Fund			-			1,299				323
SmallCap Value Fund			176			(220)				284
West Coast Equity Fund			84			206				648
	$ 38,437			$ (2,194)				$ 16,361

See accompanying notes

74

Schedule of Investments
SAM Strategic Growth Portfolio

October 31, 2008

	Shares	Value
	Held	(000's)
INVESTMENT COMPANIES (100.19%)
Principal Funds, Inc. Institutional Class (100.19%)
Disciplined LargeCap Blend Fund (a)	14,285,072 $	142,136
Diversified International Fund (a)	18,785,798	139,766
Equity Income Fund (a)	19,435,181	268,594
High Yield Fund (a)	10,280,216	62,298
International Emerging Markets Fund (a)	2,858,366	39,388
LargeCap Growth Fund (a)	30,805,274	188,836
LargeCap Growth Fund II (a)(b)	29,670,395	178,319
LargeCap Value Fund III (a)	13,267,715	112,643
MidCap Stock Fund (a)	7,640,045	89,389
Money Market Fund (a)	8,077,765	8,078
Real Estate Securities Fund (a)	4,482,306	53,026
Short Term Income Fund (a)	614,848	6,868
SmallCap Growth Fund (a)(b)	6,839,957	37,620
SmallCap Value Fund (a)	3,303,352	40,863
West Coast Equity Fund (a)	3,419,702	106,421
		1,474,245
TOTAL INVESTMENT COMPANIES	$ 1,474,245
Total Investments	$ 1,474,245
Liabilities in Excess of Other Assets, Net - (0.19)%		(2,807)
TOTAL NET ASSETS - 100.00%	$ 1,471,438

(a)	Affiliated Security
(b)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 19,915
Unrealized Depreciation		(432,526)
Net Unrealized Appreciation (Depreciation)		(412,611)
Cost for federal income tax purposes		1,886,856
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Fund Type		Percent
Domestic Equity Funds		82.77%
International Equity Funds		12.17%
Fixed Income Funds		5.25%
Liabilities in Excess of Other Assets, Net		(0.19%)
TOTAL NET ASSETS		100.00%

See accompanying notes

75

Schedule of Investments
SAM Strategic Growth Portfolio
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Disciplined LargeCap Blend Fund	22,526,739 $	319,852	3,155,870	$ 48,769		11,397,537	$ 142,878		14,285,072 $	195,236
Diversified International Fund	16,790,793	191,590	3,410,236		45,325	1,415,231		18,262	18,785,798	216,825
Equity Income Fund	20,567,049	370,438	2,695,609		55,262	3,827,477		64,469	19,435,181	341,557
High Yield Fund	11,050,648	87,136	1,493,738		11,815	2,264,170		18,243	10,280,216	79,918
International Emerging Markets Fund	2,018,243	52,006	983,672		22,683	143,549		4,328	2,858,366	70,126
LargeCap Growth Fund	66,302,014	457,866	1,294,560		12,193	36,791,300		317,085	30,805,274	192,025
LargeCap Growth Fund II	-	-	30,772,493		260,208	1,102,098		9,083	29,670,395	249,573
LargeCap Value Fund III	-	-	13,267,715		126,533	-		-	13,267,715	126,533
MidCap Stock Fund	7,252,888	89,542	1,483,569		25,587	1,096,412		16,044	7,640,045	95,829
Money Market Fund	12,173	12	24,066,091		24,066	16,000,499		16,000	8,077,765	8,078
Real Estate Securities Fund	3,409,529	62,805	1,596,297		26,470	523,520		9,717	4,482,306	75,871
Short Term Income Fund	-	-	2,183,069		25,311	1,568,221		17,922	614,848	7,109
SmallCap Growth Fund	7,047,025	42,024	1,568,803		11,170	1,775,871		16,443	6,839,957	39,485
SmallCap Value Fund	3,204,107	55,629	729,929		11,056	630,684		10,416	3,303,352	55,602
West Coast Equity Fund	3,957,965	128,229	553,676		25,302	1,091,939		40,260	3,419,702	108,402
	$ 1,857,129			$ 731,750			$ 701,150		$ 1,862,169
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Disciplined LargeCap Blend Fund	$ 4,021			$ (30,507)				$ 42,219
Diversified International Fund		11,365				(1,828)				25,062
Equity Income Fund		23,349				(19,674)				27,942
High Yield Fund		6,875				(790)				2,136
International Emerging Markets Fund			9,429			(235)				2,888
LargeCap Growth Fund		1,939				39,051				7,806
LargeCap Growth Fund II		2,222				(1,552)				2,107
LargeCap Value Fund III			-			-				-
MidCap Stock Fund		4,831				(3,256)				17,457
Money Market Fund			550			-				-
Real Estate Securities Fund			2,586			(3,687)				17,078
Short Term Income Fund			827			(280)				-
SmallCap Growth Fund			-			2,734				3,586
SmallCap Value Fund		1,800				(667)				2,691
West Coast Equity Fund		1,686				(4,869)				13,206
	$ 71,480			$ (25,560)				$ 164,178

See accompanying notes

76

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2010 FUND
Class A shares
Net Asset Value, Beginning of Period	$ 14.23	$ 13.28		$ 12.11	$ 12.04
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .43		0 .37	0 .32	0 .05
Net Realized and Unrealized Gain (Loss) on Investments	(4 .75)		1 .00	1 .08	0 .02
Total From Investment Operations	(4 .32)		1 .37	1 .40	0 .07
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .44)		(0 .35)	(0 .15)	–
Distributions from Realized Gains	(0 .23)		(0 .07)	(0 .08)	–
Total Dividends and Distributions	(0 .67)		(0 .42)	(0 .23)	–
Net Asset Value, End of Period	$ 9.24	$ 14.23		$ 13.28	$ 12.11
Total Return(c)	(31 .75)%		10 .62%	11 .78%	0 .58%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 27,444	$ 33,273		$ 17,464	$ 3,070
Ratio of Expenses to Average Net Assets(e),(f)	0 .50%		0 .50%	0 .62%	1 .30%(g)
Ratio of Net Investment Income to Average Net Assets	3 .58%		2 .69%	2 .53%	1 .27%(g)
Portfolio Turnover Rate	12 .7%		14 .7%	16 .6%	10 .2%(g)
	2008		2007(h)
PRINCIPAL LIFETIME 2010 FUND
Class C shares
Net Asset Value, Beginning of Period	$ 14.15	$ 13.25
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .35		0 .15
Net Realized and Unrealized Gain (Loss) on Investments	(4 .74)		0 .75
Total From Investment Operations	(4 .39)		0 .90
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .34)		–
Distributions from Realized Gains	(0 .23)		–
Total Dividends and Distributions	(0 .57)		–
Net Asset Value, End of Period	$ 9.19	$ 14.15
Total Return(c)	(32 .22)%		6 .79%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,856	$ 5,492
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	2 .89%		1 .39%(g)
Portfolio Turnover Rate	12 .7%		14 .7%(g)

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005. ^(b) Calculated based on average shares outstanding during the period.

^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge. ^(d) Total return amounts have not been annualized.

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

^(f) Does not include expenses of the investment companies in which the Fund invests. ^(g) Computed on an annualized basis.

^(h) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.12 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

77

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2020 FUND
Class A shares
Net Asset Value, Beginning of Period	$ 15.16	$ 13.75		$ 12.28	$ 12.13
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .37		0 .31	0 .25	0 .03
Net Realized and Unrealized Gain (Loss) on Investments	(5 .49)		1 .54	1 .48	0 .12
Total From Investment Operations	(5 .12)		1 .85	1 .73	0 .15
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .40)		(0 .35)	(0 .16)	–
Distributions from Realized Gains	(0 .29)		(0 .09)	(0 .10)	–
Total Dividends and Distributions	(0 .69)		(0 .44)	(0 .26)	–
Net Asset Value, End of Period	$ 9.35	$ 15.16		$ 13.75	$ 12.28
Total Return(c)	(35 .25)%		13 .75%	14 .34%	1 .24%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 49,723	$ 52,923		$ 23,723	$ 3,655
Ratio of Expenses to Average Net Assets(e),(f)	0 .50%		0 .50%	0 .61%	1 .40%(g)
Ratio of Net Investment Income to Average Net Assets	2 .93%		2 .17%	1 .91%	0 .75%(g)
Portfolio Turnover Rate	7 .1%		15 .1%	7 .4%	5 .5%(g)
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2020 FUND
Class B shares
Net Asset Value, Beginning of Period	$ 15.12	$ 13.72		$ 12.24	$ 12.13
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .32		0 .21	0 .14	–
Net Realized and Unrealized Gain (Loss) on Investments	(5 .52)		1 .52	1 .50	0 .11
Total From Investment Operations	(5 .20)		1 .73	1 .64	0 .11
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .30)		(0 .24)	(0 .06)	–
Distributions from Realized Gains	(0 .29)		(0 .09)	(0 .10)	–
Total Dividends and Distributions	(0 .59)		(0 .33)	(0 .16)	–
Net Asset Value, End of Period	$ 9.33	$ 15.12		$ 13.72	$ 12.24
Total Return(c)	(35 .71)%		12 .80%	13 .57%	0 .91%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 7,264	$ 11,033		$ 5,682	$ 979
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%	1 .40%	2 .15%(g)
Ratio of Net Investment Income to Average Net Assets	2 .55%		1 .50%	1 .11%	(0 .04)%(g)
Portfolio Turnover Rate	7 .1%		15 .1%	7 .4%	5 .5%(g)
	2008		2007(h)
PRINCIPAL LIFETIME 2020 FUND
Class C shares
Net Asset Value, Beginning of Period	$ 15.07	$ 13.83
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .29		0 .06
Net Realized and Unrealized Gain (Loss) on Investments	(5 .48)		1 .18
Total From Investment Operations	(5 .19)		1 .24
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .30)		–
Distributions from Realized Gains	(0 .29)		–
Total Dividends and Distributions	(0 .59)		–
Net Asset Value, End of Period	$ 9.29	$ 15.07
Total Return(c)	(35 .75)%		8 .97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,572	$ 7,038
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	2 .31%		0 .51%(g)
Portfolio Turnover Rate	7 .1%		15 .1%(g)

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005. ^(b) Calculated based on average shares outstanding during the period.

^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge. ^(d) Total return amounts have not been annualized.

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

^(f) Does not include expenses of the investment companies in which the Fund invests. ^(g) Computed on an annualized basis.

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

See accompanying notes.

78

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2030 FUND
Class A shares
Net Asset Value, Beginning of Period	$ 15.30	$ 13.64		$ 12.07	$ 11.88
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .36		0 .26	0 .18	0 .01
Net Realized and Unrealized Gain (Loss) on Investments	(5 .87)		1 .81	1 .66	0 .18
Total From Investment Operations	(5 .51)		2 .07	1 .84	0 .19
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .39)		(0 .31)	(0 .15)	–
Distributions from Realized Gains	(0 .32)		(0 .10)	(0 .12)	–
Total Dividends and Distributions	(0 .71)		(0 .41)	(0 .27)	–
Net Asset Value, End of Period	$ 9.08	$ 15.30		$ 13.64	$ 12.07
Total Return(c)	(37 .66)%		15 .55%	15 .46%	1 .60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 33,002	$ 39,873		$ 17,509	$ 2,564
Ratio of Expenses to Average Net Assets(e),(f)	0 .50%		0 .50%	0 .64%	1 .40%(g)
Ratio of Net Investment Income to Average Net Assets	2 .85%		1 .81%	1 .39%	0 .14%(g)
Portfolio Turnover Rate	6 .6%		15 .5%	9 .4%	4 .8%(g)
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2030 FUND
Class B shares
Net Asset Value, Beginning of Period	$ 15.28	$ 13.60		$ 12.04	$ 11.88
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .30		0 .15	0 .09	(0 .03)
Net Realized and Unrealized Gain (Loss) on Investments	(5 .90)		1 .84	1 .65	0 .19
Total From Investment Operations	(5 .60)		1 .99	1 .74	0 .16
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .28)		(0 .21)	(0 .06)	–
Distributions from Realized Gains	(0 .32)		(0 .10)	(0 .12)	–
Total Dividends and Distributions	(0 .60)		(0 .31)	(0 .18)	–
Net Asset Value, End of Period	$ 9.08	$ 15.28		$ 13.60	$ 12.04
Total Return(c)	(38 .04)%		14 .86%	14 .55%	1 .35%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 6,193	$ 9,058		$ 4,175	$ 789
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%	1 .40%	2 .15%(g)
Ratio of Net Investment Income to Average Net Assets	2 .36%		1 .08%	0 .72%	(0 .68)%(g)
Portfolio Turnover Rate	6 .6%		15 .5%	9 .4%	4 .8%(g)
	2008		2007(h)
PRINCIPAL LIFETIME 2030 FUND
Class C shares
Net Asset Value, Beginning of Period	$ 15.22	$ 13.77
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .28		(0 .01)
Net Realized and Unrealized Gain (Loss) on Investments	(5 .86)		1 .46
Total From Investment Operations	(5 .58)		1 .45
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .28)		–
Distributions from Realized Gains	(0 .32)		–
Total Dividends and Distributions	(0 .60)		–
Net Asset Value, End of Period	$ 9.04	$ 15.22
Total Return(c)	(38 .06)%	10 .53%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,689	$ 7,651
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	2 .27%	(0 .06)%(g)
Portfolio Turnover Rate	6 .6%		15 .5%(g)

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005. ^(b) Calculated based on average shares outstanding during the period.

^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge. ^(d) Total return amounts have not been annualized.

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

^(f) Does not include expenses of the investment companies in which the Fund invests. ^(g) Computed on an annualized basis.

^(h) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.18 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

79

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2040 FUND
Class A shares
Net Asset Value, Beginning of Period	$ 15.57	$ 13.68		$ 12.18	$ 11.96
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .34		0 .22	0 .14	(0 .02)
Net Realized and Unrealized Gain (Loss) on Investments	(6 .22)		2 .07	1 .76	0 .24
Total From Investment Operations	(5 .88)		2 .29	1 .90	0 .22
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .39)		(0 .30)	(0 .29)	–
Distributions from Realized Gains	(0 .31)		(0 .10)	(0 .11)	–
Total Dividends and Distributions	(0 .70)		(0 .40)	(0 .40)	–
Net Asset Value, End of Period	$ 8.99	$ 15.57		$ 13.68	$ 12.18
Total Return(c)	(39 .41)%		17 .09%	15 .93%	1 .84%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 19,918	$ 24,434		$ 9,356	$ 1,433
Ratio of Expenses to Average Net Assets(e),(f)	0 .50%		0 .50%	0 .64%	1 .40%(g)
Ratio of Net Investment Income to Average Net Assets	2 .68%		1 .49%	1 .08%	(0 .38)%(g)
Portfolio Turnover Rate	6 .0%		16 .5%	13 .1%	7 .1%(g)
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2040 FUND
Class B shares
Net Asset Value, Beginning of Period	$ 15.42	$ 13.55		$ 12.16	$ 11.96
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .25		0 .12	0 .05	(0 .05)
Net Realized and Unrealized Gain (Loss) on Investments	(6 .17)		2 .04	1 .74	0 .25
Total From Investment Operations	(5 .92)		2 .16	1 .79	0 .20
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .28)		(0 .19)	(0 .29)	–
Distributions from Realized Gains	(0 .31)		(0 .10)	(0 .11)	–
Total Dividends and Distributions	(0 .59)		(0 .29)	(0 .40)	–
Net Asset Value, End of Period	$ 8.91	$ 15.42		$ 13.55	$ 12.16
Total Return(c)	(39 .79)%		16 .22%	15 .03%	1 .67%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 4,794	$ 6,161		$ 3,090	$ 621
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%	1 .40%	2 .15%(g)
Ratio of Net Investment Income to Average Net Assets	1 .99%		0 .86%	0 .38%	(1 .17)%(g)
Portfolio Turnover Rate	6 .0%		16 .5%	13 .1%	7 .1%(g)
	2008		2007(h)
PRINCIPAL LIFETIME 2040 FUND
Class C shares
Net Asset Value, Beginning of Period	$ 15.49	$ 13.86
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .26		(0 .06)
Net Realized and Unrealized Gain (Loss) on Investments	(6 .21)		1 .69
Total From Investment Operations	(5 .95)		1 .63
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .28)		–
Distributions from Realized Gains	(0 .31)		–
Total Dividends and Distributions	(0 .59)		–
Net Asset Value, End of Period	$ 8.95	$ 15.49
Total Return(c)	(39 .80)%	11 .76%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,380	$ 3,162
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	2 .03%	(0 .50)%(g)
Portfolio Turnover Rate	6 .0%		16 .5%(g)

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005. ^(b) Calculated based on average shares outstanding during the period.

^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge. ^(d) Total return amounts have not been annualized.

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

^(f) Does not include expenses of the investment companies in which the Fund invests. ^(g) Computed on an annualized basis.

^(h) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.19 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

80

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME 2050 FUND
Class A shares
Net Asset Value, Beginning of Period	$ 15.36	$ 13.41		$ 11.74	$ 11.48
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .33		0 .19	0 .09	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(6 .24)		2 .13	1 .80	0 .30
Total From Investment Operations	(5 .91)		2 .32	1 .89	0 .26
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .37)		(0 .26)	(0 .11)	–
Distributions from Realized Gains	(0 .36)		(0 .11)	(0 .11)	–
Total Dividends and Distributions	(0 .73)		(0 .37)	(0 .22)	–
Net Asset Value, End of Period	$ 8.72	$ 15.36		$ 13.41	$ 11.74
Total Return(c)	(40 .22)%		17 .71%	16 .30%	2 .26%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 11,391	$ 14,930		$ 5,685	$ 553
Ratio of Expenses to Average Net Assets(e),(f)	0 .50%		0 .50%	0 .64%	1 .50%(g)
Ratio of Net Investment Income to Average Net Assets	2 .70%		1 .32%	0 .67%	(0 .93)%(g)
Portfolio Turnover Rate	6 .8%		21 .2%	15 .9%	7 .5%(g)
	2008		2007	2006(h)
PRINCIPAL LIFETIME 2050 FUND
Class B shares
Net Asset Value, Beginning of Period	$ 15.21	$ 13.30		$ 12.64
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .25		0 .02	(0 .05)
Net Realized and Unrealized Gain (Loss) on Investments	(6 .20)		2 .18	0 .71
Total From Investment Operations	(5 .95)		2 .20	0 .66
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .27)		(0 .18)	–
Distributions from Realized Gains	(0 .36)		(0 .11)	–
Total Dividends and Distributions	(0 .63)		(0 .29)	–
Net Asset Value, End of Period	$ 8.63	$ 15.21		$ 13.30
Total Return(c)	(40 .67)%		16 .80%	5 .22%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,496	$ 2,106		$ 451
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%	1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	2 .05%		0 .15%	(0 .63)%(g)
Portfolio Turnover Rate	6 .8%		21 .2%	15 .9%(g)
	2008		2007(i)
PRINCIPAL LIFETIME 2050 FUND
Class C shares
Net Asset Value, Beginning of Period	$ 15.28	$ 13.64
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .20		(0 .08)
Net Realized and Unrealized Gain (Loss) on Investments	(6 .17)		1 .72
Total From Investment Operations	(5 .97)		1 .64
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .27)		–
Distributions from Realized Gains	(0 .36)		–
Total Dividends and Distributions	(0 .63)		–
Net Asset Value, End of Period	$ 8.68	$ 15.28
Total Return(c)	(40 .62)%	12 .02%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,260	$ 1,560
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	1 .63%	(0 .66)%(g)
Portfolio Turnover Rate	6 .8%		21 .2%(g)

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005. ^(b) Calculated based on average shares outstanding during the period.

^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge. ^(d) Total return amounts have not been annualized.

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

^(f) Does not include expenses of the investment companies in which the Fund invests. ^(g) Computed on an annualized basis.

^(h) Period from March 15, 2006, date shares first offered, through October 31, 2006.

⁽ⁱ⁾ 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.

See accompanying notes.

81

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PRINCIPAL LIFETIME STRATEGIC INCOME FUND
Class A shares
Net Asset Value, Beginning of Period	$ 12.95	$ 12.74		$ 11.98	$ 11.96
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .52		0 .51	0 .40	0 .08
Net Realized and Unrealized Gain (Loss) on Investments	(3 .36)		0 .15	0 .68	(0 .06)
Total From Investment Operations	(2 .84)		0 .66	1 .08	0 .02
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .51)		(0 .39)	(0 .20)	–
Distributions from Realized Gains	(0 .17)		(0 .06)	(0 .12)	–
Total Dividends and Distributions	(0 .68)		(0 .45)	(0 .32)	–
Net Asset Value, End of Period	$ 9.43	$ 12.95		$ 12.74	$ 11.98
Total Return(c)	(23 .06)%		5 .30%	9 .16%	0 .17%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 17,473	$ 15,668		$ 6,635	$ 1,832
Ratio of Expenses to Average Net Assets(e),(f)	0 .50%		0 .50%	0 .65%	1 .30%(g)
Ratio of Net Investment Income to Average Net Assets	4 .57%		3 .98%	3 .24%	1 .90%(g)
Portfolio Turnover Rate	30 .7%		25 .3%	48 .9%	43 .8%(g)
	2008		2007	2006(h)
PRINCIPAL LIFETIME STRATEGIC INCOME FUND
Class B shares
Net Asset Value, Beginning of Period	$ 12.82	$ 12.63		$ 12.12
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .45		0 .40	0 .23
Net Realized and Unrealized Gain (Loss) on Investments	(3 .36)		0 .16	0 .28
Total From Investment Operations	(2 .91)		0 .56	0 .51
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .42)		(0 .31)	–
Distributions from Realized Gains	(0 .17)		(0 .06)	–
Total Dividends and Distributions	(0 .59)		(0 .37)	–
Net Asset Value, End of Period	$ 9.32	$ 12.82		$ 12.63
Total Return(c)	(23 .73)%		4 .51%	4 .21%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 816	$ 758		$ 114
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%	1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	3 .95%		3 .18%	3 .00%(g)
Portfolio Turnover Rate	30 .7%		25 .3%	48 .9%(g)
	2008		2007(i)
PRINCIPAL LIFETIME STRATEGIC INCOME FUND
Class C shares
Net Asset Value, Beginning of Period	$ 12.87	$ 12.53
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0 .44		0 .33
Net Realized and Unrealized Gain (Loss) on Investments	(3 .35)		–
Total From Investment Operations	(2 .91)		0 .33
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .42)		–
Distributions from Realized Gains	(0 .17)		–
Total Dividends and Distributions	(0 .59)		–
Redemption fees	–		0 .01
Net Asset Value, End of Period	$ 9.37	$ 12.87
Total Return(c)	(23 .63)%		2 .71%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,044	$ 2,577
Ratio of Expenses to Average Net Assets(e),(f)	1 .25%		1 .25%(g)
Ratio of Net Investment Income to Average Net Assets	3 .88%		3 .27%(g)
Portfolio Turnover Rate	30 .7%		25 .3%(g)

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005. ^(b) Calculated based on average shares outstanding during the period.

^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge. ^(d) Total return amounts have not been annualized.

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

^(f) Does not include expenses of the investment companies in which the Fund invests. ^(g) Computed on an annualized basis.

^(h) Period from March 15, 2006, date shares first offered, through October 31, 2006.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.05 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

82

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007		2006	2005	2004
SAM BALANCED PORTFOLIO
Class A shares
Net Asset Value, Beginning of Period	$ 16.18	$ 14.51		$ 13.32		$ 12.64	$ 11.85
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .47(a)		0 .37(a)		0 .28	0 .23	0 .20
Net Realized and Unrealized Gain (Loss) on Investments	(4 .53)		1 .70		1 .20	0.68	0 .79
Total From Investment Operations	(4 .06)		2 .07		1 .48	0.91	0 .99
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .51)		(0 .32)		(0 .29)	(0 .23)	(0 .20)
Distributions from Realized Gains	(0 .77)		(0 .08)		–	–	–
Total Dividends and Distributions	(1 .28)		(0 .40)		(0 .29)	(0 .23)	(0 .20)
Net Asset Value, End of Period	$ 10.84	$ 16.18		$ 14.51		$ 13.32	$ 12.64
Total Return(b)	(27 .01)%		14 .48%		11 .26%	7 .20%	8 .51%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,685,305	$ 2,594,033		$ 2,389,102		$ 2,125,167	$ 1,524,988
Ratio of Expenses to Average Net Assets(c)	0 .67%		0 .64%		0 .66%	0 .94%	0 .98%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		0 .64%		0 .66%	0 .94%	0 .98%
Ratio of Net Investment Income to Average Net Assets	3 .39%		2 .42%		2 .01%	1 .69%	1 .56%
Portfolio Turnover Rate	34 .8%		14 .6%		10 .0%	0 .0%	2 .0%
	2008		2007		2006	2005	2004
SAM BALANCED PORTFOLIO
Class B shares
Net Asset Value, Beginning of Period	$ 16.14	$ 14.47		$ 13.28		$ 12.61	$ 11.82
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .37(a)		0 .26(a)		0 .17	0 .12	0 .10
Net Realized and Unrealized Gain (Loss) on Investments	(4 .53)		1 .69		1 .21	0 .67	0 .79
Total From Investment Operations	(4 .16)		1 .95		1 .38	0.79	0 .89
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .40)		(0 .20)		(0 .19)	(0 .12)	(0 .10)
Distributions from Realized Gains	(0 .77)		(0 .08)		–	–	–
Total Dividends and Distributions	(1 .17)		(0 .28)		(0 .19)	(0 .12)	(0 .10)
Net Asset Value, End of Period	$ 10.81	$ 16.14		$ 14.47		$ 13.28	$ 12.61
Total Return(b)	(27 .57)%		13 .64%		10 .44%	6 .32%	7 .59%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 748,701	$ 1,377,682		$ 1,414,695		$ 1,419,870	$ 1,354,528
Ratio of Expenses to Average Net Assets(c)	1 .43%		1 .40%		1 .43%	1 .72%	1 .75%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		1 .40%		1 .43%	1 .72%	1 .75%
Ratio of Net Investment Income to Average Net Assets	2 .71%		1 .69%		1 .24%	0 .91%	0 .79%
Portfolio Turnover Rate	34 .8%		14 .6%		10 .0%	0 .0%	2 .0%
		2008		2007	2006	2005	2004
SAM BALANCED PORTFOLIO
Class C shares
Net Asset Value, Beginning of Period	$ 16.05		$ 14.40		$ 13.22	$ 12.55	$ 11.78
Income from Investment Operations:
Net Investment Income (Operating Loss)		0 .36(a)	0 .25(a)		0 .17	0 .13	0 .10
Net Realized and Unrealized Gain (Loss) on Investments		(4 .49)		1 .69	1 .20	0 .67	0 .78
Total From Investment Operations		(4 .13)		1 .94	1 .37	0 .80	0 .88
Less Dividends and Distributions:
Dividends from Net Investment Income		(0 .40)	(0 .21)		(0 .19)	(0 .13)	(0 .11)
Distributions from Realized Gains		(0 .77)	(0 .08)		–	–	–
Total Dividends and Distributions		(1 .17)	(0 .29)		(0 .19)	(0 .13)	(0 .11)
Net Asset Value, End of Period	$ 10.75		$ 16.05		$ 14.40	$ 13.22	$ 12.55
Total Return(b)	(27 .52)%		13 .59%		10 .47%	6.41%	7 .64%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 639,449		$ 966,785		$ 883,759	$ 734,801	$ 482,799
Ratio of Expenses to Average Net Assets(c)		1 .41%	1 .40%		1 .41%	1 .70%	1 .74%
Ratio of Gross Expenses to Average Net Assets(c),(d)		–	1 .40%		1 .41%	1 .70%	1 .74%
Ratio of Net Investment Income to Average Net Assets		2 .65%	1 .65%		1 .26%	0 .93%	0 .80%
Portfolio Turnover Rate		34 .8%	14 .6%		10 .0%	0 .0%	2 .0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Does not include expenses of the investment companies in which the Portfolio invests.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

83

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005	2004
SAM CONSERVATIVE BALANCED PORTFOLIO
Class A shares
Net Asset Value, Beginning of Period	$ 11.93	$ 11.12	$ 10.49	$ 10.27	$ 9.81
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .41(a)	0 .36(a)	0 .31	0 .26(a)	0 .24
Net Realized and Unrealized Gain (Loss) on Investments	(2 .65)	0 .86	0 .65	0 .23	0 .47
Total From Investment Operations	(2 .24)	1 .22	0 .96	0 .49	0 .71
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .44)	(0 .33)	(0 .31)	(0 .26)	(0 .25)
Distributions from Realized Gains	(0 .41)	(0 .08)	(0 .02)	(0 .01)	–
Total Dividends and Distributions	(0 .85)	(0 .41)	(0 .33)	(0 .27)	(0 .25)
Net Asset Value, End of Period	$ 8.84	$ 11.93	$ 11.12	$ 10.49	$ 10.27
Total Return(b)	(20 .00)%	11 .17%	9 .31%	4.82%	7 .29%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 247,297	$ 317,494	$ 309,946	$ 291,796	$ 207,816
Ratio of Expenses to Average Net Assets(c)	0 .68%	0 .66%	0 .68%	1 .00%	1 .04%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–	0 .66%	0 .68%	1 .00%	1 .04%
Ratio of Net Investment Income to Average Net Assets	3 .83%	3 .18%	2 .89%	2 .47%	2 .42%
Portfolio Turnover Rate	27 .7%	12 .7%	13 .0%	2 .0%	2 .0%
	2008	2007	2006	2005	2004
SAM CONSERVATIVE BALANCED PORTFOLIO
Class B shares
Net Asset Value, Beginning of Period	$ 11.91	$ 11.10	$ 10.47	$ 10.25	$ 9.79
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .33(a)	0 .28(a)	0 .23	0 .18(a)	0 .17
Net Realized and Unrealized Gain (Loss) on Investments	(2 .65)	0 .85	0 .65	0 .23	0 .46
Total From Investment Operations	(2 .32)	1 .13	0 .88	0 .41	0 .63
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .36)	(0 .24)	(0 .23)	(0 .18)	(0 .17)
Distributions from Realized Gains	(0 .41)	(0 .08)	(0 .02)	(0 .01)	–
Total Dividends and Distributions	(0 .77)	(0 .32)	(0 .25)	(0 .19)	(0 .17)
Net Asset Value, End of Period	$ 8.82	$ 11.91	$ 11.10	$ 10.47	$ 10.25
Total Return(b)	(20 .65)%	10 .33%	8 .50%	4.02%	6 .47%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 107,873	$ 159,229	$ 166,857	$ 169,869	$ 161,623
Ratio of Expenses to Average Net Assets(c)	1 .44%	1 .43%	1 .45%	1 .78%	1 .81%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–	1 .43%	1 .45%	1 .78%	1 .81%
Ratio of Net Investment Income to Average Net Assets	3 .12%	2 .42%	2 .12%	1 .69%	1 .65%
Portfolio Turnover Rate	27 .7%	12 .7%	13 .0%	2 .0%	2 .0%
	2008	2007	2006	2005	2004
SAM CONSERVATIVE BALANCED PORTFOLIO
Class C shares
Net Asset Value, Beginning of Period	$ 11.86	$ 11.06	$ 10.43	$ 10.22	$ 9.76
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .32(a)	0 .27(a)	0 .23	0 .18(a)	0 .16
Net Realized and Unrealized Gain (Loss) on Investments	(2 .63)	0 .85	0 .65	0 .22	0 .48
Total From Investment Operations	(2 .31)	1 .12	0 .88	0 .40	0 .64
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .36)	(0 .24)	(0 .23)	(0 .18)	(0 .18)
Distributions from Realized Gains	(0 .41)	(0 .08)	(0 .02)	(0 .01)	–
Total Dividends and Distributions	(0 .77)	(0 .32)	(0 .25)	(0 .19)	(0 .18)
Net Asset Value, End of Period	$ 8.78	$ 11.86	$ 11.06	$ 10.43	$ 10.22
Total Return(b)	(20 .62)%	10 .31%	8 .57%	4 .00%	6 .55%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 149,913	$ 181,365	$ 170,789	$ 152,208	$ 97,315
Ratio of Expenses to Average Net Assets(c)	1 .42%	1 .41%	1 .43%	1 .76%	1 .79%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–	1 .41%	1 .43%	1 .76%	1 .79%
Ratio of Net Investment Income to Average Net Assets	3 .07%	2 .42%	2 .14%	1 .71%	1 .67%
Portfolio Turnover Rate	27 .7%	12 .7%	13 .0%	2 .0%	2 .0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Does not include expenses of the investment companies in which the Portfolio invests.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

84

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007		2006	2005	2004
SAM CONSERVATIVE GROWTH PORTFOLIO
Class A shares
Net Asset Value, Beginning of Period	$ 19.04	$ 16.44		$ 14.67		$ 13.56	$ 12.47
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .45		0 .29		0 .18	0 .13	0 .10
Net Realized and Unrealized Gain (Loss) on Investments	(6 .36)		2 .52		1 .73	1.11	1 .06
Total From Investment Operations	(5 .91)		2 .81		1 .91	1.24	1 .16
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .47)		(0 .21)		(0 .14)	(0 .13)	(0 .07)
Distributions from Realized Gains	(1 .08)		–		–	–	–
Total Dividends and Distributions	(1 .55)		(0 .21)		(0 .14)	(0 .13)	(0 .07)
Net Asset Value, End of Period	$ 11.58	$ 19.04		$ 16.44		$ 14.67	$ 13.56
Total Return(b)	(33 .63)%		17 .26%		13 .07%	9 .19%	9 .44%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,204,478	$ 2,002,371		$ 1,822,661		$ 1,561,310	$ 1,157,038
Ratio of Expenses to Average Net Assets(c)	0 .68%		0 .65%		0 .67%	0 .97%	1 .01%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		0 .65%		0 .67%	0 .97%	1 .01%
Ratio of Net Investment Income to Average Net Assets	2 .90%		1 .68%		1 .16%	0 .89%	0 .74%
Portfolio Turnover Rate	32 .4%		16 .2%		11 .0%	1 .0%	5 .0%
	2008		2007		2006	2005	2004
SAM CONSERVATIVE GROWTH PORTFOLIO
Class B shares
Net Asset Value, Beginning of Period	$ 18.36	$ 15.86		$ 14.25		$ 13.17	$ 12.18
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .34		0 .16		0 .06	0 .02	–
Net Realized and Unrealized Gain (Loss) on Investments	(6 .15)		2 .42		1 .67	1 .09	1 .04
Total From Investment Operations	(5 .81)		2 .58		1 .73	1.11	1 .04
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .34)		(0 .08)		(0 .12)	(0 .03)	(0 .05)
Distributions from Realized Gains	(1 .08)		–		–	–	–
Total Dividends and Distributions	(1 .42)		(0 .08)		(0 .12)	(0 .03)	(0 .05)
Net Asset Value, End of Period	$ 11.13	$ 18.36		$ 15.86		$ 14.25	$ 13.17
Total Return(b)	(34 .12)%		16 .35%		12 .19%	8 .42%	8 .53%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 545,926	$ 1,089,177		$ 1,093,660		$ 1,059,655	$ 1,001,081
Ratio of Expenses to Average Net Assets(c)	1 .44%		1 .41%		1 .44%	1 .75%	1 .78%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		1 .41%		1 .44%	1 .75%	1 .78%
Ratio of Net Investment Income to Average Net Assets	2 .26%		0 .96%		0 .39%	0 .11%	(0 .03)%
Portfolio Turnover Rate	32 .4%		16 .2%		11 .0%	1 .0%	5 .0%
		2008		2007	2006	2005	2004
SAM CONSERVATIVE GROWTH PORTFOLIO
Class C shares
Net Asset Value, Beginning of Period	$ 18.22		$ 15.75		$ 14.15	$ 13.11	$ 12.13
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)		0 .32		0 .15	0 .06	0 .02	–
Net Realized and Unrealized Gain (Loss) on Investments	(6 .08)			2 .42	1 .66	1 .08	1 .03
Total From Investment Operations	(5 .76)			2 .57	1 .72	1 .10	1 .03
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .35)		(0 .10)		(0 .12)	(0 .06)	(0 .05)
Distributions from Realized Gains	(1 .08)			–	–	–	–
Total Dividends and Distributions	(1 .43)		(0 .10)		(0 .12)	(0 .06)	(0 .05)
Net Asset Value, End of Period	$ 11.03		$ 18.22		$ 15.75	$ 14.15	$ 13.11
Total Return(b)	(34 .16)%		16 .38%		12 .21%	8.40%	8 .53%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 590,888		$ 1,000,468		$ 906,470	$ 727,829	$ 482,019
Ratio of Expenses to Average Net Assets(c)	1 .43%		1 .41%		1 .43%	1 .73%	1 .76%
Ratio of Gross Expenses to Average Net Assets(c),(d)		–	1 .41%		1 .43%	1 .73%	1 .76%
Ratio of Net Investment Income to Average Net Assets	2 .16%		0 .92%		0 .40%	0 .13%	(0 .01)%
Portfolio Turnover Rate	32 .4%		16 .2%		11 .0%	1 .0%	5 .0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Does not include expenses of the investment companies in which the Portfolio invests.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

85

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005	2004
SAM FLEXIBLE INCOME PORTFOLIO
Class A shares
Net Asset Value, Beginning of Period	$ 11.92	$ 11.54		$ 11.19	$ 11.26	$ 10.92
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .45(a)		0 .44(a)	0 .41	0 .35	0 .34(a)
Net Realized and Unrealized Gain (Loss) on Investments	(2 .13)		0 .41	0 .39	(0 .03)	0 .35
Total From Investment Operations	(1 .68)		0 .85	0 .80	0 .32	0 .69
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .47)		(0 .43)	(0 .42)	(0 .35)	(0 .35)
Distributions from Realized Gains	(0 .27)		(0 .04)	(0 .03)	(0 .04)	–
Total Dividends and Distributions	(0 .74)		(0 .47)	(0 .45)	(0 .39)	(0 .35)
Net Asset Value, End of Period	$ 9.50	$ 11.92		$ 11.54	$ 11.19	$ 11.26
Total Return(b)	(14 .96)%		7 .54%	7 .28%	2.79%	6 .38%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 349,745	$ 393,734		$ 401,786	$ 443,361	$ 357,735
Ratio of Expenses to Average Net Assets(c)	0 .67%		0 .65%	0 .67%	1 .00%	1 .02%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		0 .65%	0 .67%	1 .00%	1 .02%
Ratio of Net Investment Income to Average Net Assets	4 .09%		3 .75%	3 .60%	3 .10%	3 .07%
Portfolio Turnover Rate	35 .1%		9 .7%	8 .0%	3 .0%	3 .0%
	2008		2007	2006	2005	2004
SAM FLEXIBLE INCOME PORTFOLIO
Class B shares
Net Asset Value, Beginning of Period	$ 11.91	$ 11.53		$ 11.17	$ 11.24	$ 10.90
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .38(a)		0 .35(a)	0 .33	0 .26	0 .26(a)
Net Realized and Unrealized Gain (Loss) on Investments	(2 .16)		0 .41	0 .39	(0 .03)	0 .34
Total From Investment Operations	(1 .78)		0 .76	0 .72	0 .23	0 .60
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .38)		(0 .34)	(0 .33)	(0 .26)	(0 .26)
Distributions from Realized Gains	(0 .27)		(0 .04)	(0 .03)	(0 .04)	–
Total Dividends and Distributions	(0 .65)		(0 .38)	(0 .36)	(0 .30)	(0 .26)
Net Asset Value, End of Period	$ 9.48	$ 11.91		$ 11.53	$ 11.17	$ 11.24
Total Return(b)	(15 .71)%		6 .72%	6 .54%	1.99%	5 .56%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 175,763	$ 258,168		$ 317,142	$ 384,036	$ 418,994
Ratio of Expenses to Average Net Assets(c)	1 .44%		1 .42%	1 .44%	1 .77%	1 .79%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		1 .42%	1 .44%	1 .77%	1 .79%
Ratio of Net Investment Income to Average Net Assets	3 .39%		3 .00%	2 .83%	2 .33%	2 .30%
Portfolio Turnover Rate	35 .1%		9 .7%	8 .0%	3 .0%	3 .0%
	2008		2007	2006	2005	2004
SAM FLEXIBLE INCOME PORTFOLIO
Class C shares
Net Asset Value, Beginning of Period	$ 11.85	$ 11.47		$ 11.12	$ 11.19	$ 10.86
Income from Investment Operations:
Net Investment Income (Operating Loss)	0 .37(a)		0 .35(a)	0 .32	0 .26	0 .26(a)
Net Realized and Unrealized Gain (Loss) on Investments	(2 .14)		0 .41	0 .39	(0 .03)	0 .34
Total From Investment Operations	(1 .77)		0 .76	0 .71	0 .23	0 .60
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .38)		(0 .34)	(0 .33)	(0 .26)	(0 .27)
Distributions from Realized Gains	(0 .27)		(0 .04)	(0 .03)	(0 .04)	–
Total Dividends and Distributions	(0 .65)		(0 .38)	(0 .36)	(0 .30)	(0 .27)
Net Asset Value, End of Period	$ 9.43	$ 11.85		$ 11.47	$ 11.12	$ 11.19
Total Return(b)	(15 .69)%		6 .76%	6 .52%	2.06%	5 .57%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 139,041	$ 143,587		$ 148,386	$ 162,140	$ 127,771
Ratio of Expenses to Average Net Assets(c)	1 .42%		1 .42%	1 .43%	1 .76%	1 .78%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–		1 .42%	1 .43%	1 .76%	1 .78%
Ratio of Net Investment Income to Average Net Assets	3 .35%		2 .99%	2 .84%	2 .34%	2 .31%
Portfolio Turnover Rate	35 .1%		9 .7%	8 .0%	3 .0%	3 .0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Does not include expenses of the investment companies in which the Portfolio invests.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

86

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005	2004
SAM STRATEGIC GROWTH PORTFOLIO
Class A shares
Net Asset Value, Beginning of Period	$ 21.28	$ 18.13	$ 15.99	$ 14.49	$ 13.16
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .44	0 .25	0 .13	0 .06	0 .01
Net Realized and Unrealized Gain (Loss) on Investments	(7 .84)	3 .12	2 .10	1 .48	1 .32
Total From Investment Operations	(7 .40)	3 .37	2 .23	1 .54	1 .33
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .47)	(0 .22)	(0 .09)	(0 .04)	–
Distributions from Realized Gains	(1 .15)	–	–	–	–
Total Dividends and Distributions	(1 .62)	(0 .22)	(0 .09)	(0 .04)	–
Net Asset Value, End of Period	$ 12.26	$ 21.28	$ 18.13	$ 15.99	$ 14.49
Total Return(b)	(37 .46)%	18 .75%	13 .99%	10 .61%	10 .11%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 729,591	$ 1,232,964	$ 1,074,546	$ 885,165	$ 609,250
Ratio of Expenses to Average Net Assets(c)	0 .72%	0 .68%	0 .71%	1.02%	1 .07%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–	0 .68%	0 .71%	1 .02%	1 .07%
Ratio of Net Investment Income to Average Net Assets	2 .58%	1 .30%	0 .74%	0 .38%	0 .07%
Portfolio Turnover Rate	32 .5%	15 .7%	12 .0%	1 .0%	3 .0%
	2008	2007	2006	2005	2004
SAM STRATEGIC GROWTH PORTFOLIO
Class B shares
Net Asset Value, Beginning of Period	$ 20.15	$ 17.18	$ 15.25	$ 13.90	$ 12.73
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .33	0 .12	(0 .01)	(0 .06)	(0 .09)
Net Realized and Unrealized Gain (Loss) on Investments	(7 .45)	2 .94	2 .01	1 .41	1 .26
Total From Investment Operations	(7 .12)	3 .06	2 .00	1 .35	1 .17
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .33)	(0 .09)	(0 .07)	–	–
Distributions from Realized Gains	(1 .15)	–	–	–	–
Total Dividends and Distributions	(1 .48)	(0 .09)	(0 .07)	–	–
Net Asset Value, End of Period	$ 11.55	$ 20.15	$ 17.18	$ 15.25	$ 13.90
Total Return(b)	(37 .94)%	17 .86%	13 .16%	9.71%	9 .19%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 343,364	$ 730,737	$ 718,841	$ 672,826	$ 612,914
Ratio of Expenses to Average Net Assets(c)	1 .47%	1 .39%	1 .48%	1 .79%	1 .83%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–	1 .39%	1 .48%	1 .79%	1 .83%
Ratio of Net Investment Income to Average Net Assets	2 .04%	0 .64%	(0 .03)%	(0 .39)%	(0 .69)%
Portfolio Turnover Rate	32 .5%	15 .7%	12 .0%	1 .0%	3 .0%
	2008	2007	2006	2005	2004
SAM STRATEGIC GROWTH PORTFOLIO
Class C shares
Net Asset Value, Beginning of Period	$ 20.19	$ 17.22	$ 15.29	$ 13.93	$ 12.74
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0 .30	0 .09	–	(0 .06)	(0 .09)
Net Realized and Unrealized Gain (Loss) on Investments	(7 .43)	2 .98	2 .00	1 .42	1 .28
Total From Investment Operations	(7 .13)	3 .07	2 .00	1 .36	1 .19
Less Dividends and Distributions:
Dividends from Net Investment Income	(0 .34)	(0 .10)	(0 .07)	–	–
Distributions from Realized Gains	(1 .15)	–	–	–	–
Total Dividends and Distributions	(1 .49)	(0 .10)	(0 .07)	–	–
Net Asset Value, End of Period	$ 11.57	$ 20.19	$ 17.22	$ 15.29	$ 13.93
Total Return(b)	(37 .96)%	17 .90%	13 .12%	9.76%	9 .34%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 344,700	$ 616,494	$ 545,153	$ 417,865	$ 277,136
Ratio of Expenses to Average Net Assets(c)	1 .46%	1 .49%	1 .47%	1 .77%	1 .81%
Ratio of Gross Expenses to Average Net Assets(c),(d)	–	1 .49%	1 .47%	1 .77%	1 .81%
Ratio of Net Investment Income to Average Net Assets	1 .88%	0 .49%	(0 .02)%	(0 .37)%	(0 .67)%
Portfolio Turnover Rate	32 .5%	15 .7%	12 .0%	1 .0%	3 .0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Does not include expenses of the investment companies in which the Portfolio invests.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

87

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Principal Funds, Inc.

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Principal LifeTime 2010 Fund, Principal LifeTime 2020 Fund, Principal LifeTime 2030 Fund, Principal LifeTime 2040 Fund, Principal LifeTime 2050 Fund, Principal LifeTime Strategic Income Fund, SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, and SAM Strategic Growth Portfolio (11 of 74 portfolios constituting Principal Funds, Inc. (collectively the “Funds”)) as of October 31, 2008, and the related statements of operations, statements of changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, and SAM Strategic Growth Portfolio for each of the periods presented through October 31, 2006, were audited by other auditors whose report dated December 18, 2006, expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2008 by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the funds listed above constituting portfolios within Principal Funds, Inc. at October 31, 2008, the results of their operations, the changes in their net assets and their financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Des Moines, Iowa

December 23, 2008

88

FUND DIRECTORS AND OFFICERS

Under Maryland law, a Board of Directors oversees the Fund. The Directors have financial or other relevant experience and meet several times during the year to review contracts, Fund activities and the quality of services provided to the Fund. Each director also has the same position with Principal Variable Contracts Funds, Inc. which is also sponsored by Principal Life Insurance Company. Each director holds office for an indefinite term. Directors considered to be “interested persons” as defined in the Investment Company Act of 1940, as amended, as shown below are considered to be interested because of an affiliation with the Manager and Principal Life Insurance Company.

The following directors are considered not to be “interested persons” as defined in the 1940 Act

		Number of
		Portfolios in Fund
		Complex	Other
Name, Position Held with the Fund,	Principal Occupation(s)	Overseen by	Directorships
Address*, and Year of Birth	During past 5 years	Director	Held by Director**
Elizabeth Ballantine	Principal, EBA Associates	114	The McClatchy
Director since 2004			Company
Member, Nominating and Governance
Committee
1948
Kristianne Blake	President, Kristianne Gates Blake,	114	Avista Corporation;
Director since 2007	P.S.		Russell Investment
Member, Operations Committee			Company; Russell
1954			Investment Funds
Craig Damos	CEO/President, Vertical Growth	114	None
Director since 2008	Officer, and CFO, The Weitz
Member, Operations Committee	Company
1954
Richard W. Gilbert	President, Gilbert Communications,	114	Calamos Asset
Director since 1985	Inc.		Management, Inc.
Member, Nominating and Governance
Committee
Member, Executive Committee
1940
Mark A. Grimmett	Executive Vice President and CFO,	114	None
Director since 2004	Merle Norman Cosmetics, Inc.
Member, Audit Committee
1960
Fritz S. Hirsch	President and CEO, Sassy, Inc.	114	None
Director since 2005
Member, Audit Committee
1951
William C. Kimball	Retired. Formerly Chairman and	114	Casey’s General Stores,
Director since 1999	CEO, Medicap Pharmacies, Inc.		Inc.
Member, Nominating and Governance
Committee
1947
Barbara A. Lukavsky	President and CEO, Barbican	114	None
Director since 1987	Enterprises, Inc.
Member, Nominating and Governance
Committee
1940
Daniel Pavelich	Retired. Formerly, Chairman and	114	Catalytic Inc.; Vaagen
Director since 2007	CEO of BDO Seidman.		Bros. Lumber, Inc.
Member, Audit Committee
1944

89

The following directors are considered to be “interested persons” as defined in the 1940 Act, as amended, because of an affiliation with the Manager and Principal Life.

Ralph C. Eucher	Director, Principal Management	114	None
Director, Vice Chairman and CEO	Corporation, since 1999. Director,
Member, Executive Committee	Principal Funds Distributor, Inc. since
1952	2007. Director, Princor since 1999.
President Princor 1999-2005. Senior
Vice President, Principal Life, since
2002. Prior thereto, Vice President.
William G. Papesh	Retired December 2007. Prior thereto,	114	None
Director	President and Director of Edge Asset
Member, Operations Committee	Management, Inc. since 2007;
1943	President and CEO of WM Group of
	Funds 1987-2006.
Larry D. Zimpleman	Chairman and Director, Principal	114	None
Director and Chairman of the Board	Management Corporation and Princor
Member, Executive Committee	since 2001. Chief Executive Officer
1951	Principal Life since 2008, President
	and Chief Operating Officer, Principal
	Life since 2006. President, Retirement
	and Investor Services, Principal
Financial Group, Inc. 2003-2006.
	Executive Vice President, 2001-2003,
	and prior thereto, Senior Vice
	President, Principal Life.

*Correspondence intended for each Director who is other than an Interested Director may be sent to 711 High Street, Des Moines, IA 50392.

**Directorships of any company registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Securities Exchange Act or any other mutual fund.

The following table presents officers of the Funds.

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
Craig L. Bassett	Vice President and Treasurer, Principal Life.
Treasurer
711 High Street, Des Moines, IA 50392
1952
Michael J. Beer	Executive Vice President and Chief Operating
Executive Vice President	Officer, Principal Management Corporation.
711 High Street, Des Moines, IA 50392	Executive Vice President, Principal Funds
1961	Distributor, Inc., since 2007. President, Princor, since
2005.
Randy L. Bergstrom	Counsel, Principal Life.
Assistant Tax Counsel
711 High Street, Des Moines, IA 50392
1955

90

Name, Position Held with the Fund, Address, and Year of Birth David J. Brown Chief Compliance Officer 711 High Street, Des Moines, IA 50392 1960	Principal Occupation(s) During past 5 years Vice President, Product & Distribution Compliance, Principal Life. Senior Vice President, Principal Management Corporation since 2004. Senior Vice President, Principal Funds Distributor, Inc., since 2007. Second Vice President, Princor, since 2003, and prior thereto, Vice President, Principal Management Corporation and Princor.
Jill R. Brown Senior Vice President 1100 Investment Blvd, ste 200 El Dorado Hills, CA 95762 1967	Second Vice President, Principal Financial Group and Senior Vice President, Principal Management Corporation and Princor, since 2006. Chief Financial Officer, Princor since 2003. Vice President, Princor 2003-2006. Senior Vice President and Chief Financial Officer, Principal Funds Distributor, Inc., since 2007. Prior thereto, Assistant Financial Controller, Principal Life.
Nora M. Everett President 711 High Street Des Moines, IA 50392 1959 Cary Fuchs Senior Vice President of Distribution 1100 Investment Blvd, ste 200 El Dorado Hills, CA 95762 1957 Steve Gallaher Assistant Counsel 711 High Street Des Moines, IA 50392 1955 Ernie H. Gillum Vice President, Assistant Secretary 711 High Street Des Moines, IA 50392 1955 Patrick A. Kirchner Assistant Counsel 711 High Street, Des Moines, IA 50392 1960 Carolyn F. Kolks Assistant Tax Counsel 711 High Street, Des Moines, IA 50392 1962 Sarah J. Pitts Assistant Counsel 711 High Street, Des Moines, IA 50392 1945 Layne A. Rasmussen Vice President, Controller, and CFO 711 High Street, Des Moines, IA 50392 1958	President since 2008, Senior Vice President and Deputy General Counsel, Principal Financial Group, Inc. 2004-2008. Vice President and Counsel, Principal Financial Group, Inc. 2001-2004. President, Principal Funds Distributor, since 2007; Director of Mutual Fund Operations, Principal Shareholder Services, since 2005; prior thereto, Divisional Vice President Boston Financial Data Services. Second Vice President and Counsel, Principal Life since 2006. Self-Employed Writer in 2005. 2004 and prior thereto Senior Vice President and Counsel of Principal Residential Mortgage, Inc. Vice President and Chief Compliance Officer, Principal Management Corporation, since 2004, and prior thereto, Vice President, Compliance and Product Development, Principal Management Corporation. Counsel, Principal Life. Counsel, Principal Life, since 2003 and prior thereto, Attorney. Counsel, Principal Life. Vice President and Controller – Mutual Funds, Principal Management Corporation.

91

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
Michael D. Roughton	Vice President and Senior Securities Counsel,
Counsel	Principal Financial Group, Inc. Senior Vice President
711 High Street, Des Moines, IA 50392	and Counsel, Principal Management Corporation,
1951	Principal Funds Distributor, Inc., and Princor.
	Counsel, Principal Global.
Adam U. Shaikh	Counsel, Principal Life, since 2006. Prior thereto,
Assistant Counsel	practicing attorney.
711 High Street, Des Moines, IA 50392
1972
Dan Westholm	Director Treasury, since 2003. Prior thereto, Assistant
Assistant Treasurer	Treasurer.
711 High Street, Des Moines, IA 50392
1966
Beth Wilson	Director and Secretary, Principal Funds, since 2007.
Vice President and Secretary	Prior thereto, Business Manager for Pella
711 High Street, Des Moines, IA 50392	Corporation.
1956

The Audit Committee selects the independent auditors for the Fund and oversees the activities of the independent auditors as well as the internal auditors. The committee also receives reports about accounting and financial matters affecting the Fund.

The Executive Committee is selected by the Board. It may exercise all the powers of the Board, with certain exceptions, when the Board is not in session. The Committee must report its actions to the Board.

The Nominating and Governance Committee selects and nominates all candidates who are not “interested persons” of the fund for election to the Board. The committee also oversees the structure and efficiency of the Board of Directors and the committees the Board establishes, and the activities of the Funds’ Chief Compliance Officer.

The Operations Committee oversees the provision of administrative and distribution services to the Funds, communications with the Funds’ shareholders, and provides review and oversight of the Funds’ operations.

Additional information about the Fund is available in the Prospectuses dated February 29, 2008 and the Statement of Additional Information dated September 30, 2008. These documents may be obtained free of charge by writing or telephoning Principal Funds Distributor, Inc., P.O. Box 10423, Des Moines, IA 50306. Telephone 1-800-222-5852.

PROXY VOTING POLICIES

A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities and the results of the proxy votes for the most recent twelve months ended June 30 may be obtained free of charge by telephoning Principal Funds Distributor, Inc., at 1-800-222-5852, at the Principal Funds website at www.principal.com, or at www.sec.gov.

SCHEDULES OF INVESTMENTS

The Fund files complete schedules of investments with the Securities and Exchange Commission as of January 31 and July 31 of each year on Form N-Q. The Fund’s Form N-Q can be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. or on the Commission’s website at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330.

SOURCE OF DISTRIBUTIONS

To the extent that distributions paid by the Funds are comprised of something other than income or capital gains, such as a return of capital, a notice will be included in your quarterly statement pursuant to Section 19(a) of the Investment Company Act of 1940, as amended, and Rule 19a-1 disclosing the source of such distributions. Furthermore, such notices shall be posted monthly on our web site at www.principalfunds.com. You may request a copy of all such notices, free of charge, by telephoning 1-800-222-5852. The amounts and sources of distributions included in such notices are estimates only and should not be reported for tax purposes. The Fund will send shareholders a Form 1099-DIV for the calendar year that will tell shareholders how to report these distributions for federal income tax purposes.

92

BOARD CONSIDERATION OF INVESTMENT ADVISORY CONTRACTS

During the period covered by this report, the Board of Directors of Principal Funds, Inc. (“PFI”) approved (1) a new Subadvisory Agreement with Westwood Management Corporation (“Westwood”) related to the LargeCap Value Fund III series of PFI; (2) the Amended and Restated Management Agreement (the “Management Agreement”) between PFI and Principal Management Corporation (the “Manager”) and a new Subadvisory Agreement with Pacific Investment Management Company LLC (“PIMCO”) related to the creation of the Core Plus Bond Fund I; (3) the Management Agreement and Amended and Restated Subadvisory Agreements with Principal Global Investors, Inc. (“PGI”), Principal Real Estate Investors, LLC (“PREI”) and Spectrum Asset Management, Inc. (“Spectrum”) related to the creation of the Global Diversified Income Fund (“Global Diversified”); (4) an Amended and Restated Subadvisory Agreement with Mellon Capital Management Corporation (“Mellon”) related to the MidCap Growth Fund III; and (5) annual review and renewal of the Management Agreement and the Subadvisory Agreements relating to all Funds. In preparation for their approval process, the Independent Directors met with independent legal counsel in advance of the meetings to discuss the information provided.

Westwood Subadvisory Agreement

At its June 9, 2008 meeting, the Board considered whether to enter into a Subadvisory Agreement with Westwood on behalf of the LargeCap Value Fund III (“LargeCap Value III” or “Fund”).

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreement. The Board considered the Subadviser’s reputation, qualifications and background, its investment approach, the experience and skills of its investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for PFI and that the due-diligence program recommended Westwood for the Fund.

The Board reviewed the historical composite performance of the Subadviser as compared to its Morningstar peer group and relevant benchmark index. The Board noted that as of March 31, 2008, the Subadviser had outperformed its category and benchmark index during most periods over the last five years. The Board concluded, based on this information, that investment performance was expected to be satisfactory.

The Board reviewed the proposed subadvisory fees and the effect of the new agreement on the subadvisory fee the Manager pays. It noted that the proposed subadvisory fee schedule is higher than the subadvisory fee schedule of the existing subadviser to the Fund. The Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and Subadviser and that the Manager compensates the Subadviser from its fees. The Board noted that the Subadviser represented that the proposed subadvisory fee for the Fund was not higher than fees charged to its other subadvisory clients with investment mandates similar to those of the Fund. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedule for the Fund was reasonable and appropriate.

The Board considered that the Subadvisory Agreement would have a slightly negative impact on the Manager’s profitability during the first year of the Subadvisory Agreement and, therefore, concluded that it need not reassess the profitability of the Fund’s Management Agreement with the Manager. In concluding that the Subadviser’s anticipated profitability will not be unreasonable, the Board determined that it need not review estimated levels of profits to the Subadviser because, as the Board noted, the Manager will compensate the Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with the Subadviser at arm’s length. The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreement. The Board noted the breakpoints included in the fee schedule and concluded that the fee schedule reflects an appropriate recognition of economies of scale at current asset levels. The Board also considered the character and amount of other incidental benefits to be received by the Subadviser. The Board considered the Subadviser’s soft dollar practices. The Board concluded that the subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of the Subadvisory Agreement are fair and reasonable and that approval of the Subadvisory Agreement is in the best interests of the Fund.

Mellon Subadvisory Agreement

At its June 9, 2008 meeting, the Board considered whether to enter into a new Subadvisory Agreement with Mellon related to the addition of Mellon (the “Subadviser”) to the MidCap Growth Fund III (the “Fund”) following a proposed merger with MidCap Growth Fund I (the “Merging Fund”).

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreement. The Board considered the Subadviser’s reputation, qualifications and background, its investment approach, the experience and skills of its investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for PFI and that the due-diligence program recommended the Subadviser for the Fund.

The Board reviewed the performance of the Merging Fund, which was sub-advised by the Subadviser, as compared to its Morningstar peer group. The Board noted that the Merging Fund’s long-term (3-year) performance was above median. The Board also considered the Manager’s statement that the Subadviser’s performance was expected to be complementary to the existing Subadviser’s performance and the Board concluded, based on this information, that investment performance was expected to be satisfactory.

93

The Board reviewed the proposed subadvisory fees and the effect of the new agreement on the subadvisory fee the Manager pays. It noted that the proposed subadvisory fee schedule is lower than the subadvisory fee schedule of the existing subadviser to the Fund. The Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and Subadviser and that the Manager compensates the Subadviser from its fees. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedule for the Fund was reasonable and appropriate.

The Board considered that the Manager’s overall profitability would slightly decrease with the addition of the new Subadvisory Agreement and, therefore, concluded that it need not reassess the profitability of the Fund’s Management Agreement with the Manager. In concluding that the Subadviser’s anticipated profitability will not be unreasonable, the Board determined that it need not review estimated levels of profits to the Subadviser because, as the Board noted, the Manager will compensate the Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with the Subadviser at arm’s length. The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreement. The Board noted the breakpoints included in the fee schedule and concluded that the fee schedule reflects an appropriate recognition of economies of scale at current asset levels. The Board also considered the character and amount of other incidental benefits to be received by the Subadviser. The Board considered the Subadviser’s soft dollar practices. The Board concluded that the subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of the Subadvisory Agreement are fair and reasonable and that approval of the Subadvisory Agreement is in the best interests of the Fund.

Management Agreement and PIMCO Subadvisory Agreement

At its June 9, 2008 meeting, the Board considered whether to enter into the Management Agreement with the Manager and a Subadvisory Agreement with PIMCO (the “Subadviser”) related to the creation of a new series of PFI, the Core Plus Bond Fund I.

Management Agreement

With respect to the Management Agreement, the Board considered, among other factors, that the Manager and its affiliates have demonstrated a commitment to support the various series of PFI (collectively, the “Funds”), including undertakings to cap Fund expenses to provide competitive expense ratios for shareholders and investment into the business through the acquisition of another fund complex with the goal of building economies of scale to be shared with shareholders. In addition, the Board considered the following factors, and made certain findings and conclusions with regard thereto, for the Fund. The Board concluded that a long-term relationship with a capable, conscientious adviser is in the best interests of the Fund.

The Board considered the nature, quality and extent of services to be provided under the Management Agreement, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources would be provided under the Management Agreement. The Board also considered the proposed delegation of day-to-day portfolio management responsibility to the Subadviser and the program developed by the Manager for identifying, recommending, monitoring and replacing subadvisers. The Board concluded that this due diligence process has worked well for PFI’s other subadvised Funds. The Board also considered the compliance program established by the Manager, the level of compliance attained for other PFI Funds and that a similar level of compliance was expected to be attained for the Fund.

The Board noted that the Manager would not directly control the Fund’s investment performance, but rather would engage the Subadviser to manage the portfolio. Based upon its familiarity with the Manager’s performance in monitoring subadvisers to other subadvised Funds, the Board concluded that the Manager has in place an effective due diligence process to monitor performance, to encourage remedial action and to change the Subadviser at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s performance was expected to be satisfactory with respect to investment performance.

The Board considered the Fund’s proposed management fee. The Board received information regarding how the Fund’s proposed management fee ranked in comparison to the advisory fees of a peer group of institutional intermediate investment-grade debt funds (“Peer Group”) based upon Lipper data. In assessing whether the management fee was reasonable, the Board considered a variety of factors, including the amount of the fee, the comparison of the fees to the Peer Group, the services to be provided, the Manager’s expectations for the Fund’s investment performance and the Manager’s anticipated profitability.

The Board also considered the level of fees that would be retained by the Manager after payment of the subadvisory fee. Although the proposed management fee was at the higher end of the range of the advisory fees of the Peer Group, the Board noted the strong reputation and performance record of the Subadviser. Considering all factors it deemed relevant, the Board concluded that the proposed management fee for the Fund was reasonable and appropriate in light of the nature and quality of services expected to be provided by the Manager and other relevant factors. The Board reviewed the Manager’s anticipated profitability from the Fund under the Management Agreement. Based upon the forecasted profitability percentage the Manager provided, the Board concluded that the profitability to the Manager from the management of the Fund was not expected to be unreasonable, taking into account the reasonableness of the Fund’s proposed management fee, and given the expected level of services to be provided.

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The Board considered whether there would be economies of scale with respect to the management of the Fund and whether the Fund would benefit from any such economies of scale through breakpoints in fees. The Board reviewed the levels at which breakpoints in the proposed management fee would occur and the amounts of the proposed reductions, as well as the breakpoint in the Subadvisory Agreement. The Board concluded that the proposed management fee for the Fund reflects an appropriate level of sharing of economies of scale at the current anticipated asset levels.

The Board also considered the character and amount of other incidental benefits expected to be received by the Manager and its affiliates from their relationships with the Fund. The Board concluded that the management and subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Subadvisory Agreement

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreement. The Board considered the reputation, qualifications and background of the Subadviser, investment approach of the Subadviser, the experience and skills of the Subadviser’s investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for the Funds and that the due diligence program recommended the Subadviser for the Fund.

The Board reviewed historical composite performance of the Subadviser as compared to a Morningstar peer group and relevant benchmark index. The Board noted that as of March 31, 2008, the Subadviser had outperformed its Morningstar category and benchmark index during most periods over the last one, three, five and ten year periods. The Board concluded, based on this information, that investment performance was expected to be satisfactory.

The Board considered the subadvisory fee proposed to be paid to the Subadviser and noted the proposed breakpoint. The Board also considered that the subadvisory fee rate was only slightly higher than the median for the peer group, that it was negotiated at arm’s length between the Manager and the Subadviser and that the Manager compensates the Subadviser from its fees. The Board noted that the Subadviser represented that the proposed subadvisory fees for the Fund were not higher than fees charged to its other subadvisory clients with investment mandates similar to those of the Fund. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedule for the Fund was reasonable and appropriate.

The Board concluded that the Subadviser’s anticipated profitability would not be unreasonable. In reaching this conclusion, the Board determined that they need not review the estimated level of profits to the Subadviser. They based this decision on the facts that both the management and subadvisory fees were determined to be reasonable and the Manager compensates the Subadviser from its own fees having negotiated the Subadvisory Agreement with the Subadviser at arm’s-length.

The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreement. The Board noted the breakpoint included in the fee schedule and concluded that the fee schedule reflects an appropriate recognition of economies of scale at current anticipated asset levels.

The Board also considered the character and amount of other incidental benefits to be received by the Subadviser. The Board noted the Subadviser’s representation that it generally does not enter into soft dollar arrangements.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of the Sub-Advisory Agreement and Management Agreement are fair and reasonable and that approval of each Agreement is in the best interests of the Fund.

Management Agreement and PGI, PREI, and Spectrum Subadvisory Agreements

At its September 8, 2008 meeting, the Board considered whether to enter into the Management Agreement with the Manager and Amended and Restated Subadvisory Agreements with PGI, PREI, and Spectrum (collectively the “Subadvisers”) related to the creation of Global Diversified.

Management Agreement

With respect to the Management Agreement, the Board considered, among other factors, that the Manager and its affiliates have demonstrated a commitment to support the various series of PFI (collectively, the “Funds”), including undertakings to cap Fund expenses to provide competitive expense ratios for shareholders and investment into the business through the acquisition of another fund complex with the goal of building economies of scale to be shared with shareholders. In addition, the Board considered the following factors, and made certain findings and conclusions with regard thereto, for the Fund.

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The Board considered the nature, quality and extent of services to be provided under the Management Agreement, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources would be provided under the Management Agreement. The Board also considered the proposed delegation of day-to-day portfolio management responsibility to the Subadvisers and the program developed by the Manager for identifying, recommending, monitoring and replacing subadvisers. The Board concluded that this due diligence process has worked well for PFI’s other subadvised Funds. The Board also considered the compliance program established by the Manager, the level of compliance attained for other PFI Funds and that a similar level of compliance was expected to be attained for the Fund.

The Board noted that the Manager would not directly control the Fund’s investment performance, but rather would engage the Subadvisers to manage the portfolio. Based upon their familiarity with the Manager’s performance in monitoring subadvisers to other subadvised Funds, the Board concluded that the Manager has in place an effective due diligence process to monitor performance, to encourage remedial action and to change the Subadvisers at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s performance with respect to Subadviser oversight was expected to be satisfactory.

The Board considered the Fund’s proposed management fee. The Board received information regarding how the Fund’s proposed management fee ranked in comparison to the advisory fees of a peer group of retail front-end load and no-load mixed asset, target allocation moderate funds (“Peer Group”) based upon Lipper data. For comparison purposes, the Manager also provided blended average peer group fees, using both Morningstar and Lipper data, determined by calculating the weighted average of average peer group fees based upon the proposed weightings of the Fund’s underlying portfolio strategies (the “Blended Peer Averages”). In assessing whether the management fee was reasonable, the Board considered a variety of factors, including the amount of the fee, the comparison of the fee to the Peer Group and to the Blended Peer Averages, the services to be provided, the Manager’s expectations for the Fund’s investment performance and the Manager’s anticipated profitability. The Board determined that the Blended Peer Averages provided the most meaningful comparisons to the proposed management fee, and the Board noted that the proposed fee was in line with the Blended Peer Averages. Considering all factors they deemed relevant, the Board concluded that the proposed management fee for the Fund was reasonable and appropriate in light of the nature and quality of services expected to be provided by the Manager and other relevant factors.

The Board reviewed the Manager’s anticipated profitability from the Fund under the Management Agreement. The Board concluded that the proposed management fee was reasonable, taking into account the forecasted profitability percentage the Manager provided and given the expected level of services to be provided. The Board considered whether there would be economies of scale with respect to the management of the Fund and whether the Fund would benefit from any such economies of scale through breakpoints in fees. The Board reviewed the levels at which breakpoints in the proposed management fee would occur and the amounts of the proposed reductions, as well as the breakpoints in the Subadvisory Agreements. The Board concluded that the proposed management fee for the Fund reflects an appropriate level of sharing of economies of scale at the currently anticipated asset levels. The Board also considered the character and amount of other incidental benefits expected to be received by the Manager and its affiliates from their relationships with the Fund. The Board concluded that the management and subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Subadvisory Agreements

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreements. The Board considered the reputation, qualifications and background of the Subadvisers, investment approaches of the Subadvisers, the experience and skills of the Subadvisers’ investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for the Funds and that the due diligence program recommended the Subadvisers for the Fund.

The Board reviewed the historical total return performance of the Subadvisers in portfolios with investment strategies similar to certain of the proposed portfolio strategies for the Fund, as compared to Morningstar peer groups and relevant benchmark indices. The Board noted that as of June 30, 2008, the Subadvisers had outperformed the benchmark indices during most periods over the last one, three, five and ten year periods where performance was available. The Board also noted the Manager’s statement that the Subadvisers have delivered competitive returns in portfolio or sub-portfolio strategies similar to those proposed for the Fund, but with a different mandate. The Board concluded, based on this information, that investment performance was expected to be satisfactory.

The Board considered the subadvisory fees proposed to be paid to the Subadvisers and noted the proposed breakpoints. The Board also considered that the subadvisory fee rates were modestly higher than the average for the Peer Group and that the Manager compensates the Subadvisers from its fees. The Board noted that the Subadvisers represented that they do not have other subadvisory clients with investment mandates similar to those of the Fund and, thus, the proposed subadvisory fees are not higher than the fees charged by the Subadvisers to other similar clients. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedules for the Fund were reasonable and appropriate.

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The Board noted that the Manager has proposed to compensate the Subadviser from its own management fee and that the proposed fees are competitive. In concluding that the proposed subadvisory fees were reasonable, the Board determined that they need not review the estimated levels of profits to the Subadvisers because, as they noted, the management fees were determined to be reasonable and the Manager compensates the Subadvisers from its own fees. The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreements. The Board noted the breakpoints included in the fee schedules and concluded that the fee schedules reflect an appropriate recognition of economies of scale at currently anticipated asset levels. The Board also considered the character and amount of other incidental benefits to be received by the Subadvisers. The Board noted the Manager’s representation that it had recently reviewed the soft dollar practices of the Subadvisers and had concluded that the indirect benefits received by the Subadvisers as a result of their use of soft dollars did not result in the Subadvisers receiving unreasonable compensation in relation to the services provided. The Board also noted Spectrum’s policy that it may execute trades on behalf of its clients as broker-dealer unless a client directs execution to another broker-dealer, and considered that this practice could result in other incidental benefits to Spectrum.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of each Subadvisory Agreement and Management Agreement are fair and reasonable and that approval of each of the Agreements is in the best interests of the Fund.

Annual Review and Renewal of Management Agreement and Subadvisory Agreements.

Also at its September 8, 2008 meeting, the Board performed its annual review and renewal of the Management Agreement and the Subadvisory Agreements relating to all Funds.

Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”) requires the Board, including a majority of the Directors who have no direct or indirect interest in the investment advisory agreement and are not “interested persons” of PFI, as defined in the 1940 Act (the “Independent Directors”), annually to review and consider the continuation of: (1) the Management Agreement as it relates to the seventy-three (73) series of PFI (each series is referred to as a “Fund”) (2) the subadvisory agreements between the Manager and each of Alliance Capital Management L.P.; American Century Investment Management, Inc.; Ark Asset Management Co., Inc.; Barrow, Hanley, Mewhinney & Strauss; Columbus Circle Investors (“CCI”); Dimensional Fund Advisors, Inc.; Edge Asset Management Inc. (“Edge”); Emerald Advisors, Inc.; Essex Investment Management Company, LLC; Goldman Sachs Asset Management, L.P.; J.P. Morgan Investment Management, Inc.; Jacobs Levy Equity Management, Inc.; Lehman Brothers Asset Management LLC; Los Angeles Capital Management and Equity Research, Inc.; Mackay Shields, LLC; Mazama Capital Management, Inc.; Mellon Capital Management Corporation; Morgan Stanley Investments LP; Neuberger Berman Management, Inc.; Principal Real Estate Investors, LLC (“PREI”); Principal Global Investors, LLC (“PGI”); Pyramis Global Advisors, LLC; Spectrum Asset Management, Inc. (“Spectrum”); T. Rowe Price Associates, Inc.; Turner Investment Partners, Inc.; UBS Global Asset Management (Americas), Inc.; and Vaughan Nelson Investment Management, LP; Westwood; (collectively, the “Subadvisers”). The Management Agreement and the Subadvisory Agreements are collectively referred to as the “Advisory Agreements.”

The Board, including the Independent Directors, considered the factors and reached the conclusions described below relating to the selection of the Manager and each Subadviser and the continuation of the Advisory Agreements. On August 11, September 7 and September 8, the Independent Directors also met independently of Fund management and the directors who are interested persons of PFI with their independent legal counsel and an independent consultant. In evaluating the Advisory Agreements, the Board, including Independent Directors, reviewed a broad range of information requested for this purpose by the Independent Directors, including but not limited to the following: (i) the investment performance of each Fund compared to the investment performance of a market index and a broad based industry category determined by Morningstar, (ii) a comparison of each Fund’s management fee (at current asset levels and theoretical asset levels) and expense ratio (at current asset levels) to the advisory fee and expense ratio for the mutual funds in a narrow peer group and a broad-based industry category, both selected by Lipper, (iii) fee schedules applicable to the Manager’s and the Subadvisers’ other clients, (iv) the Manager’s financial results and condition, including its profitability from services it performed for each Fund, (v) an analysis of the Manager’s and each Subadviser’s allocation of the benefits of economies of scale (vi) the Manager’s and each Subadvisers’ record of compliance with applicable laws and regulations, and with each Fund’s investment policies and restrictions, and (vii) the nature and character of the services the Manager and each Subadviser provides to each Fund.

Nature, Extent and Quality of Services

With regard to the Manager, the Board considered the nature, quality and extent of services provided under the Management Agreements, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources were provided under the Management Agreement. The Board also considered the delegation of day-to-day portfolio management responsibility to the Subadvisers and the due diligence program developed by the Manager for identifying, recommending, monitoring and replacing Subadvisers. The Board concluded that this due diligence process was working well. The Board also considered the compliance program established by the Manager and the level of compliance attained for the Funds.

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With regard to each Subadviser, the Board considered the nature, quality and extent of services provided under each Subadvisory Agreement. The Board considered the reputation, qualifications and background of the Subadviser, investment approach of the Subadviser, the experience and skills of investment personnel responsible for the day-to-day management of each Fund, and the resources made available to such personnel. The Board also considered the Subadvisers’ compliance with investment policies and general legal compliance. In addition, the Board considered the analysis provided under the Manager’s due-diligence program, which resulted in the Manager recommending that each Subadvisory Agreement be continued.

Investment Performance

The Board reviewed each Fund’s investment performance over longer-term periods (both for a blended three- and five-year period and for a three year period), and compared those returns to various agreed-upon performance measures, including market indices and peer group data based upon a broad-based, industry category determined by Morningstar. For Funds that did not have a three year history, the Board reviewed performance for a one-year period. The Board also considered whether each Fund’s investment results were consistent with the Fund’s investment objective and policies. For most Funds, the Board concluded that the Fund’s investment returns met or exceeded acceptable levels of investment performance. There were some Funds, or certain Subadvisers for a multi-manager fund, that had not attained during the relevant period a level of investment performance the Board considered satisfactory. However, the Board noted that the Manager does not directly control investment performance, but rather engages the Subadvisers that manage the portfolios. The Board concluded that the Manager has in place an effective due diligence process to monitor investment performance, to encourage remedial action and to make changes in the Subadviser at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s oversight of the Subadvisers was satisfactory.

As to each Fund, the Manager had advised the Board either that the investment services delivered by the Subadviser to the Fund were reasonable or the Subadviser’s longer-term track record justified continuing the contract with more in-depth monitoring. Based upon all relevant factors, the Board concluded that either: (i) the investment performance of each Fund either met or exceeded acceptable levels of investment performance, and was therefore satisfactory; or (ii) although the Fund experienced underperformance, based upon that Fund’s particular circumstances, it was in the best interests of the Fund to continue to closely monitor performance and to renew the Subadvisory Agreements. In each case involving underperformance, the Board concluded that the Manager was providing effective monitoring.

Investment Management and Subadvisory Fees

The Board considered each Fund’s management fees. The Board received information, based on data supplied by Lipper, comparing each Fund’s contractual management fee (at current asset levels and at theoretical asset levels) and actual (after fee waivers) management fee (at current asset levels) and actual total expense ratio (at current asset levels for Class A shares) to advisory fees and expense ratios of mutual funds in a narrow peer group independently selected by Lipper (“Expense Group”) and a broad-based, industry category defined by Lipper (“Expense Universe”). For PFI Funds that did not offer Class A shares, the information provided was based upon Class I shares. In addition, the Board also reviewed information for Class I shares for certain Funds for which Class A shares were a small component of the Fund’s assets.

In assessing whether the management fees were reasonable, the Board considered a variety of factors, including the amount of the fees, breakpoints, comparison to fees of peer group funds and to other funds managed by the Manager, subadvisory fees paid, services provided, investment performance, total expense ratios, profitability and expense caps. For most Funds, actual management fees and expense ratios were within the third quartile or better when compared to their Expense Group. For some Funds, although actual management fees were higher than the third quartile, total expense ratios were within the third quartile or better. For Funds with expense ratios within the fourth quartile, the Board requested further explanation from the Manager regarding the reasonableness of management fees. The Board considered factors related to certain Funds with both actual management fees and total expenses higher than third quartile as compared to their Expense Group and certain other Funds that experienced significant underperformance. For the SAM Portfolios, the Board determined that the Manager’s unique active asset allocation strategy justified higher management fees than the Funds’ peer groups and that the total expense ratios (including the expenses of the underlying funds) compare favorably. The Board considered that certain comparable PFI Funds have different management fees and noted the reasons cited by the Manager for the differing fees.

With respect to the Board’s review of the expense caps in place with respect to certain Funds, the Board considered the Manager’s proposals to extend the expense caps in place for most Funds for an additional year, to raise the expense caps for certain Funds and to let expense caps for certain other Funds expire, based upon the individual circumstances of these Funds. The Board also considered the Manager’s proposals to either add new expense caps or to lower the expense caps (thereby decreasing the effective expense ratios) applicable to certain share classes of the LargeCap Value Fund III, the MidCap Value Fund II, and the SmallCap Growth Fund II. The Board also considered the Manager’s proposal to decrease the 12b-1 fees by 10 basis points for the Short-Term Income Fund.

Considering all factors it deemed relevant, the Board concluded that the management fee schedule for each Fund was reasonable and appropriate in light of the nature and quality of services provided by the Manager and other relevant factors.

The Board considered each Fund’s subadvisory fees. The Board evaluated the subadvisory fees based upon data supplied by Lipper, which compared the contractual subadvisory fees to available information about subadvised funds in the Expense Universe.

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For each Subadviser not affiliated with the Manager (“Unaffiliated Subadvisers”) (each Subadviser except PGI, PREI, Edge, CCI and Spectrum), the Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and each Subadviser and that the Manager compensates the Subadviser from its fees.

For the Subadvisers that reported fees for “Other Clients” with comparable investment policies and receiving comparable services, the Board noted that most Subadvisers stated that they did not charge higher fees to the Manager for the Funds than were charged to their Other Clients. For the Subadvisers that did not make this representation, the Board considered the Subadviser’s representation that the fees compared favorably with those charged to Other Clients. The Board noted that the different fees to Other Clients were generally a result of fewer assets, a different level of services provided, and/or a different competitive environment at the time of the initiation of the relationship, which had resulted in the lower fees charged to the Other Clients.

For Funds where PGI, PREI, Edge, CCI or Spectrum was engaged as the Subadviser, the Board noted that the Subadviser is an affiliate of the Manager and that, therefore, the parties may allocate the fee among themselves based upon other than competitive factors, but that in the end, the shareholders pay only the management fee. Therefore, in these cases, particularly when no comparative data on subadvisory fees was provided, the Board focused primarily on whether the management fee and total expense ratios were reasonable.

For certain Subadvisers, the Manager was able to negotiate lower fees (AllianceBernstein with respect to LargeCap Value Fund III and J.P. Morgan and Mellon Capital with respect to SmallCap Value Fund I). The Board concluded that these amended fee schedules were appropriate and should be approved.

Based upon all of the above, the Board determined that the subadvisory fees for each Fund, with the amendments proposed by the Manager, were reasonable.

Profitability

The Board reviewed detailed information regarding revenues the Manager receives under the Management Agreements, as well as the estimated direct and indirect costs the Manager incurs in providing to each Fund the services described in the applicable Advisory Agreements, for the year ended December 31, 2007. The Board also considered the returns on revenue generated in connection with the payment of subadvisory fees to affiliated Subadvisers (PGI, PREI, Edge, CCI Circle and Spectrum). The Board concluded that the management fee for each Fund was reasonable, taking into account the profitability percentages the Manager provided.

The Board noted that the Manager compensates each Unaffiliated Subadviser from its own management fees and that the fees were competitive. In concluding that the Unaffiliated Subadvisers’ fees were reasonable, the Board determined that it need not review estimated levels of profits to each Unaffiliated Subadviser because, as the Board noted, the Manager compensates each Unaffiliated Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with each Unaffiliated Subadviser at arm’s-length.

Economies of Scale

The Board considered whether there are economies of scale with respect to the management of each Fund and whether the Funds benefit from any such economies of scale through breakpoints in fees. The Board also reviewed the levels at which breakpoints occurred and the amount of the reductions. The Board also considered whether the effective management fee rate for each Fund under the Management Agreement is reasonable in relation to the asset size of such Fund. The Board concluded that the fee schedule for each Fund reflects an appropriate level of sharing of any economies of scale.

The Board noted that the management fees for the LargeCap S&P 500 Index Fund, MidCap S&P 400 Index Fund and SmallCap S&P 600 Index Fund series (the “Index Funds”) do not include breakpoints. Although their management fee schedules do not contain breakpoints, the Board noted that each Index Fund has a relatively low basis point fee for initial Fund assets and the Board concluded that these Funds do not generate sufficient economies of scale at their current asset sizes to justify a breakpoint at this time.

The Board identified some Funds whose asset levels have exceeded the last breakpoint level in the Fund’s fee schedule. The Board discussed these and other Funds with management and concluded that the existing breakpoints are appropriate at the current asset levels. The Board noted, however, that the Manager would present a proposal at the December board meeting regarding the applicability of potential new breakpoints to address future growth.

The Board considered whether there are economies of scale with respect to the subadvisory services provided to each Fund and, if so, whether the subadvisory fees reflect such economies of scale through breakpoints in fees. The Board also considered whether the effective subadvisory fee rate for each Fund under the Subadvisory Agreement is reasonable in relation to the asset size of such Fund. The Board concluded that the fee schedule for each Fund, with the amendments proposed by the Manager, reflects an appropriate recognition of any economies of scale at current asset levels.

Other Benefits to the Manager and Subadvisers

The Board also considered the character and amount of other incidental benefits received by the Manager and its affiliates from their relationships with the Funds. The Board concluded that management and subadvisory fees for each Fund were reasonable in light of these fall-out benefits.

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The Board also considered the character and amount of other incidental benefits received by each Subadviser. The Board considered as a part of this analysis each Subadviser’s soft dollar practices and brokerage practices. The Board concluded that, taking into account these benefits, the fees charged under each Subadvisory Agreement were reasonable.

Overall Conclusions

Based upon all of the information it considered and the conclusions it reached, the Board determined unanimously that the terms of each Advisory Agreement continue to be fair and reasonable and that the continuation of each Advisory Agreement, with the changes proposed by the Manager, is in the best interests of each Fund.

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FEDERAL INCOME TAX INFORMATION
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)

Long Term Capital Gain Dividends. Certain of the Funds distributed long term capital gain dividends during the fiscal year ended October 31, 2008. Details of designated long term capital gain dividends for federal income tax purposes are shown in the notes to financial statements.

Dividend Received Deduction. For corporate shareholders, the percentage of ordinary income distributions (dividend income and short-term gains, if any) for the year ended October 31, 2008, that qualifies for the dividend received deduction is as follows:

	Deductible		Deductible
	Percentage		Percentage
Principal LifeTime 2010 Fund	11%	SAM Balanced Portfolio	24%
Principal LifeTime 2020 Fund	15	SAM Conservative Balanced Portfolio	13
Principal LifeTime 2030 Fund	20	SAM Conservative Growth Portfolio	42
Principal LifeTime 2040 Fund	22	SAM Flexible Income Portfolio	8
Principal LifeTime 2050 Fund	23	SAM Strategic Growth Portfolio	54
Principal LifeTime Strategic Income Fund	5

Qualified Dividend Income. Certain dividends paid by the Funds may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of ordinary income distributions for the fiscal year ended October 31, 2008, taxed at a maximum rate of 15% is as follows:

	Percentage		Percentage
Principal LifeTime 2010 Fund	16%	SAM Balanced Portfolio	34%
Principal LifeTime 2020 Fund	22	SAM Conservative Balanced Portfolio	19
Principal LifeTime 2030 Fund	30	SAM Conservative Growth Portfolio	60
Principal LifeTime 2040 Fund	34	SAM Flexible Income Portfolio	11
Principal LifeTime 2050 Fund	36	SAM Strategic Growth Portfolio	73
Principal LifeTime Strategic Income Fund	7

This information is given to meet certain requirements of the Internal Revenue Code and should not be used by shareholders for preparing their income tax returns. For tax return preparation purposes, please refer to the information supplied with the 1099-DIV form you receive from the Fund’s transfer agent.

101

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WE’LL GIVE YOU AN EDGE^®

A mutual fund’s share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

     This annual report is published as general information for the shareholders of Principal Funds. This material is not authorized for distribution unless preceded or accompanied by a current prospectus that includes more information regarding the risk factors, expenses, policies, and objectives of the funds. Investors should read the prospectus carefully before investing.

To obtain an additional prospectus, please contact your financial professional or call 800-222-5852.

For more information about these funds, including their full names, please see the Principal Funds, Inc. prospectus or visit www.principalfunds.com.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group^®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

Distributed by:
Principal Funds Distributor, Inc.
Member FINRA
1100 Investment Blvd., Suite 200
El Dorado Hills, CA 95762

FV 457-1 | 12/2008 | #11229122010
©2008 Principal Financial Services, Inc.

Principal Funds Distributor, Inc.
711 High Street
Des Moines, IA 50392-6370

Do not use this address for business correspondence.

WE’LL GIVE YOU AN EDGE^®

A mutual fund’s share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

     This annual report is published as general information for the shareholders of Principal Funds. This material is not authorized for distribution unless preceded or accompanied by a current prospectus that includes more information regarding the risk factors, expenses, policies, and objectives of the funds. Investors should read the prospectus carefully before investing.

To obtain an additional prospectus, please contact your financial professional or call 800-222-5852.

For more information about these funds, including their full names, please see the Principal Funds, Inc. prospectus or visit www.principalfunds.com.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group^®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

Distributed by:
Principal Funds Distributor, Inc.
Member FINRA
1100 Investment Blvd., Suite 200
El Dorado Hills, CA 95762

FV 457-1 | 12/2008 | #11229122010
©2008 Principal Financial Services, Inc.

Principal Funds Distributor, Inc.
711 High Street
Des Moines, IA 50392-6370

PRESORTED

Do not use this address for business correspondence.

     STANDARD U.S. POSTAGE

PAID

     PRINCIPAL FINANCIAL GROUP

CLASS A, B, & C SHARES

Principal Funds: Equity & Fixed-Income Funds

Annual Report

October 31, 2008

Table of Contents
Letter from the President	1
Economic & Financial Market Review	2
Large U.S. Equity Funds’ Performance and Investment Overview:
Equity Income Fund	4
Disciplined LargeCap Blend Fund	6
LargeCap Blend Fund I	8
LargeCap Blend Fund II	10
LargeCap Growth Fund	12
LargeCap Growth Fund I	14
LargeCap Growth Fund II	16
LargeCap S&P 500 Index Fund	18
LargeCap Value Fund	20
LargeCap Value Fund III	22
West Coast Equity Fund	24

Small/Mid U.S. Equity Funds’ Performance and Investment Overview:

MidCap Blend Fund	26
MidCap Growth Fund I	28
MidCap Growth Fund III	30
MidCap Stock Fund	32
MidCap Value Fund II	34
Real Estate Securities Fund	36
SmallCap Blend Fund	38
SmallCap Growth Fund	40
SmallCap Growth Fund II	42
SmallCap Value Fund	44
International Equity Funds’ Performance and Investment Overview:
Diversified International Fund	46
Global Real Estate Securities Fund	48
International Emerging Markets Fund	50
International Growth Fund	52
Fixed-Income Funds’ Performance and Investment Overview:
Bond & Mortgage Securities Fund	54
California Municipal Fund	56
Government & High Quality Bond Fund	58
High Yield Fund	60
Income Fund	62
Inflation Protection Fund	64
Mortgage Securities Fund	66
Preferred Securities Fund	68
Tax-Exempt Bond Fund	70

Short-Term Fixed-Income Funds’ Performance and Investment Overview:

Short-Term Bond Fund	72
Short-Term Income Fund	74
Ultra Short Bond Fund	76
Money Market Fund	78
Glossary	80
Shareholder Expense Example	83
Financial Statements	86
Notes to Financial Statements	152
Schedules of Investments	172
Financial Highlights	397
Report of Registered Independent Public Accounting Firm	435
Supplemental Information	436

Not FDIC Insured
May Lose Value • Not a Deposit • No Bank Guarantee
Not Insured by any Federal Government Agency

Nora Everett was named president of Principal Funds effective

March 1, 2008. Nora was formerly senior vice president and

deputy general counsel at The Principal, and has a background

in investments, regulation, and acquisitions.

Dear Shareholder,

By historical standards, the past fiscal year was an exceptional period for the world’s financial markets. Buffeted by an extended period of market volatility and unprecedented disruptions in the credit markets, the S&P 500 declined 36.10% for the period, while the Barclays Capital Aggregate Bond Index closed the period with a gain of 0.30% .¹

Yet while the markets suffered from extreme volatility and the traditional relationships between stock and bond prices were disrupted, our funds weathered this difficult environment. During this market period, 25 of our 49 retail funds outpaced either their benchmarks or their Morningstar peer group, and 13 of our funds beat both of these key measures.² This illustrates the benefits of our extensive research capabilities and investment approach, which are founded on disciplined investing, active management, and adhering to investment fundamentals regardless of market conditions.

Market Declines and Recoveries

Over the past year, the market environment presented challenges for managing financial assets and planning for our financial futures. As the year unfolded, it became clear we were in a significant bear market that did not reward investors and made many nervous enough to question their overall investment strategies.

This is entirely natural. Understandably, people will question their beliefs during these difficult times. Since 1919, there have been 16 economic contractions in the U.S., averaging 13 months in length.³ However, history has shown that the worst 12-month stock market declines have historically been followed by periods of even greater recovery.⁴ While this may not always happen, market cycles are an inherent part of investing.

Although it is difficult to predict the length of any particular market cycle, we encourage investors to continue to follow some time-tested principles, including the need for diversification and maintaining a long-term investment perspective. As we have cited in the past, numerous studies have found that asset allocation — the mix of asset classes you select — is the most important factor in determining the variability of investment returns in your portfolio’s performance.⁵

Investing in multiple asset classes and investment styles affects both investment returns and risk management. When a diversified portfolio is carefully constructed, it can provide a cushion against volatile markets and prices. This remains as true today as ever before. It also helps explain why our target-date Principal LifeTime Funds and target-risk Strategic Asset Management (SAM) Portfolios continue to remain popular choices for investors seeking wider diversification.

While these are challenging times, you do not have to make difficult investing choices alone. We encourage you to meet with your financial professional, who can provide the advice you need to help meet your financial goals. We also have developed a series of educational materials on market volatility and the benefits of disciplined investing, which are available in the Tools and Resources section of our Web site, principalfunds.com.

As this letter is being written, it is evident we have entered a recession which may, or may not, last longer than average. Yet regardless of the duration, we remain committed to providing you with the highest quality investment management and shareholder services possible.

Thank you for your continued support.

Note: Asset allocation/diversification does not guarantee a profit or protect against a loss. Past performance is not a guarantee of future results.

1	Based on total return. The S&P 500 is a broad-based index intended to represent the U.S. equity market. The Barclays Capital Aggregate Bond Index (formerly known as the Lehman Brothers Aggregate Bond Index) is a broad-based index intended to represent the U.S. fixed-income market. Indices are unmanaged, and individuals cannot invest directly in an index.
2	Based on Class A shares without sales charge.
3	National Bureau of Economic Research.
4	Ibbotson Associates.
5	G.P. Brinson, L.R. Hood, and G.L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, January/February 1995.

1

Economic & Financial Market Review

Despite Aggressive Fed Actions, Credit Crisis Rages

Few could have predicted the transformation that occurred in the capital markets during the past twelve months. What began as a seemingly isolated crisis in assets related to U.S. subprime mortgages ballooned into an all-encompassing crisis in liquidity and confidence that touched asset classes around the globe. Stocks faltered as the credit crisis expanded. In this tenuous environment, risk premiums soared and investors sought relative safety by investing in U.S. Treasuries.

The Federal Reserve (the Fed) took aggressive actions during the period, including:

• lowering the federal funds rate from 4.5% to 1.00% (the federal funds rate is the interest rate at which financial institutions lend balances to one another overnight).
• lowering the discount rate from 5.0% to 1.25% (the discount rate is the interest rate at which financial institutions can borrow directly from the Fed).
• reviving a Depression-era tool, the primary dealer credit facility, to allow non-banks to borrow directly from the Fed.

As the domestic crisis expanded worldwide, international central banks joined the Fed in massive attempts to foster stability and liquidity in capital markets.

Major U.S. Financial Institutions Falter and Fall

Few of the most prominent U.S. financial institutions weathered the tumult unscathed. Milestones for the period included: JPMorgan bought out Bear Stearns at $10 per share; Fannie Mae and Freddie Mac were placed into conservatorship; Bank of America acquired Merrill Lynch; Lehman Brothers filed for Chapter 11 bankruptcy protection; the Federal Reserve extended an $85 billion loan in exchange for a 79.9% equity stake in AIG; the Reserve Primary Fund — the oldest U.S. money market fund — “broke the buck” as its net asset value dropped below $1 per share; Washington Mutual Bank failed — the largest U.S. bank failure on record — and JPMorgan acquired its deposit base as the bank’s investors were wiped out; Wells Fargo agreed to acquire troubled Wachovia. And the last two major investment banks standing — Goldman Sachs and Morgan Stanley —changed their status to become bank holding companies, agreeing to oversight by the Fed in order to access the discount window.

In October, following intense debate, Congress passed a highly controversial $700 billion credit facility in an effort to slow or halt the escalating cycle of deleveraging by investing directly in troubled assets and troubled financial institutions. At the end of October, approximately $250 billion had been used for direct investments in institutions.

Within this environment, value stocks performed roughly in line with growth stocks, while small-cap stocks had a modest advantage over their larger peers (although returns were decidedly negative for all market segments, as measured by the Russell indices). U.S. real estate investment trust securities also suffered, losing slightly more than the major U.S. equity indices.

2

Commodities Climb, Then Plummet

Commodity prices rose throughout much of the 12-month period. Oil led the way, rising from $85 per barrel at the beginning of the period to nearly $150 per barrel by July (as measured by NYMEX crude oil futures). Prices were driven up in part by strong international demand and by speculation of continued growth in emerging market economies. Soon after reaching their highs, however, commodity prices corrected sharply, due partly to growing signs of a deep global recession. By the end of October, oil had dropped to below $70 per barrel.

Both Emerging and Developed Foreign Markets Suffer

The abrupt and severe correction in commodities markets caused emerging markets (particularly heavy commodities exporters such as Russia) to suffer huge market losses in the midst of skyrocketing risk premiums. Geopolitical turmoil in Russia added to investor angst in that region. Developed markets also suffered heavily, with European financial institutions under tremendous pressure and the outlook for growth significantly weakened. For U.S.-based investors, returns on international stocks generally were even lower due to resurgence in the U.S. dollar.

Risk Aversion Drives Investors to U.S. Treasuries

As credit risk climbed during the period, investors stampeded to the relative safety of U.S. Treasuries. With the investor rush to safety, the broad U.S. fixed-income market significantly lagged Treasuries. Investment-grade corporate bonds (as measured by the Barclays Capital Aggregate Bond Index) trailed like-duration Treasuries by 22.5%, and the financial segment of U.S. corporate bonds lost 25.6% relative to Treasuries. Commercial mortgage-backed securities also lagged Treasuries by 24.5%, reflecting investor fear that commercial real estate would flounder under pressure from depressed residential real estate and restricted credit conditions. Meanwhile, asset-backed securities — which are primarily collateralized by consumer debt — were down 21.0% relative to Treasuries.

*Indices are unmanaged, and individuals cannot invest directly in an index. Returns shown for indices assume reinvestment of all dividends and distributions. See glossary on page 80 for definitions of indices.

3

Equity Income Fund

Portfolio Managers:

Joseph T. Suty, CFA
David W. Simpson, CFA
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection within the financial sector combined with the decision to underweight the financial sector were the two biggest contributors to outperformance. Avoidance of brokerage stocks for much of the 12-month period was also beneficial. Stock selection within the health care sector was the third-largest contributor to outperformance. Both Abbott Labs and Roche Holding showed positive returns. The Fund’s largest holding, Wal-Mart Stores, added a positive contribution as well.

On the negative side, stock selection within consumer staples was the biggest detractor from performance. In particular, the Fund’s position in Safeway, Inc. was a laggard. Stock selection within the materials sector was the second-biggest detractor. With the economy softening globally, several metals stocks — Alcoa, Freeport-McMoRan, and Weyerhaeuser — were very weak. Stock selection within the real estate investment trust (REIT) sector was the third-biggest detractor due to the Fund’s exposure to two industrial REITs, AMB Property and ProLogis.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund focuses on providing investors with conservative, income-oriented exposure to the stock market. Using bottom-up fundamental and quantitative analysis, the sub-advisor seeks undervalued large-cap firms they believe demonstrate strong balance sheets, cash flow, and dividend growth prospects, plus the potential to weather most economic conditions. To enhance diversification and income potential, the Fund may also invest in real estate investment trusts as well as convertible, corporate, and government bonds.

What is the outlook for the Fund?

The effect of a deteriorating global economy over the period is reflected in substantially lower stock prices. However, many stocks held in the Fund potentially offer compelling value. While it is impossible to predict the direction of the stock market over the near term, historically the stock market bottoms out ahead of the trough in the economy. Furthermore, valuations suggest the possibility of strong performance for investors who have a three-to-five-year investment time horizon. The Fund’s philosophy of investing in quality mid-sized companies historically has served investors well over the long term.

Large U.S. Equity Funds 4

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-35.04%	-4.74%	3.09%	5.32%	8.41%	5/31/39	–
	Including Sales Charge	-38.62%	-6.52%	1.93%	4.73%	8.33%
Class B Shares	Excluding Sales Charge	-35.61%	-5.54%	2.21%	4.59%	7.57%	3/30/94	5/31/39
	Including Sales Charge	-38.50%	-6.58%	1.88%	4.59%	7.57%
Class C Shares	Excluding Sales Charge	-35.55%	-5.46%	2.30%	4.50%	7.57%	3/1/02	5/31/39
	Including Sales Charge	-36.13%	-5.46%	2.30%	4.50%	7.57%
S&P 5003		-36.10%	-5.21%	0.26%	0.40%	11.30%
S&P 500/Citigroup Value Index3		-38.07%	-5.25%	1.91%	1.40%	–
Morningstar Large Value		-37.27%	-6.14%	0.64%	2.08%	10.75%
Category Average3
					Gross/Net
Total Investment Expense				Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares					0.84%
Class B Shares					1.68%
Class C Shares					1.61%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -24.95% (1-year); 6.76% (5-year); 7.37% (10-year); 8.63% (since inception) Class B Shares: -24.78% (1-year); 6.74% (5-year); 7.24% (10-year); 7.88% (since inception) Class C Shares: -21.88% (1-year); 7.14% (5-year); 7.14% (10-year); 7.87% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and the since-inception return shown for the S&P 500 is calculated from 12/31/78. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
5

Disciplined LargeCap Blend Fund

Portfolio Manager:

Jeffrey A. Schwarte, CFA, CPA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund had positive stock selection in the financial, consumer discretionary, and telecommunication services sectors. It avoided any exposure to AIG, Wachovia Corp., and Sprint Nextel Corp., which helped the Fund’s relative performance compared to the benchmark. On the negative side, the Fund had poor stock selection in the industrial, materials, utilities, and consumer staples sectors. Negative contributors to relative performance included United States Steel Corp., AK Steel Holding Corp., and Anheuser-Busch Companies, Inc.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes that the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Large U.S. Equity Funds 6

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-36.96%	-6.39%	0.04%	3.29%	6/28/05	12/30/02
	Including Sales Charge	-40.43%	-8.14%	-1.10%	2.30%
Class B Shares	Excluding Sales Charge	-37.61%	-7.31%	-0.86%	2.38%	6/28/05	12/30/02
	Including Sales Charge	-40.38%	-8.38%	-1.19%	2.38%
Class C Shares	Excluding Sales Charge	-37.46%	-7.10%	-0.68%	2.57%	1/16/07	12/30/02
	Including Sales Charge	-38.02%	-7.10%	-0.68%	2.57%
S&P 5003		-36.10%	-5.21%	0.26%	3.58%
Morningstar Large Blend		-37.17%	-6.07%	-0.27%	2.88%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		0.95%		0.95%
Class B Shares		1.91%		1.91%
Class C Shares		2.98%		1.82%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -27.08% (1-year); 3.78% (5-year); 5.68% (since inception) Class B Shares: -26.96% (1-year); 3.71% (5-year); 5.81% (since inception) Class C Shares: -24.11% (1-year); 4.24% (5-year); 5.99% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/02. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
7

LargeCap Blend Fund I

Portfolio Managers:

Robert C. Jones, CFA
Andrew Alford
Mark M. Carhart, CFA
Goldman Sachs Asset Management, L.P.

What contributed to or detracted from Fund performance during the fiscal year?

During the fiscal year, quality was by far the best performing theme, followed by management, sentiment, valuation, profitability, and momentum. Among specific sectors, stock selection was positive overall. Of all sectors in the benchmark index, the Fund’s holdings in the financial sector outpaced their peers the most. On an individual stock level, underweighted positions in AIG and Fannie Mae, as well as an overweighted position in UST, contributed most positively to returns. On the negative side, holdings in the consumer staples sector were least successful relative to their peers in the benchmark. Overweighted positions in Sprint Nextel, CBS, and Regions Financial were among the biggest detractors from relative performance.

Were there any changes to the Fund’s composition during the fiscal year?

In the first quarter of 2008, the Fund manager began rebalancing the U.S. large-cap portfolios more frequently in order to achieve more timely exposure to investment themes and to better exploit shorter-lived information sources. Also, several enhancements were made to the investment process in an effort to improve performance.

What is the outlook for the Fund?

The sub-advisor continues to believe that cheaper stocks should outpace more expensive ones, and that good momentum stocks should perform better than poor momentum stocks. They prefer stocks about which fundamental research analysts are becoming more positive — profitable companies with sustainable earnings that use their capital to enhance shareholder value. As such, the sub-advisor anticipates remaining fully invested and expects that the value they add over time will be due to stock selection, as opposed to sector or size allocations. Although their underlying philosophy remains unchanged, they maintain a robust research agenda in an effort to enhance their process.

Large U.S. Equity Funds 8

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-37.03%	-7.07%	-0.94%	-4.58%	6/28/05	12/6/00
	Including Sales Charge	-40.52%	-8.82%	-2.06%	-5.26%
Class B Shares	Excluding Sales Charge	-37.62%	-7.98%	-1.81%	-5.39%	6/28/05	12/6/00
	Including Sales Charge	-40.65%	-9.19%	-2.19%	-5.39%
Class C Shares	Excluding Sales Charge	-37.63%	-7.81%	-1.74%	-5.36%	1/16/07	12/6/00
	Including Sales Charge	-38.23%	-7.81%	-1.74%	-5.36%
S&P 5003		-36.10%	-5.21%	0.26%	-2.16%
Morningstar Large Blend		-37.17%	-6.07%	-0.27%	-2.99%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.11%		1.11%
Class B Shares		2.15%		2.15%
Class C Shares		8.50%		1.90%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -27.61% (1-year); 2.74% (5-year); -3.06% (since inception) Class B Shares: -27.85% (1-year); 2.61% (5-year); -3.20% (since inception) Class C Shares: -24.81% (1-year); 3.04% (5-year); -3.16% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
9

LargeCap Blend Fund II

Portfolio Manager:

Anna M. Dopkin, CFA
T. Rowe Price Associates, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Strong stock selection in financials, such as insurance and commercial banks, was the largest positive contributor to relative returns. Underweighting thrifts and mortgage finance companies also helped. AIG was eliminated from the Fund prior to government action, amid liquidity concerns. Selections in information technology were beneficial to relative returns as well. For example, participating in the IPO of IT services provider Visa contributed to performance, and underweighting Yahoo! helped as its stock price suffered twice — on Microsoft’s retracted takeover bid, and after issuing a dampened outlook for ad revenue in a weak economy. Additionally, a slight underweighting in the industrial sector made a small contribution to relative returns, which was also augmented by advantageous stock selection. Specifically, underweighting General Electric was helpful, as was avoiding multi-industry company Textron, Inc.

On the negative side, utilities were the greatest detractor, behind adverse stock selection. Overweighting independent power producers and energy traders such as AES and NRG Energy hurt due to falling natural gas prices. Avoiding regulated utility Southern Company detracted as it performed well despite decreased demand. Also, consumer discretionary selections struggled as consumer spending slowed. Portfolio positions in hotels, restaurants, and leisure dragged on returns. Specifically, overweighting International Game Technology and holding non-index companies MGM Mirage, Melco PBL Entertainment, and Las Vegas Sands detracted from performance. Additionally, stock selection in materials was a minor detraction. A non-index position in Potash Corporation of Saskatchewan, which produces crop nutrients used in fertilizer, was detrimental, as was an overweighting in International Paper.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. With sector weightings that are approximately equal to those of the S&P 500, the sub-advisor invests primarily in large-cap stocks. A team of T. Rowe Price equity analysts selects stocks from the industries they cover based on rigorous fundamental analysis that assesses the quality of the business franchise, earnings growth potential for the company, and the value of the stock.

What is the outlook for the Fund?

The sub-advisor believes conditions that have roiled the global economy and the equity markets in recent months are likely to continue into the foreseeable future. Given that the U.S. and its major trading partners have adopted measures to inject capital and restore confidence in the financial system, the sub-advisor intends to continue to emphasize rigorous research and comprehensive analysis in seeking out companies they believe have potential for capital appreciation, while maintaining sector weightings comparable to the S&P 500. The sub-advisor remains confident this strategy will serve investors well over the long term.

Large U.S. Equity Funds 10

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-36.29%	-5.51%	-0.24%	-1.39%	6/28/05	12/6/00
	Including Sales Charge	-39.77%	-7.27%	-1.37%	-2.13%
Class B Shares	Excluding Sales Charge	-36.82%	-6.15%	-0.95%	-2.11%	6/28/05	12/6/00
	Including Sales Charge	-39.70%	-7.20%	-1.27%	-2.11%
Class C Shares	Excluding Sales Charge	-36.84%	-6.25%	-1.03%	-2.16%	1/16/07	12/6/00
	Including Sales Charge	-37.41%	-6.25%	-1.03%	-2.16%
S&P 5003		-36.10%	-5.21%	0.26%	-2.16%
Morningstar Large Blend		-37.17%	-6.07%	-0.27%	-2.99%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.41%		1.41%
Class B Shares		2.10%		2.10%
Class C Shares		7.19%		2.20%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -26.50% (1-year); 3.33% (5-year); 0.17% (since inception) Class B Shares: -26.36% (1-year); 3.43% (5-year); 0.20% (since inception) Class C Shares: -23.60% (1-year); 3.69% (5-year); 0.15% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
11

LargeCap Growth Fund

Portfolio Manager:

Anthony Rizza, CFA
Columbus Circle Investors

What contributed to or detracted from Fund performance during the fiscal year?

A few performance bright spots over the period were companies such as Millennium Pharmaceuticals and Wrigley, which benefited from being taken over at healthy premiums. Also, XTO Energy and Occidental Petroleum prospered from the early-2008 escalation in energy prices. Delta Airlines added value as well due to the rapid decline in energy prices. On the negative side, sub-par stock selection detracted most from performance, particularly in technology, as Google, Cisco, and Apple were hurt by profit-taking and IT spending deceleration. Goldman Sachs was also weak, as the company’s business suffered from the need to deleverage its business model, sluggish investment banking trends, and volatile trading conditions. Lastly, eye care-oriented drug and medical device company Alcon declined substantially late in the period after missing earnings and lowering guidance, largely because of higher-than-expected sales and marketing spending.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor's investment strategies are based on the premise that companies doing better than expected will have rising securities prices, while companies producing lower-than-expected results will not. This discipline is referred to as positive momentum and positive surprise. Through in-depth analysis of company fundamentals in the context of the prevailing economic environment, the sub-advisor selects companies that meet the criteria of positive momentum and positive surprise.

What is the outlook for the Fund?

The sub-advisor believes that although rapid action may prevent the credit crisis from depriving sound businesses and consumers of credit, keeping a recession mild, the potential for a severe recession with high unemployment rates is growing rapidly as the financial crisis deepens and spreads abroad. Further, they believe that because the deteriorating economic environment has made bottom-up stock selection difficult, maintaining a strong focus on high-quality companies possessing stable business models is prudent.

Large U.S. Equity Funds 12

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-37.78%	-3.95%	1.35%	-5.01%	6/28/05	12/6/00
	Including Sales Charge	-41.21%	-5.74%	0.20%	-5.69%
Class B Shares	Excluding Sales Charge	-38.36%	-4.84%	0.47%	-5.81%	6/28/05	12/6/00
	Including Sales Charge	-41.39%	-6.09%	0.07%	-5.81%
Class C Shares	Excluding Sales Charge	-38.32%	-4.80%	0.45%	-5.87%	1/16/07	12/6/00
	Including Sales Charge	-38.93%	-4.80%	0.45%	-5.87%
Russell 1000® Growth Index3		-36.95%	-5.90%	-1.29%	-5.03%
Morningstar Large Growth		-38.96%	-6.69%	-1.14%	-5.48%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.21%		1.21%
Class B Shares		2.14%		2.14%
Class C Shares		2.44%		2.03%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -24.64% (1-year); 5.26% (5-year); -3.52% (since inception) Class B Shares: -24.79% (1-year); 5.22% (5-year); -3.62% (since inception) Class C Shares: -21.60% (1-year); 5.53% (5-year); -3.68% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
13

LargeCap Growth Fund I

Portfolio Manager:

Robert W. Sharps, CFA, CPA
T. Rowe Price Associates, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

While every sector in the Russell 1000^® Growth Index saw double-digit losses over the period, the health care sector was one of the least damaged on a relative basis. As a result, an overweighting in the health care sector — led by the Fund’s biotechnology holdings — was the greatest positive contributor to relative returns. Stock selection in telecommunication services was also beneficial, though the effect was somewhat mitigated by a heavy overweighting in the sector. Some of the Fund’s wireless companies, such as tower and antenna company American Tower Systems, fared better than the broader sector overall. Additionally, underweighting energy stocks boosted relative returns as falling energy prices battered the sector. Avoiding positions in oil refiner and gasoline retailer Valero Corporation, as well as global oilfield service provider Baker Hughes, was helpful. However, the benefit was limited by adverse stock selection.

On the negative side, stock selection in the consumer discretionary category led detractors. Slowing consumer spending and travel led to deep declines in the Fund’s hotel, restaurant, and leisure company holdings. Specifically, positions in MGM Mirage, Las Vegas Sands, and Marriott International all performed poorly. Conversely, defensive sectors like consumer staples performed relatively well in a challenging market environment, and an underweighting in the group hampered returns significantly. Tobacco and food product companies — in which the Fund had little exposure — had strong results for the period. Weak stock selection in information technology was a factor in the Fund’s underperformance as well. Additionally, concerns about decreased spending from both consumers and businesses caused declines for some portfolio holdings, including game companies Nintendo and Electronic Arts and credit card company Mastercard.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor's investment process involves finding and holding large companies they believe offer solid earnings and cash-flow growth.

What is the outlook for the Fund?

The sub-advisor believes that the equity market is closer to a bottom than to a top, but remains somewhat cautious in the near term due to the current challenging market environment. However, it is important to recognize that the sub-advisor is a long-term investor and their investment philosophy remains unchanged. Risk aversion and pessimism in the markets has resulted in lower valuations for many high-quality growth companies, and the sub-advisor continues to rely on the strength of their independent research to select stocks for the Fund that reflect above-average earnings and free cash flow over time. They continue to concentrate on the underlying fundamentals of their holdings. However, they are paying more attention to credit considerations, including evaluation of companies’ credit facilities, terms, and counterparties, given the credit environment.

Over time, the sub-advisor believes that better fundamentals will drive improvements in sentiment and stock performance. One encouraging note is the possible expansion in price/earnings multiples that could be driven by two factors: a reduction in risk aversion and a softening of inflation fears. Regarding inflation worries, weaker global economic growth and tighter monetary policy outside of the U.S. may eventually put the inflation genie back in the bottle. The sub-advisor believes that over time, falling commodity prices may help ease pressure on the inflation front, along with improving worker productivity and restrained wage gains. In this scenario it is possible, they believe, to see some stock prices moving higher even absent a return of robust economic and corporate earnings growth.

Large U.S. Equity Funds 14

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-41.07%	-9.27%	-3.02%	-6.60%	6/28/05	12/6/00
	Including Sales Charge	-44.31%	-10.97%	-4.12%	-7.27%
Class B Shares	Excluding Sales Charge	-41.54%	-10.06%	-3.81%	-7.34%	6/28/05	12/6/00
	Including Sales Charge	-44.33%	-11.13%	-4.16%	-7.34%
Class C Shares	Excluding Sales Charge	-41.39%	-9.55%	-3.44%	-7.09%	1/16/07	12/6/00
	Including Sales Charge	-41.95%	-9.55%	-3.44%	-7.09%
Russell 1000® Growth Index3		-36.95%	-5.90%	-1.29%	-5.03%
Morningstar Large Growth		-38.96%	-6.69%	-1.14%	-5.48%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.59%		1.59%
Class B Shares		2.50%		2.50%
Class C Shares		13.76%		2.20%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -30.78% (1-year); 0.71% (5-year); -5.05% (since inception) Class B Shares: -30.85% (1-year); 0.68% (5-year); -5.11% (since inception) Class C Shares: -27.59% (1-year); 1.42% (5-year); -4.87% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
15

LargeCap Growth Fund II

Portfolio Managers:

Prescott LeGard, CFA
Gregory J. Woodhams, CFA
American Century Investment Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection in the consumer discretionary sector drove the Fund’s outperformance, led by positioning in multi-line and specialty retail, among other industries. The sector was home to the number one overall contributor to relative results, an overweighted position in Family Dollar Stores. Materials shares were another important source of outperformance, led by allocation and selection decisions in the chemicals and metals and mining industry segments. Monsanto, the world’s largest seed producer, was the leading contributor in this space. Financial shares also helped relative performance, thanks to stock selection in insurance, as well as to underweighted positions in consumer finance and thrift companies. The key contribution to relative results in this sector came from an overweighted position in The Chubb Corporation.

On the negative side, the information technology sector was the largest detractor from relative returns. Stock selection in the software industry drove the underperformance, behind an underweighted position in Microsoft, which appeared to be viewed by investors as a large “safe-haven” during the market turmoil experienced throughout the period. An underweighted position as well as stock selection in the IT services industry segment also detracted. Here, it hurt to be under-represented in IBM, another company apparently viewed by investors as a safe haven. An overweighting in Western Union and DST Systems also detracted. Industrial shares were the only other sector to hurt relative performance, largely as a result of an overweighted position in, and stock selection among, electrical equipment companies. Additionally, positioning in the commercial services, building products, and road and rail industries detracted slightly.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund is structured to potentially provide long-term capital appreciation for investors who can tolerate short-term share price fluctuations. The sub-advisor pursues this objective by continuing to remain fully invested in large companies exhibiting sustainable improvement in their businesses. It is the sub-advisor’s belief that owning such companies will generate outperformance over time versus both the Russell 1000^® Growth Index and other funds within the large-growth peer group.

What is the outlook for the Fund?

The sub-advisor’s investment process focuses on large companies exhibiting sustainable improvement in their businesses. Each stock is selected based on a thesis, and the entire research effort is designed to identify the companies in each sector and industry the sub-advisor believes are likely to outperform. They believe owning such companies will generate outperformance over time versus the Russell 1000^® Growth Index and the other funds in the large-growth peer group. As a result, the Fund’s sector and industry selection as well as capitalization range allocations are primarily a result of identifying what the sub-advisor believes to be superior individual securities.

Large U.S. Equity Funds 16

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-34.55%	-4.39%	-0.34%	-4.95%	6/28/05	12/6/00
	Including Sales Charge	-38.17%	-6.16%	-1.45%	-5.63%
Class C Shares	Excluding Sales Charge	-35.04%	-5.15%	-1.11%	-5.68%	1/16/07	12/6/00
	Including Sales Charge	-35.63%	-5.15%	-1.11%	-5.68%
Russell 1000® Growth Index3		-36.95%	-5.90%	-1.29%	-5.03%
Morningstar Large Growth		-38.96%	-6.69%	-1.14%	-5.48%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		4.48%		1.70%
Class C Shares		17.51%		2.45%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -23.10% (1-year); 3.48% (5-year); -3.45% (since inception) Class C Shares: -20.00% (1-year); 3.86% (5-year); -3.49% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
17

LargeCap S&P 500 Index Fund

Portfolio Managers:

Dirk Laschanzky, CFA
Scott Smith
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund underperformed the S&P 500 for the period due primarily to transaction costs, timing of cash flows, and portfolio fees. All 10 economic sectors in the index posted negative returns during the period. The health care and consumer staples sectors provided the least negative returns for the period, while the financial and telecommunication services sectors delivered the largest negative returns.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor uses a passive indexing strategy and does not attempt to manage market volatility, use defensive strategies, or reduce the effect of any long-term periods of negative stock market performance.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Large U.S. Equity Funds 18

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 1.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

This index-based investment option is invested in the stocks of the unmanaged index it tracks. There is no assurance that an index-based investment option will match the performance of the index itself. S&P 500 is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Principal Management Corporation. This fund is not sponsored, endorsed, sold, or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in it.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-36.55%	-5.84%	-0.46%	-3.17%	6/28/05	12/6/00
	Including Sales Charge	-37.51%	-6.31%	-0.75%	-3.36%
Class C Shares	Excluding Sales Charge	-36.92%	-6.45%	-1.06%	-3.74%	1/16/07	12/6/00
	Including Sales Charge	-37.54%	-6.45%	-1.06%	-3.74%
S&P 5003		-36.10%	-5.21%	0.26%	-2.16%
Morningstar Large Blend		-37.17%	-6.07%	-0.27%	-2.99%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		0.67%		0.67%
Class C Shares		3.65%		1.30%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -23.68% (1-year); 4.08% (5-year); -1.09% (since inception) Class C Shares: -23.84% (1-year); 3.75% (5-year); -1.48% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
19

LargeCap Value Fund

Portfolio Managers:

John Pihlblad, CFA
Arild Holm, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund had positive stock selection in the financial, consumer discretionary, and information technology sectors. It held underweighted positions in AIG, Wachovia Corp., and Washington Mutual, Inc., which helped the Fund’s relative performance compared to the benchmark. On the negative side, the Fund had poor stock selection in the industrial, health care, utilities, and consumer staples sectors. Negative contributors to relative performance included Manitowoc Co., Idearc Inc., and Bunge Ltd.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Large U.S. Equity Funds 20

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-35.48%	-5.49%	0.52%	-0.04%	6/28/05	12/6/00
	Including Sales Charge	-39.04%	-7.25%	-0.61%	-0.75%
Class B Shares	Excluding Sales Charge	-36.08%	-6.45%	-0.27%	-0.71%	6/28/05	12/6/00
	Including Sales Charge	-39.01%	-7.52%	-0.59%	-0.71%
Class C Shares	Excluding Sales Charge	-35.81%	-6.14%	-0.18%	-0.73%	1/16/07	12/6/00
	Including Sales Charge	-36.40%	-6.14%	-0.18%	-0.73%
Russell 1000® Value Index3		-36.80%	-5.24%	1.90%	0.73%
Morningstar Large Value		-37.27%	-6.14%	0.64%	-0.79%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		0.94%		0.94%
Class B Shares		2.01%		2.01%
Class C Shares		8.26%		1.70%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -26.15% (1-year); 4.33% (5-year); 1.67% (since inception) Class B Shares: -26.14% (1-year); 4.36% (5-year); 1.72% (since inception) Class C Shares: -23.00% (1-year); 4.77% (5-year); 1.69% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
21

LargeCap Value Fund III

Portfolio Managers:

U.S. Value Investment Susan M. Byrne Mark R. Freeman, CFA
Policy Group Scott Lawson, CFA Jay Singhania, CFA
AllianceBernstein L.P. Kellie R. Stark, CFA
Westwood Management Corporation

What contributed to or detracted from Fund performance during the fiscal year?

Despite negative stock selection overall, stock selection was positive in the information technology sector. Having a slight underweighting in the financial sector was beneficial, as this was one of the worst-performing sectors in the benchmark Russell 1000^® Value Index. Although stock selection was poor in the financial sector, the Fund avoided several companies that severely underperformed, such as Lehman Brothers and Bear Stearns.

On a negative note, stock selection was a detractor for the period. Poor stock selection was led by the financial sector, as the Fund held some of the worst-performing stocks, including AIG, Fannie Mae, and Freddie Mac. Stock selection was also negative in the energy sector. An underweighting in the utilities sector detracted from performance as well, as this was one of the better-performing sectors in the index.

Were there any changes to the Fund’s composition during the fiscal year?

Westwood Management Corp. was added to the Fund in mid-July. The Fund is now co-sub-advised by AllianceBernstein and Westwood. AllianceBernstein is responsible for approximately 65% of overall portfolio assets. AllianceBernstein seeks to take advantage of pricing distortions due to short-term events. Value investing requires in-depth research into companies and industries and the discipline to stand by a company while it addresses temporary problems — even when others are avoiding it. AllianceBernstein identifies value by using a dividend discount model, which compares the present value of each company’s projected cash flows to its current stock price to calculate the stock’s long-term expected return. Westwood is responsible for approximately 35% of overall portfolio assets. Westwood seeks to capture price anomalies that stem from operational improvements that they believe will result in significantly stronger earnings and long-term outperformance for the stock. Analysts focus on ideas that have limited downside risk and the opportunity to generate earnings and cash flows that are higher than what is implied by the current stock price.

What is the outlook for the Fund?

This multi-managed fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors for the Fund that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

Large U.S. Equity Funds 22

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-42.36%	-9.27%	-1.96%	0.15%	6/28/05	12/6/00
	Including Sales Charge	-45.52%	-10.97%	-3.06%	-0.60%
Class B Shares	Excluding Sales Charge	-42.87%	-9.97%	-2.71%	-0.61%	6/28/05	12/6/00
	Including Sales Charge	-45.53%	-11.01%	-3.21%	-0.61%
Class C Shares	Excluding Sales Charge	-42.78%	-9.94%	-2.71%	-0.62%	1/16/07	12/6/00
	Including Sales Charge	-43.32%	-9.94%	-2.71%	-0.62%
Russell 1000® Value Index3		-36.80%	-5.24%	1.90%	0.73%
Morningstar Large Value		-37.27%	-6.14%	0.64%	-0.79%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.41%		1.41%
Class B Shares		2.18%		2.18%
Class C Shares		6.98%		2.25%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -34.87% (1-year); 1.80% (5-year); 1.83% (since inception) Class B Shares: -34.86% (1-year); 1.66% (5-year); 1.84% (since inception) Class C Shares: -32.27% (1-year); 2.18% (5-year); 1.82% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
23

West Coast Equity Fund

Portfolio Manager:

Philip M. Foreman, CFA
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Though an overweighting in health care and an underweighting in telecommunications aided performance, in general the net effect of various sector allocations was neutral to performance. Stock selection was a positive during the year, with UnionBanCal Corp. adding value due to its purchase by Mitsubishi UFJ Financial Group Inc., Japan's largest bank. Performance was helped further by the pending sale of Genentech to Roche Holding. While the Fund’s stock selection in the financial sector was not positive in absolute terms versus the passive Russell 3000^® Index, in relative terms the Fund’s holdings outperformed the sector — as evidenced by Wells Fargo’s performance. On the negative side, an underweighting in energy hurt returns. From an individual holdings perspective, Nabors Industries was a poor performer due to falling natural gas prices, while Red Lion Hotels took a hit as a result of the slowing economy.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Using a unique approach that blends a regional investment focus with the flexibility to invest in companies of any size, the Seattle-based sub-advisor invests in companies located (or doing significant business) in Alaska, California, Oregon, or Washington — a region ranking among the largest economies in the world. With the ability to invest in companies of any size, the sub-advisor seeks high-quality businesses trading at reasonable prices, possessing competitive advantages, and competing in industries with barriers to entry.

What is the outlook for the Fund?

For some time the sub-advisor was optimistic that a recession could be avoided. It now appears to them that the breadth and depth of the recent credit crisis has severely impacted real economic conditions and may take until the middle of 2009 to dissipate. However, they believe there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The sub-advisor is assessing the opportune time to adjust the Fund’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

Large U.S. Equity Funds 24

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

West Coast Equity Fund: Small-cap and mid-cap stocks may have additional risks, including greater price volatility. There may be additional investment risks due to the fund’s concentration in West Coast companies.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-32.95%	-3.64%	2.00%	9.18%	11.95%	11/24/86	–
	Including Sales Charge	-36.64%	-5.44%	0.85%	8.56%	11.66%
Class B Shares	Excluding Sales Charge	-33.59%	-4.55%	1.04%	8.38%	11.27%	3/30/94	11/24/86
	Including Sales Charge	-36.66%	-5.68%	0.69%	8.38%	11.27%
Class C Shares	Excluding Sales Charge	-33.60%	-4.50%	1.10%	8.22%	10.98%	3/1/02	11/24/86
	Including Sales Charge	-34.21%	-4.50%	1.10%	8.22%	10.98%
Russell 3000® Index3		-36.60%	-5.46%	0.46%	1.05%	8.73%
Morningstar Large Blend		-37.17%	-6.07%	-0.27%	0.89%	7.38%
Category Average3
					Gross/Net
Total Investment Expense				Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares					0.83%
Class B Shares					1.74%
Class C Shares					1.74%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -19.62% (1-year); 6.65% (5-year); 11.99% (10-year); 12.74% (since inception) Class B Shares: -19.60% (1-year); 6.54% (5-year); 11.80% (10-year); 12.34% (since inception) Class C Shares: -16.49% (1-year); 6.92% (5-year); 11.65% (10-year); 12.05% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. The West Coast Equity Fund’s performance in 1997 benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 11/30/86. Indices are unmanaged, and individuals cannot invest directly in an index.

Large U.S. Equity Funds
25

MidCap Blend Fund

Portfolio Manager:

K. William Nolin, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund benefited from owning Valeant Pharmaceuticals, a specialty pharmaceutical company. Valeant had changed management, and the new management team made steady progress in streamlining the company’s product lines and core focus. The Fund also benefited from owning EOG Resources, an energy company focused mainly on natural gas production. EOG has an experienced management team, a low-cost structure, and a disciplined culture focused on maximizing returns. Additionally, owning UST Incorporated, a leader in the smokeless tobacco market, added to returns. UST rose on news that the company received an offer to be acquired by Altria Group Incorporated.

On the negative note, Coventry Health Care detracted from Fund performance. Coventry, a leading managed-care company, declined substantially during the period. Though Coventry continued to emphasize pricing over increased volume, they were hurt by the higher costs plaguing the managed-care industry. Forest City Enterprises Inc., a real estate operating company, detracted from the Fund as well. Forest City, which has a long track record of value creation in property development and management, fell as pressures in the real estate markets increased sharply. Dish Network Corporation also hurt returns. Dish, one of the two satellite television companies, declined as slowing subscriber growth and concerns about a weakening economy weighed on the company.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The investment strategy includes superior stock selection combined with disciplined risk management as the key to consistent outperformance. Superior stock selection is achieved through systematic evaluation of company fundamentals to produce in-depth original research. By focusing on fundamental research, four critical drivers of stock selection are emphasized: 1) sustainable competitive advantages, 2) market dominance in niche industries, 3) ability to generate high returns on invested capital consistently, and 4) attractive valuation.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Small/Mid U.S. Equity Funds 26

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 6/30/08 (Class A and B shares) or 2/28/09 (Class C shares). Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap and mid-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-33.98%	-3.84%	3.07%	3.48%	6/28/05	12/6/00
	Including Sales Charge	-37.62%	-5.63%	1.91%	2.74%
Class B Shares	Excluding Sales Charge	-34.31%	-4.17%	2.80%	3.27%	6/28/05	12/6/00
	Including Sales Charge	-37.28%	-5.18%	2.50%	3.27%
Class C Shares	Excluding Sales Charge	-34.58%	-4.69%	2.20%	2.65%	1/16/07	12/6/00
	Including Sales Charge	-35.17%	-4.69%	2.20%	2.65%
Russell Midcap® Index3		-40.67%	-7.06%	1.76%	1.70%
Morningstar Mid-Cap Blend		-39.14%	-7.05%	0.45%	0.58%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.14%		1.02%
Class B Shares		2.04%		1.32%
Class C Shares		3.76%		1.95%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -20.11% (1-year); 7.90% (5-year); 5.78% (since inception) Class B Shares: -19.60% (1-year); 8.56% (5-year); 6.34% (since inception) Class C Shares: -17.00% (1-year); 8.21% (5-year); 5.69% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
27

MidCap Growth Fund I

Portfolio Managers:

Adam T. Logan, CFA
John O’Toole, CFA
Mellon Capital Management

What contributed to or detracted from Fund performance during the fiscal year?

Specialty retail holdings within the consumer cyclical sector had a positive impact on performance. Within this sector, value-oriented retailers provided strong results. Holdings among technology-based companies added value as well. Within this sector, strong stock selection among computer hardware and electronic equipment investments benefited performance. Holdings within the consumer hard goods sector also had a positive impact. Leisure and entertainment-based holdings such as Marvel Entertainment and Hasbro provided competitive results as well.

On the negative side, health care-related holdings hurt returns. Within this sector, holdings among medical service providers were disappointing. Medical insurers such as Humana and Coventry Health Care appeared under pressure based on rising costs and growing political uncertainty. Holdings among industrial-based companies detracted as well. Within this sector, industrial parts and component companies and trucking and freight firms provided disappointing results. Variances in sector weightings relative to its benchmark, the Russell Midcap Growth Index, were kept to a minimum. A modest overweighting in energy-related names detracted from performance, as commodity prices fell sharply beginning in June 2008.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure during the Fiscal year.

What is the outlook for the Fund?

The MidCap Growth Fund I, sub-advised by Mellon Capital Management, will be merged into the MidCap Growth Fund III, sub-advised by Turner Investment Partners. Following the merger, Turner and Mellon will be co-sub-advisors on the MidCap Growth Fund III. We expect the merger to be completed on November 21, 2008.

Small/Mid U.S. Equity Funds 28

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap and mid-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
			1-Year	3-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge		-41.57%	-8.10%	-1.91%	6/28/05	12/29/03
	Including Sales Charge		-44.77%	-9.82%	-3.04%
Class C Shares	Excluding Sales Charge		-42.02%	-8.84%	-2.67%	1/16/07	12/29/03
	Including Sales Charge		-42.53%	-8.84%	-2.67%
Russell Midcap® Growth Index3			-42.65%	-7.70%	-0.95%
Morningstar Mid-Cap Growth			-42.22%	-6.85%	-1.23%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		2.45%		1.75%
Class C Shares		28.20%		2.50%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -28.50% (1-year); 1.62% (since inception)

Class C Shares: -25.57% (1-year); 2.03% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/03. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
29

MidCap Growth Fund III

Portfolio Managers:

Tara R. Hedlund, CFA, CPA
Christopher K. McHugh
Jason D. Schrotberger, CFA
Turner Investment Partners, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

The materials and processing sector contributed the most to positive relative performance as fertilizer producer Mosaic posted a double-digit return for the period, benefiting primarily from a strong agricultural cycle and the growing demand from developing countries for soybeans, corn, and wheat. The financial sector also added value, as Hudson City Bancorp Inc., a recent addition to the Fund, enjoyed attractive spreads on jumbo mortgages and a widening yield curve. Energy holdings also contributed to excess return relative to the Fund’s benchmark, the Russell Midcap Growth Index, due primarily to rising commodity prices during the first eight months of the period. The Fund reduced its exposure to companies specializing in oil and gas production, coal, and drillers in favor of offshore oil service and equipment companies.

On the negative side, the technology sector, and specifically semi-conductors such as NVIDIA and Cypress Semiconductor, detracted the most from relative performance. Utility holding NII Holdings, a digital wireless communication services provider, was the worst individual detractor from relative performance, as the company reported a disappointing quarter in late 2007. (The position has since been sold.) Additionally, the consumer discretionary sector was the second-worst detractor from relative performance. Holdings with greater exposure to the consumer, such as printing company VistaPrint Inc., suffered from the slowdown in consumer spending.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure during the Fiscal year.

What is the outlook for the Fund?

The MidCap Growth Fund I, sub-advised by Mellon Capital Management, will be merged into the MidCap Growth Fund III, sub-advised by Turner Investment Partners. Following the merger, Turner and Mellon will be co-sub-advisors on the MidCap Growth Fund III. We expect the merger to be completed November 21, 2008.

The sub-advisor believes from a fundamental standpoint that the market seems slightly undervalued and earnings outside the financial sector remain strong. In addition, the sub-advisor believes that both corporations and investors, both of which currently are holding historically high levels of cash on the sidelines, are patiently waiting to re-enter the market. In the sub-advisor’s judgment, corporate profits may hit bottom and stocks could trough in the near future. In remaining true to the growth investing style and their philosophy specifically, the sub-advisor’s focus is on owning stocks they believe have superior earnings prospects.

Small/Mid U.S. Equity Funds 30

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap and mid-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-44.68%	-7.80%	-1.17%	-5.51%	6/28/05	12/6/00
	Including Sales Charge	-47.73%	-9.52%	-2.27%	-6.19%
Class B Shares	Excluding Sales Charge	-45.07%	-8.47%	-1.89%	-6.21%	6/28/05	12/6/00
	Including Sales Charge	-47.63%	-9.58%	-2.25%	-6.21%
Class C Shares	Excluding Sales Charge	-45.12%	-8.31%	-1.80%	-6.16%	1/16/07	12/6/00
	Including Sales Charge	-45.63%	-8.31%	-1.80%	-6.16%
Russell Midcap® Growth Index3		-42.65%	-7.70%	-0.18%	-2.96%
Morningstar Mid-Cap Growth		-42.22%	-6.85%	-0.29%	-3.77%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.82%		1.75%
Class B Shares		2.61%		2.50%
Class C Shares		10.80%		2.50%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -31.16% (1-year); 4.23% (5-year); -3.38% (since inception) Class B Shares: -31.13% (1-year); 4.28% (5-year); -3.42% (since inception) Class C Shares: -28.44% (1-year); 4.74% (5-year); -3.34% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
31

MidCap Stock Fund

Portfolio Manager:

Daniel R. Coleman
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

The largest contributor to outperformance was stock selection within the energy sector. Two exploration and production companies, Cimarex Energy and Noble Energy, were positive contributors due to higher production results. Stock selection in the health care sector was the next largest contributor to outperformance. Within that sector, Express Scripts and Edwards Lifesciences were positive performers, as earnings surpassed expectations. Finally, Estee Lauder, a cosmetic manufacturer, helped make stock selection within the consumer staples sector the third-largest positive contributor to outperformance.

On the negative side, the biggest detractor was stock selection within the industrial sector. HNI Corp, an office furniture manufacturer, and AMR Corp, a legacy airline, were negative contributors. HNI saw a sharp decline in home office sales, while AMR was faced with a substantial increase in year-over-year fuel prices. The second-largest detractor was stock selection in the materials sector. OM Group, a manufacturer of cobalt, and Rockwood Holdings, a manufacturer of specialty chemicals, were negative performers as demand for their products moderated. Stock selection within the financial sector was the third-largest detractor. Ambac Financial Group, a financial guarantee provider, and PMI Group, a mortgage insurer, hurt returns due to the meltdown within the credit markets.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. To construct the Fund, the sub-advisor looks for those mid-cap firms they believe compete in a dynamic industry with long-term growth potential, possess a sustainable competitive advantage, exhibit strong positive cash flows, are led by shareholder-oriented management, and trade at undervalued prices. The goal of this process is to produce a portfolio of 40 to 60 holdings with the potential to grow faster than the S&P MidCap 400 Index at lower risk levels.

What is the outlook for the Fund?

The effect of a deteriorating global economy over the 12-month period is reflected in substantially lower stock prices. However, the sub-advisor believes that many stocks held in the Fund potentially offer compelling value. While it is impossible to predict the direction of the stock market over the near term, historically the stock market bottoms out ahead of the trough in the economy. Furthermore, valuations suggest the possibility of strong performance for investors who have a three-to-five-year investment time horizon. The Fund’s philosophy of investing in quality mid-sized companies historically has served investors well over the long term.

Small/Mid U.S. Equity Funds 32

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap and mid-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-34.40%	-7.32%	0.73%	5.98%	3/1/00	–
	Including Sales Charge	-38.02%	-9.05%	-0.40%	5.30%
Class B Shares	Excluding Sales Charge	-34.98%	-8.20%	-0.22%	5.04%	3/1/00	–
	Including Sales Charge	-37.74%	-9.13%	-0.51%	5.04%
Class C Shares	Excluding Sales Charge	-35.00%	-8.13%	-0.15%	5.03%	3/1/02	3/1/00
	Including Sales Charge	-35.55%	-8.13%	-0.15%	5.03%
S&P MidCap 4003		-36.46%	-5.52%	1.96%	3.64%
Morningstar Mid-Cap Blend		-39.14%	-7.05%	0.45%	0.97%
Category Average3
				Gross/Net
Total Investment Expense			Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares				1.08%
Class B Shares				2.10%
Class C Shares				2.18%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -24.68% (1-year); 5.54% (5-year); 8.13% (since inception) Class B Shares: -24.34% (1-year); 5.42% (5-year); 7.86% (since inception) Class C Shares: -21.73% (1-year); 5.80% (5-year); 7.86% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 2/29/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
33

MidCap Value Fund II

Portfolio Managers:

S. Basu Mullick, Ph.D.
Neuberger Berman Management, Inc.

Bruce Jacobs, Ph.D.
Ken Levy, CFA
Jacobs Levy Equity Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Although stock selection was poor overall, it was very strong in the information technology sector. Also, having a slight underweighting in the consumer discretionary sector benefited returns. Additionally, the Fund had a lower price-to-earnings ratio than its benchmark, the Russell Midcap Value Index, which contributed positively to relative returns.

Stock selection was negative for the period; specifically, the materials and industrial sectors saw the worst stock selection. An overweighting in the information technology sector also detracted from relative performance. In addition, owning stocks that in aggregate exhibited higher volatility than the stocks held in the index hurt relative performance.

Were there any changes to the Fund’s composition during the fiscal year?

Effective October 31, 2008, Neuberger Berman was removed as a sub-advisor due to quantitative concerns. Jacobs Levy is now the sole sub-advisor for this investment option.

What is the outlook for the Fund?

The investment models used by Jacobs Levy focus mainly on company-level, bottom-up information. This investment approach results in portfolios that are diversified across stocks, industries, sectors, and numerous potential opportunities. Among industries, the Fund is moderately overweighted in electric and gas utilities, commercial banks, and computer hardware, and is underweighted in alcohol and tobacco.

Small/Mid U.S. Equity Funds 34

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap and mid-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-43.29%	-11.00%	-1.12%	1.33%	6/28/05	12/6/00
	Including Sales Charge	-46.40%	-12.67%	-2.23%	0.60%
Class B Shares	Excluding Sales Charge	-43.68%	-11.45%	-1.70%	0.68%	6/28/05	12/6/00
	Including Sales Charge	-46.20%	-12.35%	-1.98%	0.68%
Class C Shares	Excluding Sales Charge	-43.72%	-11.65%	-1.85%	0.58%	1/16/07	12/6/00
	Including Sales Charge	-44.22%	-11.65%	-1.85%	0.58%
Russell Midcap® Value Index3		-38.83%	-6.82%	2.97%	4.16%
Morningstar Mid-Cap Value		-38.13%	-7.08%	1.24%	2.32%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.73%		1.73%
Class B Shares		3.24%		2.50%
Class C Shares		7.63%		2.50%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -28.84% (1-year); 4.69% (5-year); 4.15% (since inception) Class B Shares: -28.58% (1-year); 4.95% (5-year); 4.23% (since inception) Class C Shares: -25.97% (1-year); 5.09% (5-year); 4.13% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
35

Real Estate Securities Fund

Portfolio Manager:

Kelly D. Rush, CFA
Principal Real Estate Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Security selection in large regional mall owners was a positive contributor. Also, avoiding/underweighting companies with balance sheet challenges and lower quality assets benefited selection. This included avoiding Macerich, CBL & Associates, and Glimcher Realty, and underweighting General Growth Properties. The decision to underweight the position in industrial owner and large index constituent Prologis proved beneficial as well, as the stock was off since April 30, 2008. Prologis owns and develops industrial property for sale on a worldwide basis, and fears of a global slowdown weighed on its stock price during the period. Favorable security selection involving the owners of a strip mall shopping center was a contributor as well. In addition, a large underweighting in Developers Diversified Realty and a large overweighting in Federal Realty aided performance.

On the negative side, the decision to underweight HCP, the largest publicly traded owner of health care facilities, was a large drag on performance as the stock outperformed. Also, stock selection in the diversified sector detracted from performance. This underperformance was tied to four stocks that were less subject to selling pressure from large institutions as their investor base was dominated by individuals less prone to sell into the market weakness. An underweighting in multi-family apartment owner Equity Residential was a drag on returns as well. Equity Residential benefited from the availability of government-sponsored agency debt through Fannie Mae and Freddie Mac, while financing in most sectors had dried up.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s philosophy is that superior returns are achieved by investing in — but not overpaying for — high-quality companies expected to experience favorable trends. Their strategy encompasses a bottom-up, fundamental research-based process that includes index-relative portfolio construction with a quality bias.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Small/Mid U.S. Equity Funds 36

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Real estate investment options are subject to some risks inherent in real estate and real estate investment trusts (REITs), such as risks associated with general and local economic conditions. Investing in REITs involves special risks, including interest rate fluctuation, credit risks, and liquidity risks, including the effect of interest-rate conditions on real estate values and occupancy rates.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-36.02%	-4.21%	6.48%	9.72%	6/28/05	12/6/00
	Including Sales Charge	-39.53%	-6.00%	5.28%	8.93%
Class B Shares	Excluding Sales Charge	-36.50%	-4.88%	5.72%	8.95%	6/28/05	12/6/00
	Including Sales Charge	-38.86%	-5.74%	5.46%	8.95%
Class C Shares	Excluding Sales Charge	-36.48%	-4.81%	5.91%	9.18%	1/16/07	12/6/00
	Including Sales Charge	-36.95%	-4.81%	5.91%	9.18%
MSCI U.S. REIT Index3		-40.46%	-6.48%	4.49%	8.17%
Morningstar Specialty – Real Estate		-41.77%	-8.03%	3.24%	7.19%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.43%		1.28%
Class B Shares		2.23%		2.08%
Class C Shares		2.33%		1.98%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -15.32% (1-year); 12.48% (5-year); 13.50% (since inception) Class B Shares: -14.45% (1-year); 12.70% (5-year); 13.52% (since inception) Class C Shares: -11.69% (1-year); 13.17% (5-year); 13.77% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
37

SmallCap Blend Fund

Portfolio Managers:

Thomas Morabito, CFA
Phil Nordhus, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

While the consumer discretionary sector was one of the weak performers in the Fund’s benchmark, the Russell 2000^® Index, the Fund’s holdings in this sector fared much better. The Fund had below-average exposure to companies involved in automotive manufacturing and home building, which were especially weak during the period. Meanwhile, the Fund’s holdings in educational services and casino gaming performed well. Holdings in the consumer staples sector also helped offset some of the period’s weak performance. The stock selection process used in the Fund favored companies with strong business fundamentals that could increase market share even in a weakening economy.

On a negative note, the Fund had above-average exposure to the commercial aerospace industry. These holdings were adversely affected by a combination of capacity reduction at the airlines and potential order delays caused by a labor dispute at Boeing and development delays in their new 787 Dreamliner. In addition, the Fund had above-average exposure to companies with global end markets, and those companies were especially weak during the financial crisis. In the financial sector, several real estate investment trust holdings with exposure to mortgage-backed securities and commercial mortgages hurt returns. Regional banks performed poorly for the Fund, as its holdings were more adversely affected by deteriorating credit quality compared with other banks.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Small/Mid U.S. Equity Funds 38

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-36.97%	-6.59%	0.60%	3.41%	6/28/05	12/6/00
	Including Sales Charge	-40.42%	-8.34%	-0.53%	2.67%
Class B Shares	Excluding Sales Charge	-37.52%	-7.36%	-0.19%	2.62%	6/28/05	12/6/00
	Including Sales Charge	-40.38%	-8.35%	-0.49%	2.62%
Class C Shares	Excluding Sales Charge	-37.44%	-7.31%	-0.18%	2.62%	1/16/07	12/6/00
	Including Sales Charge	-38.01%	-7.31%	-0.18%	2.62%
Russell 2000® Index3		-34.16%	-4.79%	1.57%	2.65%
Morningstar Small Blend		-37.24%	-6.73%	1.21%	2.71%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.44%		1.44%
Class B Shares		2.27%		2.27%
Class C Shares		5.13%		2.20%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -23.53% (1-year); 5.59% (5-year); 5.74% (since inception) Class B Shares: -23.46% (1-year); 5.64% (5-year); 5.70% (since inception) Class C Shares: -20.41% (1-year); 5.98% (5-year); 5.70% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
39

SmallCap Growth Fund

Portfolio Manager:

Mariateresa Monaco
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Consumer discretionary holdings posted relative outperformance. Lack of exposure to Auto Component, and the strong relative performance of DeVry Inc. within the diversified consumer services sector and G-III Apparel Group in textile, apparel, and luxury goods, all contributed to good relative performance. Within health care providers and services, the Fund enjoyed very strong stock selection with the robust performance of LHC Group and Amedisys, Inc. The Fund also benefited from an acquisition in the pharmaceutical industry. Sciele Pharma, Inc. was acquired by Japanese-based Shionogi at a 60% premium.

On the negative side, a good portion of the underperformance is attributable to the industrial sector, especially in commercial aerospace. After peaking around year-end 2007, the aerospace group’s performance was pressured by increasingly negative investor sentiment. Information technology also weighed on underperformance. The worst portion of this sector was the semiconductor industry, where a weak consumer electronics environment affected several portfolio holdings. Within the energy sector, the Fund was penalized for not owning two coal companies, Alpha Natural Resources, Inc. and Walter Industries, in the first half of 2008.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Small/Mid U.S. Equity Funds 40

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-43.33%	-8.32%	-2.55%	-3.62%	1/16/07	12/6/00
	Including Sales Charge	-46.43%	-10.02%	-3.64%	-4.31%
Class B Shares	Excluding Sales Charge	-43.82%	-9.37%	-3.70%	-4.79%	1/16/07	12/6/00
	Including Sales Charge	-46.47%	-10.43%	-4.03%	-4.79%
Class C Shares	Excluding Sales Charge	-43.58%	-9.02%	-3.34%	-4.43%	1/16/07	12/6/00
	Including Sales Charge	-44.11%	-9.02%	-3.34%	-4.43%
Russell 2000® Growth Index3		-37.87%	-5.31%	-0.13%	-1.32%
Morningstar Small Growth		-41.57%	-7.64%	-1.38%	-2.20%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.19%		1.19%
Class B Shares		2.54%		2.54%
Class C Shares		4.64%		2.21%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -27.85% (1-year); 3.26% (5-year); -0.96% (since inception) Class B Shares: -27.94% (1-year); 2.84% (5-year); -1.45% (since inception) Class C Shares: -24.81% (1-year); 3.57% (5-year); -1.09% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
41

SmallCap Growth Fund II

Portfolio Managers:
Paul A. Graham, Jr., CFA	Kenneth G. Mertz II, CFA	Nancy B. Prial, CFA
David N. Wabnik	Stacey L. Sears	Essex Investment Management
UBS Global Asset Management	Joseph W. Garner	Company, LLC
(Americas) Inc.	Emerald Advisers, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

An underweighting in the most volatile stocks in the index and an underweighting in the troubled consumer discretionary sector benefited results. On the negative side, security selection hindered performance. The Fund struggled mightily in the information technology sector and to a lesser degree in the industrial sector. Within information technology, an underweighting in Nuance Communications and an overweighting in Ultimate Software Group were the primary detractors. Within industrials, a lack of exposure to Walter Industries and an overweighting in Taser International detracted the most. Additionally, an up-in-market-capitalization bias was a further hindrance to performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. UBS is responsible for approximately 43% of overall portfolio assets. A quantitative valuation model is used to identify a targeted buy list of stocks using three primary factors: earnings revisions, analyst diffusion ((up estimates - down estimates)/total estimates), and the 12-month stock price return. Each stock is ranked in quintiles, with the top quintile as the targeted buy list. More traditional in-depth fundamental analysis is applied to provide confirmation of the earnings growth story. Emerald is responsible for approximately 42% of overall portfolio assets. Emerald is a small-cap growth stock specialist that uses in-depth research to identify attractive small-cap growth companies. Essex is responsible for approximately 15% of overall portfolio assets. Essex uses a focused and disciplined level of fundamental security analysis. They identify companies in the early stages of positive business and earnings change. Essex focuses on micro-cap stocks in addition to small caps. This micro-cap focus should help to reduce the market capitalization of the overall portfolio.

What is the outlook for the Fund?

This multi-managed fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

Small/Mid U.S. Equity Funds 42

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-42.88%	-9.38%	-3.23%	-6.03%	6/28/05	12/6/00
	Including Sales Charge	-46.02%	-11.09%	-4.32%	-6.73%
Class B Shares	Excluding Sales Charge	-43.22%	-10.03%	-3.93%	-6.72%	6/28/05	12/6/00
	Including Sales Charge	-45.89%	-11.03%	-4.24%	-6.72%
Class C Shares	Excluding Sales Charge	-43.25%	-10.05%	-3.94%	-6.73%	1/16/07	12/6/00
	Including Sales Charge	-43.79%	-10.05%	-3.94%	-6.73%
Russell 2000® Growth Index3		-37.87%	-5.31%	-0.13%	-1.32%
Morningstar Small Growth		-41.57%	-7.64%	-1.38%	-2.20%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		2.06%		1.95%
Class B Shares		2.77%		2.70%
Class C Shares		21.84%		2.70%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -26.86% (1-year); 2.61% (5-year); -3.52% (since inception) Class B Shares: -26.87% (1-year); 2.65% (5-year); -3.52% (since inception) Class C Shares: -24.00% (1-year); 2.97% (5-year); -3.53% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
43

SmallCap Value Fund

Portfolio Manager:

Thomas Morabito, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Within the consumer discretionary sector, many of the stocks that were avoided in the Fund fell rapidly throughout the year. These stocks were hammered by persistent concerns about the consumer’s ability to spend, given higher food and fuel costs, and the prospect of recession. Financials were at the forefront of much of the news over the period. The Fund’s positive relative performance was driven by success in the real estate investment trust industry, where the Fund benefited from positive stock selection and small relative underweighting. This outperformance was slightly offset by some holdings that were maintained for risk-control purposes as the government began to intervene. Also, several holdings in consumer staples, while relatively small, posted positive returns during the timeframe they were held.

On the negative side, holdings in industrials and technology lagged the benchmark Russell 2000^® Value Index. Holdings in the machinery sector were negatively impacted by end-market weakness and order cutbacks as the economy stalled. Also, an overweighted position was held in the aerospace and defense sector, which hurt returns due initially to delays in the rollout of the next-generation airplane by Boeing, and later by a machinists’ strike at Boeing. Within technology, an inaccurate assumption that consumers would be willing to pay for better televisions detracted from performance. While sales of large screen plasma and LCD televisions were strong, the best-selling brands were the lower-end models that used cheaper parts than those produced by firms held within the Fund.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

Small/Mid U.S. Equity Funds 44

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Small-cap stocks may have additional risks, including greater price volatility.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-29.06%	-4.95%	2.45%	6.98%	6/28/05	12/6/00
	Including Sales Charge	-32.98%	-6.73%	1.30%	6.22%
Class B Shares	Excluding Sales Charge	-29.76%	-5.76%	1.75%	6.23%	6/28/05	12/6/00
	Including Sales Charge	-33.01%	-6.80%	1.44%	6.23%
Class C Shares	Excluding Sales Charge	-29.54%	-5.55%	1.91%	6.48%	1/16/07	12/6/00
	Including Sales Charge	-30.19%	-5.55%	1.91%	6.48%
Russell 2000® Value Index3		-30.54%	-4.49%	3.05%	6.12%
Morningstar Small Value		-33.15%	-6.37%	1.82%	5.16%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.46%		1.35%
Class B Shares		2.65%		2.29%
Class C Shares		2.85%		2.08%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -17.41% (1-year); 6.83% (5-year); 8.84% (since inception) Class B Shares: -17.40% (1-year); 7.00% (5-year); 8.86% (since inception) Class C Shares: -14.04% (1-year); 7.46% (5-year); 9.10% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Small/Mid U.S. Equity Funds
45

Diversified International Fund

Portfolio Managers:

Paul H. Blankenhagen, CFA
Juliet Cohn
Chris Ibach, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund maintains an exposure to emerging markets of about 10%, compared to the emerging-market weighting within its benchmark, the MSCI ACWI (ex-U.S.) Index, of about 19% over the 12-month period. This underweighting in emerging markets added value to the Fund, as emerging markets declined more than developed international markets over the period (as measured, respectively, by the MSCI EMF Index and MSCI EAFE Index). Stock selection in financials was positive as the Fund benefited from owning strongly capitalized and liquid banks as well as relatively defensive non-life insurance companies. This positioning led the Fund away from U.K. banks, investment banks, and certain diversified financials. Also, stock selection in the telecommunication services sector was positive in the 12-month period. NTT DoCoMo and Koninklijke KPN performed well. NTT DoCoMo benefited from a change in the way handsets are sold in Japan, while KPN exceeded earnings expectations.

Stock selection was negative in the industrial sector. Capital goods companies, such as Komatsu, suffered from weakening commodity prices due to worries about the economic growth outlook. This investor concern drove down prices of Japanese trading companies such as Itochu and Mitsui & Co. Additionally, stock selection was negative in the consumer discretionary sector. The biggest detractor was not holding Volkswagen AG in the Fund, as it was the best performer in the group. Also, stock selection in the materials sector was negative. An overweighted position in Xstrata PLC, as well as an underweighting in Rio Tinto PLC, hurt performance; Rio Tinto benefited from a takeover offer from BHP Billiton, while Xstrata suffered due to lower commodity prices.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

International Equity Funds 46

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-50.60%	-4.89%	4.70%	-0.02%	6/28/05	12/6/00
	Including Sales Charge	-53.32%	-6.68%	3.52%	-0.74%
Class B Shares	Excluding Sales Charge	-51.01%	-5.61%	4.04%	-0.59%	6/28/05	12/6/00
	Including Sales Charge	-53.16%	-6.59%	3.72%	-0.59%
Class C Shares	Excluding Sales Charge	-50.91%	-5.52%	4.02%	-0.66%	1/16/07	12/6/00
	Including Sales Charge	-51.34%	-5.52%	4.02%	-0.66%
MSCI ACWI ex-US Index3		-48.53%	-4.34%	4.61%	1.17%
Morningstar Foreign Large Blend		-47.60%	-5.35%	2.93%	-1.01%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.38%		1.38%
Class B Shares		2.26%		2.26%
Class C Shares		2.31%		2.08%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -36.04% (1-year); 10.53% (5-year); 2.52% (since inception) Class B Shares: -35.92% (1-year); 10.79% (5-year); 2.67% (since inception) Class C Shares: -33.37% (1-year); 11.05% (5-year); 2.60% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

International Equity Funds
47

Global Real Estate Securities Fund

Portfolio Managers:

Simon Hedger
Chris Lepherd
Kelly D. Rush, CFA
Principal Real Estate Investors

What contributed to or detracted from Fund performance during the fiscal year?

Security selection within North America was a positive contributor to relative performance. Strong selection within the retail mall, industrial, and shopping center sectors were the key drivers of performance in the region. Security selection within Europe was a large positive contributor to relative performance. The Fund continued to benefit from owning higher-quality, less-leveraged companies through the credit market crisis — which led to strong selection through a bear market, particularly in the United Kingdom. An underweighted allocation to Japan and security selection among Japanese stocks also added value. Positive security selection was attributed to underweighting both those property owners suffering from increasing vacancies within the office sector and the soft residential market.

On the negative side, security selection in Australia was a detractor from relative performance. Especially harmful were portfolio positions within Australia involving companies with both above-average balance sheet leverage and a material portion of earnings derived from managing assets jointly owned with third parties. Also detracting from performance was the lack of exposure to HCP, a member of the health care sector in the United States, due to concerns regarding its ability to successfully assimilate recent acquisitions and finance them; this decision proved unfavorable as HCP widely outperformed. An underweighting in United States multi-family apartment owner Equity Residential hurt returns as well. Equity Residential and all apartment owners benefited from the availability of government-sponsored agency debt through Fannie Mae and Freddie Mac when financing in most other sectors had dried up.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor invests at least 80% of the Fund’s net assets in equity securities of U.S. and non-U.S. companies principally engaged in the real estate industry. A real estate company has at least 50% of its assets, income, or profits derived from products or services related to the real estate industry. Real estate companies include real estate investment trusts and companies with substantial real estate holdings such as paper, lumber, hotel, and entertainment companies. Companies whose products and services relate to the real estate industry include building supply manufacturers, mortgage lenders, and mortgage servicing companies.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

International Equity Funds
48

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards. REIT securities are subject to risk factors associated with the real estate industry and tax factors of REIT registration.

Average Annual Total Returns1 as of October 31, 2008
				1-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge			-48.89%	-45.82%	10/1/07	10/1/07
	Including Sales Charge			-51.71%	-48.57%
Class C Shares	Excluding Sales Charge			-49.64%	-46.61%	10/1/07	10/1/07
	Including Sales Charge			-50.14%	-46.61%
FTSE EPRA/NAREIT Global Real Estate Index3				-51.21%	-47.21%
Morningstar Global Real Estate				-50.57%	-46.48%
Category Average3
		Gross	Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		3.82%	1.45%
Class C Shares		4.84%	2.20%
Average annual total returns1 including sales charge as of 9/30/08:
Class A Shares: -35.27% (since inception)
Class C Shares: -33.09% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

International Equity Funds
49

International Emerging Markets Fund

Portfolio Managers:

Michael L. Reynal
Michael Ade, CFA
Mihail Dobrinov, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Asset allocation was positive on a country and sector basis. In particular, Israel, Brazil, and India contributed positively to performance. In Israel, the Fund benefited from an overweighted position in Teva Pharmaceutical Industries. The Fund outperformed in the telecommunication services, information technology, and health care sectors. An overweighted position in Cellcom Israel led the outperformance in telecommunication services for the 12-month period.

On a negative note, stock selection was negative on a country and a sector basis. In particular, materials, financials, and consumer staples contributed negatively to performance. In materials, an overweighted position in Evraz Group hurt relative performance. On a country basis, South Africa, Malaysia, and South Korea detracted from performance. In South Africa, performance suffered from an overweighted position in African Rainbow Minerals.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

International Equity Funds 50

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-58.51%	-0.09%	9.76%	9.23%	6/28/05	12/6/00
	Including Sales Charge	-60.79%	-1.96%	8.52%	8.45%
Class B Shares	Excluding Sales Charge	-58.91%	-0.96%	8.84%	8.38%	6/28/05	12/6/00
	Including Sales Charge	-60.63%	-1.91%	8.55%	8.38%
Class C Shares	Excluding Sales Charge	-58.91%	-0.91%	8.91%	8.41%	1/16/07	12/6/00
	Including Sales Charge	-59.25%	-0.91%	8.91%	8.41%
MSCI Emerging Markets Free Index – NDTR3		-56.35%	-0.37%	9.50%	9.71%
Morningstar Diversified Emerging Markets		-56.93%	-1.64%	8.38%	8.41%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.84%		1.84%
Class B Shares		2.72%		2.72%
Class C Shares		3.43%		2.80%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -38.83% (1-year); 17.92% (5-year); 13.16% (since inception) Class B Shares: -38.56% (1-year); 18.07% (5-year); 13.10% (since inception) Class C Shares: -36.34% (1-year); 18.35% (5-year); 13.13% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

International Equity Funds
51

International Growth Fund

Portfolio Managers:

Steven Larson, CFA
John Pihlblad, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection was most effective in the energy, consumer staples, and health care sectors, and specifically, in the food and staples, retailing, and pharmaceuticals industries. From a country perspective, stock selection was most effective in Italy and the Netherlands. Fast Retailing Co., a Japanese casual clothing retailer, Nestle, the Swiss food and beverage provider, and Family Mart Co., a Japanese convenience store operator, were among the stocks that met stock selection requirements and generated outperformance during the 12-month period.

On the negative side, stock selection among capital goods stocks was especially weak during the period. From a country perspective, stock selection was least effective in Japan, the United Kingdom, and Germany. The largest negative contributors to performance included Vestas Wind Systems, the Danish manufacturer of wind power systems and turbines, Komatsu, the Japanese manufacturer of earth-moving equipment, and ABB, the Swiss manufacturer of electrical equipment. The stocks of these and many other companies were negatively impacted by market uncertainties and fear of a potential global economic slowdown that threatened future profitability.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

International Equity Funds 52

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-51.07%	-7.11%	3.72%	-0.22%	10/1/07	12/6/00
	Including Sales Charge	-53.75%	-8.86%	2.55%	-0.93%
Class C Shares	Excluding Sales Charge	-51.14%	-7.62%	3.07%	-0.89%	10/1/07	12/6/00
	Including Sales Charge	-51.59%	-7.62%	3.07%	-0.89%
Citigroup BMI World ex-US Growth Index3		-47.72%	-5.62%	3.48%	0.06%
MSCI World ex-US Growth Index3, 4		-45.81%	-3.83%	3.78%	-1.04%
Morningstar Foreign Large Growth		-49.81%	-5.56%	2.18%	-2.19%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		21.96%		1.60%
Class C Shares		32.42%		2.35%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -37.35% (1-year); 9.03% (5-year); 2.37% (since inception) Class C Shares: -34.91% (1-year); 9.41% (5-year); 2.33% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.
4	This index is now the benchmark against which the Fund measures its performance. Principal Management Corporation and the portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

International Equity Funds
53

Bond & Mortgage Securities Fund

Portfolio Managers:

William C. Armstrong, CFA
Timothy R. Warrick, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Over the 12-month period the Fund maintained a long duration, which contributed positively to performance as interest rates fell in response to a lower federal funds target rate, a slowing economy, and risk aversion. The Fund also benefited from an overweighting in the mortgage-backed securities (MBS) sector, which was the only spread (i.e., non-U.S. Treasury) sector to outperform the benchmark Barclays Capital Aggregate Bond Index. On the negative side, the remaining spread sectors underperformed the benchmark index during the period. Also, the Fund’s overweighting in investment-grade credit, asset-backed securities, and commercial mortgage-backed securities — along with an out-of-index allocation to below-investment-grade credit — hindered performance. An underweighting in U.S. Treasuries and agencies negatively contributed to performance as well, as these sectors outperformed the benchmark index.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s investment management process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented, and need to be given time to fully work through the financial system. Further, the sub-advisor believes that the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

Fixed-Income Funds 54

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 6/30/09 (Class A and B shares) or 2/28/09 (Class C shares). Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-14.83%	-2.59%	-0.35%	2.12%	6/28/05	12/6/00
	Including Sales Charge	-18.63%	-4.07%	-1.26%	1.52%
Class B Shares	Excluding Sales Charge	-15.41%	-3.27%	-0.96%	1.54%	6/28/05	12/6/00
	Including Sales Charge	-19.47%	-4.42%	-1.30%	1.54%
Class C Shares	Excluding Sales Charge	-15.62%	-3.39%	-1.15%	1.37%	1/16/07	12/6/00
	Including Sales Charge	-16.43%	-3.39%	-1.15%	1.37%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.94%
Morningstar Intermediate-Term Bond		-7.20%	0.22%	1.37%	3.26%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.06%		0.94%
Class B Shares		2.07%		1.60%
Class C Shares		4.45%		1.75%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -12.51% (1-year); -0.12% (5-year); 2.40% (since inception) Class B Shares: -13.40% (1-year); -0.14% (5-year); 2.43% (since inception) Class C Shares: -10.13% (1-year); 0.01% (5-year); 2.26% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
55

California Municipal Fund

Portfolio Managers:

Mark Paris
Robert J. Stryker, CFA
Van Kampen Asset Management

What contributed to or detracted from Fund performance during the fiscal year?

For the 12-month period, an overweighting in shorter-maturity bonds and an underweighting in longer-maturity issues boosted relative performance as the short end of the municipal yield curve outperformed the long end of the curve by more than 1,800 basis points (as measured by the benchmark Barclays Capital Municipal Bond Index). Holdings of education bonds enhanced relative performance due to strong demand within essential service sectors. Higher education bonds were particularly additive; the sector outpaced the overall municipal market for the period. Also, an underweighting in insured bonds was beneficial as various monoline insurers suffered credit rating downgrades, which caused the insured sector of the market to underperform uninsured, high-quality municipal bonds.

On the negative side, an overweighting in the tobacco bond sector was one of the largest detractors from relative performance. Significant spread-widening in the sector put considerable pressure on prices. An overweighting in health care was also disadvantageous due to ongoing spread-widening in the sector. However, the negative impact on relative performance was somewhat offset by favorable security selection within the sector that led holdings to outperform the broad health care index. The residential housing slump and credit crisis have caused spreads in the housing sector to widen as well. As a result, the Fund’s holdings in the sector, which were overweighted versus the benchmark, contributed significantly to the Fund’s underperformance for the period.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor adheres to a balanced approach in seeking to achieve above average-total returns and distributed returns. All actions look to add value through a disciplined, systematic, value-added process. Rather than focusing on a strategy of attempting to forecast interest rates, strategies that have a higher probability of delivering superior risk adjusted returns are emphasized.

Fixed-Income Funds 56

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. A portion of the funds’ income may be subject to state and/or local taxes, and it may be subject to federal alternative minimum tax (AMT) for certain investors.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-14.26%	-3.12%	-0.12%	2.22%	4.73%	7/25/89	–
	Including Sales Charge	-18.14%	-4.60%	-1.04%	1.75%	4.48%
Class B Shares	Excluding Sales Charge	-14.93%	-3.86%	-0.87%	1.62%	–	7/1/94	–
	Including Sales Charge	-19.03%	-5.00%	-1.20%	1.62%	–
Class C Shares	Excluding Sales Charge	-15.01%	-3.89%	-0.89%	1.47%	4.03%	3/1/02	7/25/89
	Including Sales Charge	-15.83%	-3.89%	-0.89%	1.47%	4.03%
Barclays Capital Municipal Bond Index3		-3.30%	1.71%	2.73%	4.14%	5.94%
Morningstar Muni CA Long		-8.87%	-0.76%	1.33%	2.82%	5.00%
Category Average3
					Gross/Net
Total Investment Expense				Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares					1.18%
Class B Shares					1.92%
Class C Shares					2.49%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -12.77% (1-year); 0.08% (5-year); 2.33% (10-year); 4.82% (since inception) Class B Shares: -13.69% (1-year); -0.09% (5-year); 2.19% (10-year) Class C Shares: -10.26% (1-year); 0.22% (5-year); 2.05% (10-year); 4.37% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. Performance between 1995 and 1999 for the California Municipal Fund benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 7/31/89. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
57

Government & High Quality Bond Fund

Portfolio Managers:

Brad Fredericks
Bryan C. Davis, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Duration contributed positively to performance during the fiscal year. Portfolio duration was longer than that of its benchmark, the Barclays Capital Government/Mortgage Index, specifically in the front-end of the yield curve. (Duration is a measure of a bond’s price sensitivity to changes in interest rates.) Overweighted positions to higher-coupon fixed-rate agency mortgage-backed securities (MBS) and agency adjustable-rate MBS also contributed positively to performance. On the negative side, the primary cause of the Fund’s underperformance was exposure to floating-rate asset-backed securities, which were utilized for asset replication strategies. Additionally, sector allocation contributed to underperformance due to holdings of commercial mortgage-backed securities, which are not in the index, and to an underweighting in U.S. Treasuries and agencies.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

Fixed-Income Funds 58

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-3.04%	1.67%	1.91%	3.16%	6/28/05	12/6/00
	Including Sales Charge	-7.37%	0.11%	0.97%	2.55%
Class B Shares	Excluding Sales Charge	-3.91%	0.78%	1.11%	2.43%	6/28/05	12/6/00
	Including Sales Charge	-8.55%	-0.45%	0.76%	2.43%
Class C Shares	Excluding Sales Charge	-3.69%	0.93%	1.17%	2.43%	1/16/07	12/6/00
	Including Sales Charge	-4.62%	0.93%	1.17%	2.43%
Barclays Capital Government/Mortgage Index3		5.62%	5.49%	4.59%	5.38%
Morningstar Intermediate Government		1.62%	3.41%	3.02%	4.03%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		0.89%		0.89%
Class B Shares		1.79%		1.79%
Class C Shares		6.79%		1.65%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -4.11% (1-year); 1.46% (5-year); 2.97% (since inception) Class B Shares: -5.32% (1-year); 1.26% (5-year); 2.85% (since inception) Class C Shares: -1.16% (1-year); 1.66% (5-year); 2.85% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
59

High Yield Fund

Portfolio Manager:

Gary J. Pokrzywinski, CFA
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Because of its non-cyclical profile, the health care sector performed extremely well in the turbulent 12-month period. As a result, the Fund’s overweighting in health care supply and pharmaceuticals was a major positive contributor to performance. Additionally, an underweighting in auto manufacturing and parts helped performance as companies continued to grapple with the combined negative effects of a troubled economy, high gas prices, and decreasing credit available to customers. Also aiding performance was an underweighting in diversified media, a sector that did poorly, combined with an outperformance by individual companies held within that sector.

The largest negative factor was the overwhelming underperformance of various holdings in the financial sector. The acceleration of market turmoil and customer concern drove the sector down substantially and forced some companies out of business. Positions in Washington Mutual, Freddie Mac, and Lehman Brothers produced substantial losses. Also, Sirius Radio underperformed due to concern about the decline in auto sales and consumer discretionary spending.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund is constructed with a long-term focus and a value-oriented philosophy. It emphasizes sectors the sub-advisor views as favorable on a long-term basis, such as health care, finance, technology, telecom/media, gaming, and services. Opportunities are also sought among the best companies in out-of-favor sectors. Also, the sub-advisor may utilize alternative investments — such as broken convertibles, emerging market securities, and real estate investment trusts— to enhance diversification and return potential.

What is the outlook for the Fund?

For some time the sub-advisor was optimistic that a recession could be avoided. It now appears to them that the breadth and depth of the recent credit crisis has severely impacted real economic conditions and may take until the middle of 2009 to dissipate. However, they believe there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The sub-advisor is assessing the opportune time to adjust the Fund’s risk position, increasing equity exposures from neutral to overweighted as negative credit and economic conditions become discounted in market prices.

Fixed-Income Funds 60

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Lower-rated securities are subject to additional credit and default risks.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-22.77%	-0.99%	3.21%	5.80%	4.77%	4/8/98	–
	Including Sales Charge	-26.23%	-2.51%	2.26%	5.31%	4.31%
Class B Shares	Excluding Sales Charge	-23.55%	-1.83%	2.40%	5.17%	4.20%	5/5/98	4/8/98
	Including Sales Charge	-27.02%	-2.86%	2.11%	5.17%	4.20%
Class C Shares	Excluding Sales Charge	-23.43%	-1.79%	2.42%	4.95%	3.92%	3/1/02	4/8/98
	Including Sales Charge	-24.13%	-1.79%	2.42%	4.95%	3.92%
Citigroup U.S. High-Yield		-24.05%	-3.87%	0.60%	–	–
Market Capped Index3
Morningstar High-Yield Bond		-25.33%	-4.79%	-0.27%	1.98%	1.02%
Category Average3
					Gross/Net
Total Investment Expense				Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares					0.85%
Class B Shares					1.68%
Class C Shares					1.63%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -14.66% (1-year); 5.69% (5-year); 6.69% (10-year); 5.68% (since inception) Class B Shares: -15.38% (1-year); 5.52% (5-year); 6.54% (10-year); 5.57% (since inception) Class C Shares: -12.12% (1-year); 5.87% (5-year); 6.33% (10-year); 5.29% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. The performance of the High Yield Fund II between 1998 and 1999 benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 4/30/98. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
61

Income Fund

Portfolio Manager:

John R. Friedl, CFA
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

An overweighting in U.S. Treasuries helped performance, as they were the best performer of all fixed-income asset classes during the period. Investors gravitated toward the safest investments as risky securities plunged in value. Within the Fund, mortgages outperformed, as the type of mortgage securities held in the Fund — primarily low-coupon, agency-backed pass-through mortgages — are generally considered safe and relatively liquid. As the economy slumped, investments considered safe and of high quality have done well. An underweighting in the financial services/bank sector also helped performance, as it was one of the worst-performing sectors in the benchmark Citigroup Broad Investment-Grade Bond Index. A continued write-down of bad assets, a furthering slump in real estate, and an erosion in bank liquidity conspired to reduce value in the sector.

On the negative side, security selection in the financial sector was a detractor. Freddie Mac lost value after the U.S. government took it over, while Wachovia and Morgan Stanley underperformed as credit market turmoil reduced liquidity. Additionally, Lehman Brothers lost value due to bankruptcy, while Washington Mutual declined following to the company’s takeover by federal regulators. High-yield securities also underperformed during the 12-month period as investors avoided risky securities. The asset class performed poorly due to investors’ belief that the U.S. is in a severe economic slowdown and that default rates on high-yield securities therefore will rise considerably. Finally, the gaming sector underperformed as most gaming markets experienced negative year-over-year revenue growth. The continued economic slowdown appears to be eroding consumer discretionary spending on such items as gaming.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund is invested in a diversified pool of fixed-income securities selected with a long-term focus and a value-oriented philosophy. The sub-advisor favors securities and sectors they believe could perform well over one or more economic cycles. They also look for opportunities among the best companies in out-of-favor sectors and typically keep the Fund’s duration close to that of the Fund’s benchmark.

What is the outlook for the Fund?

The sub-advisor has based its outlook on the following perspective: The U.S. and much of the global economy are in the middle of a severe credit crunch and potentially long recession, and massive government policy actions — including a $700 billion rescue plan for the financial industry and a continued lowering of interest rates by the Federal Reserve — have been used to help revive the economy. They believe that it remains to be seen how quickly these actions may stimulate bank lending and consumer spending. However, they also believe that corporate bond prices are at historic lows and already incorporating a deep recession. As a result, the sub-advisor is selectively increasing the Fund’s exposure to companies they believe have solid balance sheets and the ability to withstand a long downturn.

Fixed-Income Funds 62

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government. Lower-rated securities are subject to additional credit and default risks.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-7.90%	0.67%	1.86%	4.27%	7.60%	12/15/75	–
	Including Sales Charge	-12.01%	-0.88%	0.92%	3.80%	7.45%
Class B Shares	Excluding Sales Charge	-8.67%	-0.12%	1.11%	3.68%	7.02%	3/30/94	12/15/75
	Including Sales Charge	-13.03%	-1.29%	0.79%	3.68%	7.02%
Class C Shares	Excluding Sales Charge	-8.68%	-0.11%	1.11%	3.56%	6.97%	3/1/02	12/15/75
	Including Sales Charge	-9.55%	-0.11%	1.11%	3.56%	6.97%
Citigroup Broad Investment-Grade		1.12%	3.93%	3.74%	5.12%	–
Bond Index3
Morningstar Intermediate-Term Bond		-7.20%	0.22%	1.37%	3.71%	7.38%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			0.90%		0.90%
Class B Shares			1.66%		1.64%
Class C Shares			1.84%		1.65%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -6.67% (1-year); 1.91% (5-year); 4.19% (10-year); 7.64% (since inception) Class B Shares: -7.75% (1-year); 1.75% (5-year); 4.07% (10-year); 7.21% (since inception) Class C Shares: -4.06% (1-year); 2.07% (5-year); 3.95% (10-year); 7.16% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. The Income Fund’s performance in 1999 benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/78. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
63

Inflation Protection Fund

Portfolio Managers:

Martin J. Schafer
Bryan C. Davis, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The underweighting in treasury inflation-protected securities (TIPS) in favor of commercial mortgage-backed securities and asset-backed securities hurt the Fund as these sectors underperformed both nominal and inflation-protected securities. Portfolio performance was also hurt by its use of a strategy of entering into secured lending agreements for more than 20% of the Fund. The Fund engaged in a strategy of entering into a significant amount of total rate-of-return swaps. This strategy detracted from returns due to the poor price performance of the securities the Fund purchased with collateral it received in connection with total rate-of-return swaps. In addition, the Fund’s duration was slightly longer compared to the index, which hurt performance as TIPS rates rose. (Duration is a measure of a bond's price sensitivity to changes in interest rates).

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

Fixed-Income Funds 64

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
			1-Year	3-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge		-17.81%	-4.38%	-3.11%	6/28/05	12/29/04
	Including Sales Charge		-21.52%	-5.83%	-4.27%
Class C Shares	Excluding Sales Charge		-18.45%	-5.04%	-3.86%	1/16/07	12/29/04
	Including Sales Charge		-19.20%	-5.04%	-3.86%
Barclays Capital U.S. Treasury TIPS Index3			-4.11%	1.64%	1.65%
Morningstar Inflation-Protected Bond			-6.01%	0.50%	0.52%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.36%		0.90%
Class C Shares		9.71%		1.65%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -11.20% (1-year); -1.33% (since inception)

Class C Shares: -8.51% (1-year); -0.87% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the Inflation Protection Fund’s benchmarks are calculated from 12/31/04. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
65

Mortgage Securities Fund

Portfolio Manager:

Craig V. Sosey
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

The best-performing bonds were the most liquid bonds. 30-year agency mortgage-backed securities (MBS) were the most liquid bonds (outside of U.S. Treasuries) and contributed the most to performance. Lower-coupon 30-year MBS benefited from falling interest rates due to their longer duration. For the period, the agency collateralized mortgage obligations (CMOs) held in the Fund also helped performance. The acceptable structure of the CMOs in the Fund helped mitigate the recent lack of liquidity experienced in these types of securities. Also, the Fund benefited slightly from its underweighting in 15-year agency MBS. In a historically normal market, these bonds would be expected to perform well. However, in the steepening interest-rate-curve environment over the period, they underperformed as typical buyers of the bonds, such as banks, were better sellers.

On the negative side, the worst-performing sector was non-agency CMOs, which investors shunned. Though bonds continued to have good underlying collateral performance, forced selling from leveraged investors and no demand from new investors drove prices down. The Fund’s duration was, on average, slightly below the benchmark Citigroup Mortgage Index duration over the period, which led to a small underperformance as interest rates fell. Although the overall 30-year agency MBS sector performed well, premiums on the Fund’s specified 30-year MBS dropped as investors looked only for liquidity, which slightly hurt performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor emphasizes a value-based, bottom-up approach to picking individual securities. Mortgage-backed securities and collateralized mortgage obligations comprise the majority of holdings, while a small allocation to Treasury and agency securities is used to manage liquidity and duration. The sub-advisor strives to keep the Fund’s duration close to that of its benchmark to prevent performance from being whipsawed or left behind by large interest-rate movements.

What is the outlook for the Fund?

The sub-advisor believes the mortgage market, as well as the overall economy, may continue to struggle for at least the near term. They believe the Fund is well-positioned to ride out the markets, with plenty of liquidity in the agency mortgage-backed security sector and potentially acceptable underlying performance of the non-agency bonds held in the Fund. When the overall economy and housing market begin to recover, the sub-advisor believes the Fund is positioned to be able to take advantage of anticipated spread-tightening in mortgage products.

Fixed-Income Funds 66

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	2.72%	4.03%	3.47%	4.46%	7.14%	5/4/84	–
	Including Sales Charge	-1.94%	2.44%	2.52%	3.98%	6.94%
Class B Shares	Excluding Sales Charge	2.06%	3.30%	2.73%	3.86%	6.55%	3/30/94	5/4/84
	Including Sales Charge	-2.85%	2.06%	2.38%	3.86%	6.55%
Class C Shares	Excluding Sales Charge	1.99%	3.30%	2.73%	3.77%	6.46%	3/1/02	5/4/84
	Including Sales Charge	1.01%	3.30%	2.73%	3.77%	6.46%
Citigroup Mortgage Index3		4.52%	5.28%	4.65%	5.58%	8.93%
Morningstar Intermediate Government		1.62%	3.41%	3.02%	4.19%	7.07%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			0.93%		0.91%
Class B Shares			1.68%		1.65%
Class C Shares			1.93%		1.63%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: 0.45% (1-year); 2.70% (5-year); 4.11% (10-year); 7.03% (since inception) Class B Shares: -0.72% (1-year); 2.56% (5-year); 3.98% (10-year); 6.64% (since inception) Class C Shares: 3.21% (1-year); 2.89% (5-year); 3.89% (10-year); 6.55% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. The Mortgage Securities Fund’s performance between 1998 and 2000 benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 5/31/84. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
67

Preferred Securities Fund

Portfolio Managers:

L. Phillip Jacoby
Bernard M. Sussman
Spectrum Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

Deeply-discounted securities purchased during the recent market turmoil — such as DB Capital, FPL Group, and Arch Capital —performed the best as the $25 par market rebounded in October from the historic sell-off experienced in September. Given the positive cash flow into the Fund, the sub-advisor was able to take advantage of the new-issue market, where securities were priced at large concessions and subsequently held up better than secondary issues when the market turned down. The volatility and inefficiency experienced in the markets provided many trading and swap opportunities that helped total return.

On a negative note, the Fund’s investments in AIG, Fannie Mae, Freddie Mac, and Wachovia Corp. hurt returns as all four firms suffered dramatic losses resulting from the unprecedented credit crisis. The U.S. government took control of AIG and the U.S. Federal Reserve agreed to lend $85 billion to the insurer. Fannie Mae and Freddie Mac fell significantly as the U.S. government seized control of the companies and placed them into a conservatorship. Wachovia Corp.’s value plummeted under the weight of overdue mortgages, and the firm ultimately agreed to a takeover by Wells Fargo.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s strategy emphasizes a rigorous credit approach with a primary emphasis on investment-grade hybrid preferred securities offering superior, risk-adjusted yield premiums.

What is the outlook for the Fund?

The sub-advisor believes the preferred securities market may ultimately benefit from the Emergency Economic Stabilization Act (EESA), the heart of which establishes the Troubled Asset Relief Program (TARP). While it is impossible to predict exactly how the plan will work, who will participate, and what it might mean for the preferred shareholders of companies that do sell assets to the government, the sub-advisor believes the program may provide a boost to investor confidence in the financial system and positively impact the preferred securities market.

Fixed-Income Funds 68

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-29.61%	-9.31%	-4.53%	-1.79%	6/28/05	5/1/02
	Including Sales Charge	-32.80%	-10.69%	-5.41%	-2.48%
Class C Shares	Excluding Sales Charge	-30.14%	-9.97%	-5.12%	-2.35%	1/16/07	5/1/02
	Including Sales Charge	-30.81%	-9.97%	-5.12%	-2.35%
Merrill Lynch Hybrid Preferred Securities Index3		-21.64%	-5.95%	-2.32%	0.17%
Barclays Capital Aggregate Bond Index3		0.30%	3.60%	3.48%	4.34%
Preferreds Blended Index3, 4		-33.19%	-10.51%	-4.99%	-1.47%
Morningstar Intermediate-Term Bond		-7.20%	0.22%	1.37%	2.55%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		1.20%		1.00%
Class C Shares		2.19%		1.75%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -29.93% (1-year); -4.65% (5-year); -1.95% (since inception) Class C Shares: -27.85% (1-year); -4.35% (5-year); -1.80% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 4/30/02. Indices are unmanaged, and individuals cannot invest directly in an index.
4	This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

Fixed-Income Funds
69

Tax-Exempt Bond Fund

Portfolio Managers:

Thomas M. Byron
Mark Paris
Robert J. Stryker, CFA
Van Kampen Asset Management

What contributed to or detracted from Fund performance during the fiscal year?

An overweighting in pre-refunded bonds, the top-performing sector for the period, enhanced relative returns during the period. These short-maturity securities benefited from the outperformance of the short end of the yield curve. An overweighting in industrial revenue bonds, which performed well, also aided returns. Yield-curve positioning, specifically a shorter duration (a measure of interest-rate sensitivity) relative to the benchmark Barclays Capital Municipal Index, also added value, as the 10-year-and-shorter portion of the curve turned in positive returns while the longer end of the curve posted negative returns. Additionally, holdings in municipal auction-rate securities and variable-rate demand notes, which are highly liquid securities with zero durations, were beneficial as their yields remained well above those of long-maturity municipal bonds.

On the negative side, holdings in securities with durations greater than 10 years detracted from relative performance as the long end of the yield curve underperformed the short end of the curve by more than 1,800 basis points (as measured by the Barclays Capital Municipal Bond Index). Also, exposure to the tobacco, health care, airport, and housing sectors, held in the form of inverse floating-rate securities, hindered performance as credit-rating downgrades of various monoline bond insurers caused spreads on these previously AAA-rated securities to widen. Additionally, although an overweighting in bonds rated BBB-and-below enhanced portfolio income, it hindered total return. Investors’ flight to quality during the period led higher-rated bonds to outperform, while BBB-rated municipal spreads widened by nearly 200 basis points.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor adheres to a balanced approach in seeking to achieve above-average total returns and distributed returns. All actions look to add value through a disciplined, systematic, value-added process. Rather than focusing on a strategy of attempting to forecast interest rates, strategies that have a higher probability of delivering superior risk-adjusted returns are emphasized.

Fixed-Income Funds 70

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. A portion of the fund’s income may be subject to state and/or local taxes, and it may be subject to federal alternative minimum tax (AMT) for certain investors.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-10.57%	-1.40%	0.63%	2.66%	5.17%	1/3/77	–
	Including Sales Charge	-14.61%	-2.89%	-0.30%	2.20%	5.01%
Class B Shares	Excluding Sales Charge	-10.94%	-1.94%	0.00%	2.05%	4.43%	3/30/94	1/3/77
	Including Sales Charge	-15.19%	-3.09%	-0.32%	2.05%	4.43%
Class C Shares	Excluding Sales Charge	-11.52%	-2.24%	-0.19%	1.87%	4.30%	3/1/02	1/3/77
	Including Sales Charge	-12.37%	-2.24%	-0.19%	1.87%	4.30%
Barclays Capital Municipal Bond Index3		-3.30%	1.71%	2.73%	4.14%	–
Morningstar Muni National Long		-7.96%	-0.45%	1.27%	2.80%	6.11%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			1.15%		1.06%
Class B Shares			1.98%		1.45%
Class C Shares			2.74%		1.95%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -10.64% (1-year); 0.41% (5-year); 2.61% (10-year); 5.17% (since inception) Class B Shares: -11.25% (1-year); 0.39% (5-year); 2.47% (10-year); 4.58% (since inception) Class C Shares: -8.29% (1-year); 0.53% (5-year); 2.28% (10-year); 4.45% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. The performance of the Tax-Exempt Bond Fund I in 2000 benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/78. Indices are unmanaged, and individuals cannot invest directly in an index.

Fixed-Income Funds
71

Short-Term Bond Fund

Portfolio Managers:

Doug Earney, CFA
Craig Dawson, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Duration was the primary contributor to performance over the period. The Fund was positioned with a longer duration than that of the benchmark Braclays Capital Government Credit 1-3 Year Index. This was beneficial as interest rates fell during the period. The Fund also benefited from changes in sector allocation. An increased weighting in U.S. Treasuries and a decreased weighting in spread (i.e., non-U.S. Treasury) sectors improved the overall quality of the Fund. In general, higher-quality securities outperformed lower-quality securities.

On the negative side, the Fund’s out-of-index weighting in securitized assets was the major detractor during the period. These sectors were severely impacted by deleveraging taking place in the market as well as by rating agency actions resulting from continued housing market declines. The Fund’s position in investment-grade corporate bonds also hurt returns as risk premiums elevated. Additionally, an underweighted position in U.S. Treasuries versus the index contributed negatively, as Treasuries were one of the best-performing sectors. An out-of-index weighting to below-investment-grade corporate bonds also contributed negatively to performance. The flight to quality was primarily into U.S. Treasuries and out of all spread sectors.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

Portfolio management believes that the reasonably strong underlying fundamentals of corporations and consumers, coupled with a friendly Federal Reserve, will provide the support to ensure that the financial market turmoil is relatively short-lived and contained. They believe growth will slow, but the U.S. economy should avoid recession. Defaults and losses will continue as a result of the subprime crisis, but current valuations reflect extreme losses that the portfolio management team does not believe will ultimately be realized. Fundamentals of corporations remain strong, but will gradually decline over the next two years (defaults have remained around 1% for the past 12 months). However, current risk premiums reflect the fundamental risks, plus the potential of a steep increase in defaults/credit deterioration, which the team does not believe will materialize. Despite unfavorable technicals (commercial mortgage-backed securities are now being shorted aggressively by macro hedge funds), the team believes that underlying commercial mortgages will continue to perform and do not have the same fundamental risk as subprime residential mortgage-backed securities. The portfolio management team believes this market environment represents numerous long-term opportunities, which offer necessary value to withstand the short-term volatility of risk premiums.

Short-Term Fixed-Income Funds 72

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 2.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-9.33%	-0.69%	0.09%	2.14%	6/28/05	12/6/00
	Including Sales Charge	-11.59%	-1.54%	-0.42%	1.81%
Class C Shares	Excluding Sales Charge	-10.18%	-1.57%	-0.75%	1.33%	1/16/07	12/6/00
	Including Sales Charge	-11.05%	-1.57%	-0.75%	1.33%
Barclays Capital 1–3 Year Govt./Credit Index3		6.26%	5.42%	3.76%	4.37%
Morningstar Short-Term Bond		-3.77%	1.22%	1.31%	2.74%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		0.79%		0.79%
Class C Shares		6.31%		1.70%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -7.77% (1-year); 0.31% (5-year); 2.39% (since inception)

Class C Shares: -7.15% (1-year); -0.02% (5-year); 1.91% (since inception)inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 12/31/00. Indices are unmanaged, and individuals cannot invest directly in an index.

Short-Term Fixed-Income Funds
73

Short-Term Income Fund

Portfolio Manager:

Craig V. Sosey
Edge Asset Management, Inc.

What contributed to or detracted from Fund performance during the fiscal year?

The top positive contributor was an overweighting in liquid, less-credit-sensitive sectors such as U.S. Treasury and agency bonds. Though Fannie Mae and Freddie Mac were placed into conservatorship, the resulting stronger U.S. government backing kept their debt from widening as much as other credit-related sectors. An underweighting in the bank/finance sector aided performance as well. This sector widened as the credit crunch unfolded and many financials failed or were on the brink of doing so. As this sector typically makes up a large portion of many indices, the underweighting had a significant positive impact on performance. An underweighting in asset-backed securities (ABS) added value as well. When the market began to realize the credit crisis was going to hurt consumers, spreads on consumer-related ABS, like credit card and auto ABS, widened. Having alomost no exposure to this sector helped the Fund greatly.

On a negative note, although the Fund overall was underweighted in the bank/finance sector, several individual issues within the sector hurt performance. Most significantly, a small position in Washington Mutual and a larger position in International Lease Finance (a subsidiary of AIG) detracted from returns. An overweighting in the real estate investment trust (REIT) sector also hurt performance as investors began to believe that the problems seen in the residential mortgage market would begin to spill over to the commercial mortgage market. The underperformance was felt across all sectors within the REIT category. In addition, non-agency mortgage securities hurt performance. One bond was marked to below-investment-grade and priced accordingly. Several other bonds saw dramatic price declines mainly from a lack of liquidity in the sector.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor takes a flexible investment approach, selecting securities from multiple fixed-income asset classes that are arrayed along the front part of the yield curve. They also look for value in lower-rated corporate securities while maintaining the Fund’s high overall credit rating. Comprehensive credit research is conducted to identify opportunities among out-of-favor sectors and securities.

What is the outlook for the Fund?

The sub-advisor believes that over the near term the front part of the interest-rate curve is likely to remain fairly low, although credit spreads may remain at high levels until the credit crisis eases. Once liquidity begins to return to the market and the economy shows signs of picking up, they believe spreads on corporates and mortgages may improve and have positioned the Fund to be able to take advantage of these potential improvements in the credit market.

Short-Term Fixed-Income Funds 74

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 2.5%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	10-Year	Since	Inception	Extended Performance
						Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-0.06%	2.72%	2.30%	3.94%	4.22%	11/1/93	–
	Including Sales Charge	-2.58%	1.85%	1.80%	3.68%	4.05%
Class C Shares	Excluding Sales Charge	-0.78%	2.01%	1.57%	3.16%	3.38%	3/1/02	11/1/93
	Including Sales Charge	-1.74%	2.01%	1.57%	3.16%	3.38%
Citigroup Broad Investment-Grade		-2.34%	2.57%	2.37%	4.51%	5.14%
Credit 1–3 Years Index3
Morningstar Short-Term Bond		-3.77%	1.22%	1.31%	3.40%	3.92%
Category Average3
			Gross		Net
Total Investment Expense			Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares			0.97%		0.95%
Class C Shares			2.10%		1.67%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -0.89% (1-year); 2.03% (5-year); 3.86% (10-year); 4.19% (since inception) Class C Shares: -0.04% (1-year); 1.80% (5-year); 3.34% (10-year); 3.52% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized. The Short-Term Income Fund’s performance between 1995 and 2005 benefited from agreements to limit the fund’s expenses.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 10/31/93. Indices are unmanaged, and individuals cannot invest directly in an index.

Short-Term Fixed-Income Funds
75

Ultra Short Bond Fund

Portfolio Managers:

Doug Earney, CFA
Craig Dawson, CFA
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Duration was the primary contributor to performance over the 12-month period. The Fund was positioned with a longer duration than that of the benchmark 6-month LIBOR Index, which was beneficial as interest rates fell, especially at the front end of the yield curve. Also, the Fund’s weightings to U.S. Treasuries, U.S. agencies, and cash were increased over the period, adding to performance as investors sought the safest investments available.

On the negative side, the Fund’s weighting in securitized assets was the major detractor to performance over the period. Specifically, the Fund’s weighting in collateralized mortgage obligations was the largest detractor to performance, followed by asset-backed securities and commercial mortgage-backed securities. The Fund’s weighting in investment-grade corporate bonds also hindered performance due to widening risk premiums. Additionally, the weighting in below-investment-grade bonds hurt returns as prices declined due to investors’ flight to quality.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

Short-Term Fixed-Income Funds 76

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 1%; Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government.

Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception	Extended Performance
					Inception	Date	Inception Date
Class A Shares	Excluding Sales Charge	-15.40%	-4.04%	-1.53%	-0.05%	3/15/06	6/15/01
	Including Sales Charge	-16.27%	-4.35%	-1.73%	-0.19%
Class C Shares	Excluding Sales Charge	-16.04%	-4.68%	-2.22%	-0.77%	1/16/07	6/15/01
	Including Sales Charge	-16.85%	-4.68%	-2.22%	-0.77%
6-Month LIBOR Index3		4.02%	4.88%	3.78%	3.27%
Morningstar Ultrashort Bond		-5.94%	0.59%	1.32%	1.58%
Category Average3
		Gross		Net
Total Investment Expense		Expense Ratio	Expense Ratio
As shown in the 2/29/08 prospectus.
Class A Shares		0.74%		0.74%
Class C Shares		3.26%		1.50%

Average annual total returns¹ including sales charge as of 9/30/08:

Class A Shares: -14.38% (1-year); -1.12% (5-year); 0.21% (since inception) Class C Shares: -14.80% (1-year); -1.59% (5-year); -0.35% (since inception)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	Returns shown for the benchmarks assume reinvestment of all dividends and distributions, and since-inception returns shown for the benchmarks are calculated from 6/30/01. Indices are unmanaged, and individuals cannot invest directly in an index.

Short-Term Fixed-Income Funds
77

Money Market Fund

Portfolio Managers:

Tracy Reeg
Alice Robertson
Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Fund’s allocation to variable rate demand notes added value during the period.* Also, the Fund benefited from having a consistently shorter average-days-to-maturity measurement than did its peers (although the average for the peer group did decline over the period). On a negative note, the prime money market industry saw large outflows in September, resulting from one money market fund falling below $1.00 net asset value. Throughout the year, the Fund’s exposures to asset-backed commercial paper and financial credits were adjusted due to the continued stress in the market.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies consistently focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

*      Variable rate demand notes are debt instruments representing borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate.

Short-Term Fixed-Income Funds
78

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

A contingent deferred sales charge may apply as follows: Class B shares: 5%, which declines over 5 years (5–5–4–3–2–0%); Class C shares: 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge.

Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option’s expenses. Expense limits apply through 2/28/09. Returns displayed are based on net total investment expense.

An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

The 7-day simple yield more closely reflects current fund earnings than the total return data.

Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception Extended Performance
					Inception	Date	Inception Date
Class A Shares		3.02%	4.15%	2.95%	2.50%	6/28/05	12/6/00
Class B Shares	Excluding Sales Charge	2.03%	2.98%	2.18%	2.00%	6/28/05	12/6/00
	Including Sales Charge	-2.97%	1.71%	1.81%	2.00%
Class C Shares	Excluding Sales Charge	2.08%	2.96%	1.89%	1.52%	1/16/07	12/6/00
	Including Sales Charge	1.08%	2.96%	1.89%	1.52%
		Gross/Net				7-Day	7-Day
Total Investment Expense		Expense Ratio	Yields2 as of October 31, 2008			Simple Yield Effective Yield
As shown in the 2/29/08 prospectus.			Class A Shares			1.87%	1.89%
Class A Shares		0.44%
			Fund yields2 as of 9/30/08:
Class B Shares		1.44%
Class C Shares		1.70%	Class A Shares: 2.59% (7-day simple yield);
				2.62% (7-day effective yield)

See glossary on page 80 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Net asset value is not adjusted for sales charge.
3	The 7- day simple yield is calculated based on the income generated by an investment in the fund over a 7- day period and is expressed as an annual percentage rate. The 7-day effective yield is calculated similarly to the 7-day simple yield but assumes that income earned from the fund’s investments is reinvested and compounded.

Short-Term Fixed-Income Funds
79

Glossary

6-Month LIBOR (London Interbank Offered Rate) Index:

An average of the interest rate of U.S. dollar deposits, known as Eurodollars, of a stated maturity.

Barclays Capital Aggregate Bond Index:

(Formerly known as Lehman Brothers Aggregate Bond Index.) A broad-based index intended to represent the U.S. fixed-income market.

Barclays Capital Government/Mortgage Index:

(Formerly known as Lehman Brothers Government/Mortgage Index.) A combination of the Barclays Capital Government Index and the Barclays Capital Mortgage-Backed Securities (MBS) Index. The Government Index includes all government bonds including, but not limited to, U.S. Treasury bonds and government-sponsored agency securities, with no maturity restrictions. The MBS Index includes all securitized mortgage pools by GNMA, FNMA and the FHLMC.

Barclays Capital 1–3 Year Government/Credit Index:

(Formerly known as Lehman Brothers 1–3 Year Government/ Credit Index.) A combination of the Barclays Capital Government and Corporate Bond indices with maturities between one year and three years.

Barclays Capital 1–5 Year Government/Credit Index:

(Formerly known as Lehman Brothers 1–5 Year Government/ Credit Index.) An index composed of Treasury notes, agencies, and corporate debt securities rated BBB or better with maturities between one year and five years.

Barclays Capital Municipal Bond Index:

(Formerly known as Lehman Brothers Municipal Bond Index.) A total return performance benchmark for the long-term, investment-grade, tax-exempt bond market.

Barclays Capital U.S. Treasury TIPS (Treasury Inflation Protection Securities) Index:

(Formerly known as Lehman Brothers U.S. Treasury TIPS (Treasury Inflation Protection Securities) Index.) An index of inflation-protected U.S. Treasury securities that will mature in one year or longer.

Citigroup Broad Investment-Grade Bond Index:

Measures the performance of bonds, including U.S. and non-U.S. corporate securities and non-U.S. sovereign and provincial securities. It includes institutionally traded U.S. Treasury, government-sponsored, mortgage, asset-backed, and investment-grade securities.

Citigroup Broad Investment-Grade Credit 1–3 Years Index:

Measures the performance of bonds, including U.S. and non-U.S. corporate securities and non-U.S. sovereign and provincial securities, with maturities between one and three years.

Citigroup Broad Market (BMI) Global ex-US Index:

A float-weighted, rules-based benchmark of the institutionally investable universe of all companies (excluding companies domiciled in the U.S.) with an available free float market cap of U.S. $100 million and above.

Citigroup Mortgage Index:

Represents the mortgage-backed securities component of Citigroup’s Broad Investment-Grade Bond Index. It consists of 30- and 15-year agency-issued (GNMA, FNMA, and FHLMC) pass-through securities as well as FNMA and FHLMC balloon mortgages.

Citigroup U.S. High-Yield Market Capped Index:

Measures the performance of below-investment-grade debt issued by corporations domiciled in the U.S. or Canada, with the imposition of a cap on the par amount of each issuer and delayed entry of fallen angels following their downgrade.

FTSE EPRA/NAREIT Global Real Estate Index:

Designed to represent general trends in eligible real estate equities worldwide.

Merrill Lynch Hybrid Preferred Securities Index:

An index of investment-grade, exchange-traded preferred stocks with outstanding market values of at least $30 million and at least one year to maturity.

Morgan Stanley Capital International All Country World ex-US Index (MSCI ACWI ex-US Index):

A market capitalization-weighted index designed to measure equity market performance in 47 global developed and emerging markets, excluding the U.S.

Morgan Stanley Capital International (MSCI) EAFE Index:

A broad-based, capitalization-weighted index of equity markets representing 21 countries in Europe, Australasia, and the Far East.

Morgan Stanley Capital International (MSCI) EMF (Emerging Markets Free) Index:

Measures the stock returns of companies in 27 developing countries.

Morgan Stanley Capital International (MSCI) U.S. REIT Index:

A total-return index comprised of the most actively traded real estate investment trusts and designed to be a measure of real estate equity performance.

Morningstar Diversified Emerging Markets Category Average:

An average of the net asset value (NAV) returns of mutual funds that tend to divide their assets among 20 or more nations, although they tend to focus on the emerging markets of Asia and Latin America rather than on those of the Middle East, Africa, or Europe. These funds invest at least 70% of total assets in equities and invest at least 50% of stock assets in emerging markets.

80

Glossary

Morningstar Foreign Large Blend Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in a variety of big international stocks. Most of these funds divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany, and they typically have less than 20% of assets invested in U.S. stocks.

Morningstar Foreign Large Growth Category Average:

An average of the net asset value (NAV) returns of mutual funds that seek capital appreciation by investing in large international stocks that are growth-oriented. Large-cap foreign stocks have market capitalizations greater than $5 billion. Growth is defined based on high price-to-book and price-to-cash flow ratios, relative to the MSCI EAFE Index.

Morningstar Global Real Estate Category Average:

Global real estate portfolios invest primarily in non-US real estate securities, but may also invest in U.S. real estate securities. Securities that these portfolios purchase include: debt & equity securities, convertible securities, and securities issued by Real Estate Investment Trusts (REITs) and REIT like entities. Portfolios in this category also invest in real-estate operating companies.

Morningstar High-Yield Bond Category Average:

An average of the net asset value (NAV) returns of mutual funds that primarily invest in U.S. high-income debt securities where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor’s or Moody’s at the level of BB (considered speculative for taxable bonds) and below.

Morningstar Inflation-Protected Bond Category Average:

An average of the net asset value (NAV) returns of mutual funds that primarily invest in fixed-income securities that increase coupon and/or principal payments at the rate of inflation. These bonds can be issued by any organization, but the U.S. Treasury is currently the largest issuer of these types of securities. Most of these funds buy bonds with intermediate- to long-term maturities.

Morningstar Intermediate-Term Bond Category Average:

An average of the net asset value (NAV) returns of bond mutual funds that have average durations that are greater than 3.5 years and less than 6 years.

Morningstar Intermediate Government Category Average:

An average of the net asset value (NAV) returns of mutual funds that devote at least 90% of their bond holdings to government issues. These mutual funds have, on average, durations between 3.5 and 6 years.

Morningstar Large Blend Category Average:

An average of the net asset value (NAV) returns of domestic mutual funds that focus on large companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries.

Morningstar Large Growth Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in large U.S companies that are projected to grow faster than other large-cap stocks.

Morningstar Large Value Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest primarily in big U.S. companies that are less expensive or growing more slowly than other large-cap stocks.

Morningstar Mid-Cap Blend Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in U.S. stocks of various sizes and styles, giving them a middle-of-the-road profile. Most shy away from high-priced growth stocks, but aren’t so price-conscious that they land in value territory.

Morningstar Mid-Cap Growth Category Average

An average of the net asset value (NAV) returns of mutual funds that invest in stocks of all sizes, thus leading to a mid-cap profile, or those that focus on midsize companies. These funds target U.S. firms that are projected to grow faster than other mid-cap stocks, therefore commanding relatively higher prices.

Morningstar Mid-Cap Value Category Average:

An average of the net asset value (NAV) returns of mid-cap value mutual funds that focus on medium-size companies or that own a mix of small-, mid-, and large-cap stocks. All look for U.S. stocks that are less expensive or growing more slowly than the market.

Morningstar Muni CA Long Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest at least 80% of assets in California municipal debt and have durations of more than seven years (or, if duration is unavailable, average maturities of more than 12 years).

Morningstar Muni National Long Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in municipal bonds with maturities of 10 years or more that are issued by various state and local governments to fund public projects and are free from federal taxes.

Morningstar Short Government Category Average:

An average of the net asset value (NAV) returns of mutual funds that have at least 90% of their bond holdings in bonds backed by the U.S. government or by government-linked agencies and have durations between 1 and 3.5 years.

81

Glossary

Morningstar Short-Term Bond Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of 1 to 3.5 years.

Morningstar Small Blend Category Average:

An average of the net asset value (NAV) returns of mutual funds that favor U.S. firms at the smaller end of the market-capitalization range. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages.

Morningstar Small Growth Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in faster-growing companies whose shares are at the lower end of the market-capitalization range. These funds tend to favor companies in up-and-coming industries or young firms in their early growth stages.

Morningstar Small Value Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in small U.S. companies with valuations and growth rates below other small-cap peers.

Morningstar Specialty – Real Estate Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest primarily in real estate investment trusts (REITs) of various types. The performance of these mutual funds is less connected to the overall market than most other types of stock funds.

Morningstar Ultrashort Bond Category Average:

An average of the net asset value (NAV) returns of bond mutual funds that invest primarily in investment-grade U.S. fixed-income issues and have durations of less than one year.

Russell 1000^® Growth Index:

Measures the performance of those Russell 1000^® Index securities with higher price-to-book ratios and higher forecasted growth values

Russell 1000^® Value Index:

Measures the performance of those Russell 1000^® Index securities with lower price-to-book ratios and lower forecasted growth values

Russell 2000^® Index:

Measures the performance of the 2,000 smallest stocks in the Russell 3000^® Index.

Russell 2000^® Growth Index:

Measures the performance of those Russell 2000^® Index securities with higher price-to-book ratios and higher forecasted growth values

Russell 2000^® Value Index:

Measures the performance of those Russell 2000^® Index securities with lower price-to-book ratios and lower forecasted growth values

. . . .

Russell 3000^® Index:

Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

Russell Midcap^® Index:

Measures the performance of the 800 smallest stocks in the Russell 1000^® Index.

Russell Midcap^® Growth Index:

Measures the performance of those Russell Midcap^® Index securities with higher price-to-book ratios and higher forecasted growth values.

Russell Midcap^® Value Index:

Measures the performance of those Russell Midcap^® Index securities with lower price-to-book ratios and lower forecasted growth values.

S&P 500:

A broad-based index intended to represent the U.S. equity market.

S&P 500/Citigroup Value Index:

A float-adjusted market-capitalization-weighted index comprised of stocks representing approximately half the market capitalization of the S&P 500 that have been identified as being on the value end of the growth-value spectrum.

S&P MidCap 400:

A weighted index of the common stocks of 400 mid-size companies.

82

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)

As a shareholder of Principal Funds, Inc., you incur two types of costs: (1) transaction costs, including sales charges on purchase payments, contingent deferred sales charges; and under certain limited circumstances redemption fees or exchange fees; and (2) ongoing costs, including management fees; distribution fees; and other fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in Principal Funds, Inc. and to compare these costs with the ongoing costs of investing in other mutual funds.

The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (May 1, 2008 to October 31, 2008), unless otherwise noted.

Actual Expenses

The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. An annual fee of $15.00 or $30.00 may apply to IRA accounts and 403(b) accounts, respectively. These fees are not included in the table below. If they were, the estimate of expenses you paid during the period would be higher, and your ending account value lower, by this amount.

Hypothetical Example for Comparison Purposes

The second section of the table below provides information about hypothetical account values and hypothetical expenses based on each funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in Principal Funds, Inc. and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as sales charges on purchase payments, contingent deferred sales charges, redemption fees or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

		Actual			Hypothetical
			Expenses Paid			Expenses Paid
	Beginning	Ending	During Period		Ending	During Period
	Account	Account Value	May 1, 2008 to	Beginning	Account Value	May 1, 2008 to
	Value May 1,	October 31,	October 31,	Account Value	October 31,	October 31,	Annualized
	2008	2008	2008(a)	May 1, 2008	2008	2008(a)	Expense Ratio
Bond & Mortgage Securities Fund
Class A	$1,000.00	$874.83	$4.43	$1,000.00	$1,020.41	$4.77	0.94%
Class B	1,000.00	870.88	7.52	1,000.00	1,017.09	8.11	1.60
Class C	1,000.00	870.10	8.23	1,000.00	1,016.34	8.87	1.75
California Municipal Fund
Class A	1,000.00	875.75	3.91	1,000.00	1,020.96	4.22	0.83
Class B	1,000.00	872.18	7.53	1,000.00	1,017.09	8.11	1.60
Class C	1,000.00	871.41	7.76	1,000.00	1,016.84	8.36	1.65
California Municipal Fund
(Excluding Interest Expense & Fees)
Class A	1,000.00	982.66	2.95	1,000.00	1,021.02	3.01	0.59
Class B	1,000.00	978.90	6.78	1,000.00	1,017.19	6.94	1.36
Class C	1,000.00	978.78	7.03	1,000.00	1,017.19	7.20	1.41
Disciplined LargeCap Blend Fund
Class A	1,000.00	699.79	4.83	1,000.00	1,019.46	5.74	1.13
Class B	1,000.00	695.37	9.29	1,000.00	1,014.18	11.04	2.18
Class C	1,000.00	696.61	7.72	1,000.00	1,016.04	9.17	1.81
Diversified International Fund
Class A	1,000.00	563.31	5.78	1,000.00	1,017.75	7.46	1.47
Class B	1,000.00	561.31	9.34	1,000.00	1,013.17	12.04	2.38
Class C	1,000.00	561.98	8.13	1,000.00	1,014.73	10.48	2.07
Equity Income Fund
Class A	1,000.00	730.31	4.35	1,000.00	1,020.11	5.08	1.00
Class B	1,000.00	726.95	8.16	1,000.00	1,015.69	9.53	1.88
Class C	1,000.00	727.03	7.73	1,000.00	1,016.19	9.02	1.78
Global Real Estate Securities Fund
Class A	1,000.00	587.12	5.74	1,000.00	1,017.90	7.30	1.44
Class C	1,000.00	584.46	8.72	1,000.00	1,014.13	11.09	2.19

83

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
	Beginning	Ending	During Period		Ending	During Period
	Account	Account Value	May 1, 2008 to	Beginning	Account Value	May 1, 2008 to
	Value May 1,	October 31,	October 31,	Account Value	October 31,	October 31,	Annualized
	2008	2008	2008(a)	May 1, 2008	2008	2008(a)	Expense Ratio
Government & High Quality Bond
Fund
Class A	$1,000.00	$961.63	$4.54	$1,000.00	$1,020.51	$4.67	0.92%
Class B	1,000.00	957.20	8.86	1,000.00	1,016.09	9.12	1.80
Class C	1,000.00	958.92	8.12	1,000.00	1,016.84	8.36	1.65
High Yield Fund
Class A	1,000.00	771.93	4.23	1,000.00	1,020.36	4.82	0.95
Class B	1,000.00	768.30	7.69	1,000.00	1,016.44	8.77	1.73
Class C	1,000.00	768.50	7.69	1,000.00	1,016.44	8.77	1.73
Income Fund
Class A	1,000.00	894.16	4.24	1,000.00	1,020.66	4.52	0.89
Class B	1,000.00	889.95	7.74	1,000.00	1,016.94	8.26	1.63
Class C	1,000.00	889.91	7.79	1,000.00	1,016.89	8.31	1.64
Inflation Protection Fund
Class A	1,000.00	836.78	4.16	1,000.00	1,020.61	4.57	0.90
Class C	1,000.00	834.27	7.61	1,000.00	1,016.84	8.36	1.65
International Emerging Markets Fund
Class A	1,000.00	474.65	7.15	1,000.00	1,015.43	9.78	1.93
Class B	1,000.00	472.48	10.59	1,000.00	1,010.76	14.46	2.86
Class C	1,000.00	472.84	10.26	1,000.00	1,011.21	14.00	2.77
International Growth Fund
Class A	1,000.00	560.03	6.27	1,000.00	1,017.09	8.11	1.60
Class C	1,000.00	561.84	9.19	1,000.00	1,013.37	11.84	2.34
LargeCap Blend Fund I
Class A	1,000.00	710.82	4.77	1,000.00	1,019.56	5.63	1.11
Class B	1,000.00	708.66	7.73	1,000.00	1,016.09	9.12	1.80
Class C	1,000.00	707.32	8.11	1,000.00	1,015.63	9.58	1.89
LargeCap Blend Fund II
Class A	1,000.00	703.02	5.69	1,000.00	1,018.45	6.75	1.33
Class B	1,000.00	700.20	9.19	1,000.00	1,014.33	10.89	2.15
Class C	1,000.00	699.71	9.36	1,000.00	1,014.13	11.09	2.19
LargeCap Growth Fund
Class A	1,000.00	692.83	5.36	1,000.00	1,018.80	6.39	1.26
Class B	1,000.00	689.61	9.13	1,000.00	1,014.33	10.89	2.15
Class C	1,000.00	689.66	8.62	1,000.00	1,014.93	10.28	2.03
LargeCap Growth Fund I
Class A	1,000.00	669.18	6.63	1,000.00	1,017.19	8.01	1.58
Class B	1,000.00	666.67	10.05	1,000.00	1,013.07	12.14	2.40
Class C	1,000.00	667.50	9.18	1,000.00	1,014.13	11.09	2.19
LargeCap Growth Fund II
Class A	1,000.00	702.15	7.27	1,000.00	1,016.59	8.62	1.70
Class C	1,000.00	699.76	10.43	1,000.00	1,012.87	12.35	2.44
LargeCap S&P 500 Index Fund
Class A	1,000.00	704.73	2.87	1,000.00	1,021.77	3.40	0.67
Class C	1,000.00	702.06	5.56	1,000.00	1,018.60	6.60	1.30
LargeCap Value Fund
Class A	1,000.00	710.57	4.26	1,000.00	1,020.16	5.03	0.99
Class B	1,000.00	707.73	7.94	1,000.00	1,015.84	9.37	1.85
Class C	1,000.00	708.26	7.30	1,000.00	1,016.59	8.62	1.70
LargeCap Value Fund III
Class A	1,000.00	661.72	6.06	1,000.00	1,017.85	7.35	1.45
Class B	1,000.00	658.84	9.67	1,000.00	1,013.47	11.74	2.32
Class C	1,000.00	659.11	9.34	1,000.00	1,013.88	11.34	2.24
MidCap Blend Fund
Class A	1,000.00	705.10	4.67	1,000.00	1,019.66	5.53	1.09
Class B	1,000.00	702.82	7.28	1,000.00	1,016.59	8.62	1.70
Class C	1,000.00	702.10	8.30	1,000.00	1,015.38	9.83	1.94
MidCap Growth Fund I
Class A	1,000.00	635.60	7.19	1,000.00	1,016.34	8.87	1.75
Class C	1,000.00	633.36	10.22	1,000.00	1,012.62	12.60	2.49
MidCap Growth Fund III
Class A	1,000.00	613.86	4.26	1,000.00	1,019.86	5.33	1.05
Class B	1,000.00	612.58	5.63	1,000.00	1,018.15	7.05	1.39
Class C	1,000.00	611.94	4.58	1,000.00	1,019.46	5.74	1.13
MidCap Stock Fund
Class A	1,000.00	723.94	7.15	1,000.00	1,016.84	8.36	1.65
Class B	1,000.00	721.58	9.91	1,000.00	1,013.62	11.59	2.29
Class C	1,000.00	720.60	10.47	1,000.00	1,012.97	12.25	2.42
MidCap Value Fund II
Class A	1,000.00	640.70	7.18	1,000.00	1,016.39	8.82	1.74
Class B	1,000.00	638.71	10.26	1,000.00	1,012.62	12.60	2.49
Class C	1,000.00	638.33	10.25	1,000.00	1,012.62	12.60	2.49

84

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
	Beginning	Ending	During Period		Ending	During Period
	Account	Account Value	May 1, 2008 to	Beginning	Account Value	May 1, 2008 to
	Value May 1,	October 31,	October 31,	Account Value	October 31,	October 31,	Annualized
	2008	2008	2008(a)	May 1, 2008	2008	2008(a)	Expense Ratio
Money Market Fund
Class A	$1,000.00	$1,011.06	$2.88	$1,000.00	$1,022.27	$2.90	0.57 %
Class B	1,000.00	1,006.79	7.31	1,000.00	1,017.85	7.35	1.45
Class C	1,000.00	1,006.90	7.16	1,000.00	1,018.00	7.20	1.42
Mortgage Securities Fund
Class A	1,000.00	993.92	4.56	1,000.00	1,020.56	4.62	0.91
Class B	1,000.00	990.22	8.25	1,000.00	1,016.84	8.36	1.65
Class C	1,000.00	990.29	8.15	1,000.00	1,016.94	8.26	1.63
Preferred Securities Fund
Class A	1,000.00	719.97	4.32	1,000.00	1,020.11	5.08	1.00
Class C	1,000.00	717.13	7.55	1,000.00	1,016.34	8.87	1.75
Real Estate Securities Fund
Class A	1,000.00	691.44	5.44	1,000.00	1,018.70	6.50	1.28
Class B	1,000.00	688.75	8.79	1,000.00	1,014.73	10.48	2.07
Class C	1,000.00	688.81	8.36	1,000.00	1,015.23	9.98	1.97
Short-Term Bond Fund
Class A	1,000.00	929.29	3.88	1,000.00	1,021.11	4.06	0.80
Class C	1,000.00	924.85	8.23	1,000.00	1,016.59	8.62	1.70
Short-Term Income Fund
Class A	1,000.00	975.95	4.72	1,000.00	1,020.36	4.82	0.95
Class C	1,000.00	973.22	8.28	1,000.00	1,016.74	8.47	1.67
SmallCap Blend Fund
Class A	1,000.00	728.55	6.39	1,000.00	1,017.75	7.46	1.47
Class B	1,000.00	725.63	9.85	1,000.00	1,013.72	11.49	2.27
Class C	1,000.00	725.34	9.50	1,000.00	1,014.13	11.09	2.19
SmallCap Growth Fund
Class A	1,000.00	666.26	7.87	1,000.00	1,015.69	9.53	1.88
Class B	1,000.00	664.17	10.71	1,000.00	1,012.27	12.95	2.56
Class C	1,000.00	665.84	9.21	1,000.00	1,014.08	11.14	2.20
SmallCap Growth Fund II
Class A	1,000.00	691.53	8.25	1,000.00	1,015.38	9.83	1.94
Class B	1,000.00	689.52	11.42	1,000.00	1,011.61	13.60	2.69
Class C	1,000.00	689.66	11.43	1,000.00	1,011.61	13.60	2.69
SmallCap Value Fund
Class A	1,000.00	796.12	6.10	1,000.00	1,018.35	6.85	1.35
Class B	1,000.00	792.13	10.27	1,000.00	1,013.67	11.54	2.28
Class C	1,000.00	793.89	9.33	1,000.00	1,014.73	10.48	2.07
Tax-Exempt Bond Fund
Class A	1,000.00	903.93	3.64	1,000.00	1,021.32	3.86	0.76
Class B	1,000.00	902.07	5.50	1,000.00	1,019.36	5.84	1.15
Class C	1,000.00	899.68	7.88	1,000.00	1,016.84	8.36	1.65
Tax-Exempt Bond Fund
(Excluding Interest Expense & Fees)
Class A	1,000.00	995.08	2.72	1,000.00	1,021.37	2.76	0.54
Class B	1,000.00	993.10	4.67	1,000.00	1,019.41	4.75	0.93
Class C	1,000.00	991.98	7.18	1,000.00	1,016.89	7.30	1.43
Ultra Short Bond Fund
Class A	1,000.00	926.04	3.68	1,000.00	1,021.32	3.86	0.76
Class C	1,000.00	921.81	7.25	1,000.00	1,017.60	7.61	1.50
West Coast Equity Fund
Class A	1,000.00	745.93	4.26	1,000.00	1,020.26	4.93	0.97
Class B	1,000.00	742.25	8.45	1,000.00	1,015.43	9.78	1.93
Class C	1,000.00	742.15	8.54	1,000.00	1,015.33	9.88	1.95

^(a) Expenses are equal to a fund's annualized expense ratio multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).

85

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
			Disciplined
	Bond & Mortgage	California	LargeCap Blend
Amounts in thousands, except per share amounts	Securities Fund	Municipal Fund	Fund
Investment in securities--at cost	$ 3,817,715	$ 390,943	$ 2,462,870
Assets
Investment in securities--at value	$ 3,273,985(a)	$ 333,705	$ 2,022,950
Cash	12,117	100	20
Receivables:
Capital Shares sold	7,867	1,270	2,011
Custodian credits	–	2	–
Dividends and interest	27,309	5,337	2,602
Expense reimbursement from Manager	23	–	1
Expense reimbursement from Underwriter	8	–	–
Investment securities sold	34,083	2,961	15,400
Swap premiums paid	405	–	–
Variation margin on futures contracts	–	–	579
Other assets	7	–	5
Total Assets	3,355,804	343,375	2,043,568
Liabilities
Accrued management and investment advisory fees	1,114	139	997
Accrued administrative service fees	23	–	2
Accrued distribution fees	138	115	73
Accrued service fees	27	–	2
Accrued transfer agent fees	207	50	227
Accrued directors' expenses	–	–	1
Accrued other expenses	101	53	149
Payables:
Capital Shares reacquired	1,278	881	691
Dividends payable	7,194	1,332	–
Line of credit	–	2,850	–
Interest expense and fees payable	–	69	–
Investment securities purchased	574,274	974	18,473
Unrealized loss on swap agreements	2,387	–	–
Variation margin on futures contracts	63	–	–
Collateral obligation on securities loaned, at value	304,575	–	–
Floating rate notes issued	–	17,607	–
Total Liabilities	891,381	24,070	20,615
Net Assets Applicable to Outstanding Shares	$ 2,464,423	$ 319,305	$ 2,022,953
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 3,077,555	$ 388,231	$ 2,780,442
Accumulated undistributed (overdistributed) net investment income (operating loss)	5,426	614	31,050
Accumulated undistributed (overdistributed) net realized gain (loss)	(72,165)	(12,302 )	(349,618)
Net unrealized appreciation (depreciation) of investments	(546,393)	(57,238)	(438,921)
Total Net Assets	$ 2,464,423	$ 319,305	$ 2,022,953
Capital Stock (par value: $.01 a share):
Shares authorized	715,000	300,000	905,000
Net Asset Value Per Share:
Class A: Net Assets	$ 116,109	$ 250,177	$ 218,451
Shares Issued and Outstanding	13,633	28,475	22,006
Net Asset Value per share	$ 8.52	$ 8.79	$ 9.93
Maximum Offering Price	$ 8.92(b)	$ 9.20(b)	$ 10.51(c)
Class B: Net Assets	$ 14,841	$ 61,118	$ 25,190
Shares Issued and Outstanding	1,742	6,956	2,579
Net Asset Value per share	$ 8.52(d)	$ 8.79(d)	$ 9.77(d)
Class C: Net Assets	$ 2,263	$ 8,010	$ 1,526
Shares Issued and Outstanding	266	911	155
Net Asset Value per share	$ 8.51(d)	$ 8.79(d)	$ 9.85(d)
Class J: Net Assets	$ 186,176	N/A	N/A
Shares Issued and Outstanding	21,743
Net Asset Value per share	$ 8.56(d)
Institutional: Net Assets	$ 1,971,313	N/A	$ 1,763,971
Shares Issued and Outstanding	231,528		177,360
Net Asset Value per share	$ 8.51		$ 9.95
R-1: Net Assets	$ 6,999	N/A	$ 1,148
Shares Issued and Outstanding	822		117
Net Asset Value per share	$ 8.51		$ 9.85
R-2: Net Assets	$ 28,127	N/A	$ 1,668
Shares Issued and Outstanding	3,328		170
Net Asset Value per share	$ 8.45		$ 9.80
R-3: Net Assets	$ 48,733	N/A	$ 6,630
Shares Issued and Outstanding	5,750		674
Net Asset Value per share	$ 8.48		$ 9.84
R-4: Net Assets	$ 22,799	N/A	$ 3,006
Shares Issued and Outstanding	2,651		304
Net Asset Value per share	$ 8.60		$ 9.88
R-5: Net Assets	$ 67,063	N/A	$ 1,363
Shares Issued and Outstanding	7,905		137
Net Asset Value per share	$ 8.48		$ 9.91

(a)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

86

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Diversified		Equity Income	Global Real Estate
Amounts in thousands, except per share amounts	International Fund		Fund(a)	Securities Fund
Investment in securities--at cost	$ 1,783,789		$ 2,591,513	$ 6,921
Foreign currency--at cost	$ 339		–	$ 134
Assets
Investment in securities--at value	$ 1,247,667		$ 2,165,298	$ 4,450
Foreign currency--at value		335	–	132
Cash		–	10	8
Receivables:
Capital Shares sold		972	830	–
Dividends and interest		3,818	6,633	17
Expense reimbursement from Manager		6	–	30
Expense reimbursement from Underwriter		7	–	–
Foreign currency contracts		–	–	133
Foreign tax refund		74	–	–
Investment securities sold		10,072	–	–
Other assets		5	1	–
Total Assets	1,262,956		2,172,772	4,770
Liabilities
Accrued management and investment advisory fees		962	965	4
Accrued administrative service fees		22	–	–
Accrued distribution fees		175	428	1
Accrued service fees		27	–	–
Accrued transfer agent fees		407	600	3
Accrued directors' expenses		2	3	–
Accrued other expenses		572	394	22
Cash overdraft		2,024	–	–
Payables:
Capital Shares reacquired		506	3,530	–
Foreign currency contracts		–	–	79
Investment securities purchased		16,772	10,292	19
Total Liabilities		21,469	16,212	128
Net Assets Applicable to Outstanding Shares	$ 1,241,487		$ 2,156,560	$ 4,642
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,988,324		$ 2,868,807	$ 8,778
Accumulated undistributed (overdistributed) net investment income (operating loss)		29,054	12,493	(14)
Accumulated undistributed (overdistributed) net realized gain (loss)		(239,793)	(298,525)	(1,703)
Net unrealized appreciation (depreciation) of investments		(536,122)	(426,215)	(2,471)
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		24	–	52
Total Net Assets	$ 1,241,487		$ 2,156,560	$ 4,642
Capital Stock (par value: $.01 a share):
Shares authorized		910,000	650,000	300,000
Net Asset Value Per Share:
Class A: Net Assets	$ 257,621		$ 712,089	$ 2,704
Shares Issued and Outstanding		34,651	51,572	537
Net Asset Value per share	$ 7.43		$ 13.81	$ 5.04
Maximum Offering Price	$ 7.86(b)		$ 14.61(b)	$ 5.33(b)
Class B: Net Assets	$ 27,621		$ 177,768	N/A
Shares Issued and Outstanding		3,750	12,998
Net Asset Value per share	$ 7.37(c)		$ 13.68(c)
Class C: Net Assets	$ 11,322		$ 134,522	$ 932
Shares Issued and Outstanding		1,533	9,928	187
Net Asset Value per share	$ 7.39(c)		$ 13.55(c)	$ 4.99(c)
Class J: Net Assets	$ 145,271		N/A	N/A
Shares Issued and Outstanding		19,724
Net Asset Value per share	$ 7.37(c)
Institutional: Net Assets	$ 621,394		$ 1,132,181	$ 1,006
Shares Issued and Outstanding		83,486	81,902	200
Net Asset Value per share	$ 7.44		$ 13.82	$ 5.03
R-1: Net Assets	$ 6,336		N/A	N/A
Shares Issued and Outstanding		858
Net Asset Value per share	$ 7.38
R-2: Net Assets	$ 18,080		N/A	N/A
Shares Issued and Outstanding		2,464
Net Asset Value per share	$ 7.34
R-3: Net Assets	$ 57,078		N/A	N/A
Shares Issued and Outstanding		7,714
Net Asset Value per share	$ 7.40
R-4: Net Assets	$ 36,959		N/A	N/A
Shares Issued and Outstanding		4,920
Net Asset Value per share	$ 7.51
R-5: Net Assets	$ 59,805		N/A	N/A
Shares Issued and Outstanding		8,043
Net Asset Value per share	$ 7.44

(a)	Effective June 13, 2008, Equity Income Fund I changed its name to Equity Income Fund.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

87

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Government &
	High Quality Bond
Amounts in thousands, except per share amounts	Fund	High Yield Fund(a)	Income Fund
Investment in securities--at cost	$ 477,302	$ 1,835,679	$ 1,075,116
Investment in affiliated securities--at cost	$ –	$ 33,507	$ –
Foreign currency--at cost	–	$ 4,542	–
Assets
Investment in securities--at value	$ 442,152(b)	$ 1,330,724	$ 915,378(b)
Investment in affiliated securities--at value	–	$ 29,942	–
Foreign currency--at value	–	4,197	–
Cash	920	277	10
Receivables:
Capital Shares sold	1,384	14,502	5,507
Dividends and interest	2,321	34,432	15,190
Expense reimbursement from Manager	–	–	9
Expense reimbursement from Underwriter	5	–	–
Investment securities sold	20,038	–	–
Unrealized gain on swap agreements	–	9	–
Variation margin on futures contracts	70	–	–
Other assets	19	–	–
Total Assets	466,909	1,414,083	936,094
Liabilities
Accrued management and investment advisory fees	128	639	414
Accrued administrative service fees	6	–	–
Accrued distribution fees	117	324	86
Accrued service fees	7	–	–
Accrued transfer agent fees	157	256	79
Accrued directors' expenses	–	1	1
Accrued other expenses	75	189	54
Payables:
Capital Shares reacquired	361	5,023	1,808
Dividends payable	1,115	9,462	5,522
Investment securities purchased	79,660	12,302	8,382
Swap premiums received	–	5,598	–
Unrealized loss on swap agreements	53	–	–
Variation margin on futures contracts	16	–	–
Collateral obligation on securities loaned, at value	24,823	–	1,497
Total Liabilities	106,518	33,794	17,843
Net Assets Applicable to Outstanding Shares	$ 360,391	$ 1,380,289	$ 918,251
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 404,780	$ 1,896,368	$ 1,092,051
Accumulated undistributed (overdistributed) net investment income (operating loss)	844	(1,354 )	(8,726)
Accumulated undistributed (overdistributed) net realized gain (loss)	(10,448)	(5,508 )	(5,336)
Net unrealized appreciation (depreciation) of investments	(34,785)	(508,511 )	(159,738)
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency	–	(706)	–
Total Net Assets	$ 360,391	$ 1,380,289	$ 918,251
Capital Stock (par value: $.01 a share):
Shares authorized	730,000	600,000	600,000
Net Asset Value Per Share:
Class A: Net Assets	$ 170,968	$ 765,971	$ 122,603
Shares Issued and Outstanding	18,304	126,070	15,662
Net Asset Value per share	$ 9.34	$ 6.08	$ 7.83
Maximum Offering Price	$ 9.78(c)	$ 6.37(c)	$ 8.20(c)
Class B: Net Assets	$ 32,602	$ 49,140	$ 51,278
Shares Issued and Outstanding	3,490	8,045	6,528
Net Asset Value per share	$ 9.34(d)	$ 6.11(d)	$ 7.85(d)
Class C: Net Assets	$ 7,666	$ 120,324	$ 15,103
Shares Issued and Outstanding	819	19,702	1,924
Net Asset Value per share	$ 9.36(d)	$ 6.11(d)	$ 7.85(d)
Class J: Net Assets	$ 101,922	N/A	N/A
Shares Issued and Outstanding	10,868
Net Asset Value per share	$ 9.38(d)
Institutional: Net Assets	$ 3,955	$ 444,854	$ 729,267
Shares Issued and Outstanding	423	73,379	92,958
Net Asset Value per share	$ 9.36	$ 6.06	$ 7.85
R-1: Net Assets	$ 1,291	N/A	N/A
Shares Issued and Outstanding	138
Net Asset Value per share	$ 9.34
R-2: Net Assets	$ 10,801	N/A	N/A
Shares Issued and Outstanding	1,163
Net Asset Value per share	$ 9.29
R-3: Net Assets	$ 12,471	N/A	N/A
Shares Issued and Outstanding	1,342
Net Asset Value per share	$ 9.29
R-4: Net Assets	$ 4,726	N/A	N/A
Shares Issued and Outstanding	508
Net Asset Value per share	$ 9.31
R-5: Net Assets	$ 13,989	N/A	N/A
Shares Issued and Outstanding	1,502
Net Asset Value per share	$ 9.31

(a)	Effective June 13, 2008, High Yield Fund II changed its name to High Yield Fund.
(b)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

88

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
			International
	Inflation Protection		Emerging Markets	International
Amounts in thousands, except per share amounts	Fund		Fund	Growth Fund
Investment in securities--at cost	$ 602,604		$ 1,138,943	$ 1,906,704
Foreign currency--at cost		–	$ 1,063	–
Assets
Investment in securities--at value	$ 492,979(a)		$ 703,262	$ 1,303,899
Foreign currency--at value		–	1,052	–
Cash		406	–	10,862
Receivables:
Capital Shares sold		2,869	1,428	1,789
Dividends and interest		2,363	2,421	4,277
Expense reimbursement from Manager		3	–	7
Expense reimbursement from Underwriter		–	5	2
Foreign tax refund		–	285	–
Investment securities sold		795	775	23,018
Unrealized gain on swap agreements		47	–	–
Variation margin on futures contracts		–	–	368
Total Assets		499,462	709,228	1,344,222
Liabilities
Accrued management and investment advisory fees		148	735	1,155
Accrued administrative service fees		–	7	6
Accrued distribution fees		8	90	23
Accrued service fees		1	8	7
Accrued transfer agent fees		8	220	22
Accrued directors' expenses		–	1	1
Accrued other expenses		29	573	278
Cash overdraft		–	108	–
Payables:
Capital Shares reacquired		22	448	131
Dividends payable		119	–	–
Investment securities purchased		–	2,797	19,514
Unrealized loss on swap agreements		12,457	–	–
Collateral obligation on securities loaned, at value		78,811	–	–
Total Liabilities		91,603	4,987	21,137
Net Assets Applicable to Outstanding Shares	$ 407,859		$ 704,241	$ 1,323,085
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 543,452		$ 1,325,644	$ 2,241,576
Accumulated undistributed (overdistributed) net investment income (operating loss)		(29)	8,091	29,625
Accumulated undistributed (overdistributed) net realized gain (loss)		(13,529)	(193,663 )	(344,324)
Net unrealized appreciation (depreciation) of investments		(122,035)	(435,681)	(604,000)
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		–	(150)	208
Total Net Assets	$ 407,859		$ 704,241	$ 1,323,085
Capital Stock (par value: $.01 a share):
Shares authorized		680,000	455,000	590,000
Net Asset Value Per Share:
Class A: Net Assets	$ 6,167		$ 85,229	$ 1,760
Shares Issued and Outstanding		863	6,196	253
Net Asset Value per share	$ 7.15		$ 13.76	$ 6.95
Maximum Offering Price	$ 7.49(b)		$ 14.56(c)	$ 7.35(c)
Class B: Net Assets		N/A	$ 12,272	N/A
Shares Issued and Outstanding			917
Net Asset Value per share			$ 13.39(d)
Class C: Net Assets	$ 1,808		$ 6,248	$ 246
Shares Issued and Outstanding		253	460	36
Net Asset Value per share	$ 7.17(d)		$ 13.58(d)	$ 6.95(d)
Class J: Net Assets	$ 7,961		$ 113,241	$ 36,673
Shares Issued and Outstanding		1,126	8,502	5,418
Net Asset Value per share	$ 7.08(d)		$ 13.32(d)	$ 6.77(d)
Institutional: Net Assets	$ 388,931		$ 435,442	$ 1,236,938
Shares Issued and Outstanding		54,939	31,609	178,071
Net Asset Value per share	$ 7.08		$ 13.78	$ 6.95
R-1: Net Assets	$ 430		$ 3,515	$ 1,733
Shares Issued and Outstanding		61	258	252
Net Asset Value per share	$ 7.05		$ 13.60	$ 6.87
R-2: Net Assets	$ 642		$ 6,741	$ 6,325
Shares Issued and Outstanding		91	499	941
Net Asset Value per share	$ 7.05		$ 13.50	$ 6.72
R-3: Net Assets	$ 904		$ 15,136	$ 19,243
Shares Issued and Outstanding		128	1,113	2,694
Net Asset Value per share	$ 7.06		$ 13.59	$ 7.14
R-4: Net Assets	$ 378		$ 11,432	$ 8,349
Shares Issued and Outstanding		54	833	1,220
Net Asset Value per share	$ 7.06		$ 13.72	$ 6.85
R-5: Net Assets	$ 638		$ 14,985	$ 11,818
Shares Issued and Outstanding		91	1,090	1,719
Net Asset Value per share	$ 7.07		$ 13.75	$ 6.88

(a)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

89

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	LargeCap Blend		LargeCap Blend	LargeCap Growth
Amounts in thousands, except per share amounts	Fund I(a)		Fund II(b)	Fund
Investment in securities--at cost	$ 901,846		$ 822,511	$ 2,464,970
Assets
Investment in securities--at value	$ 691,592		$ 644,215	$ 2,050,124
Cash		1,239	4,689	10
Receivables:
Capital Shares sold		1,116	734	8,902
Dividends and interest		952	813	802
Expense reimbursement from Underwriter		1	4	2
Investment securities sold		–	6,052	70,887
Variation margin on futures contracts		–	38	–
Other assets		3	–	12
Total Assets		694,903	656,545	2,130,739
Liabilities
Accrued management and investment advisory fees		262	417	1,165
Accrued administrative service fees		1	10	21
Accrued distribution fees		37	67	140
Accrued service fees		1	12	25
Accrued transfer agent fees		142	91	475
Accrued directors' expenses		–	–	1
Accrued other expenses		60	63	199
Payables:
Capital Shares reacquired		86	253	1,259
Investment securities purchased		–	4,103	25,762
Total Liabilities		589	5,016	29,047
Net Assets Applicable to Outstanding Shares	$ 694,314		$ 651,529	$ 2,101,692
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,013,116		$ 874,462	$ 2,620,769
Accumulated undistributed (overdistributed) net investment income (operating loss)		10,046	7,188	–
Accumulated undistributed (overdistributed) net realized gain (loss)		(116,533)	(52,308)	(104,231)
Net unrealized appreciation (depreciation) of investments		(212,315)	(177,813)	(414,846)
Total Net Assets	$ 694,314		$ 651,529	$ 2,101,692
Capital Stock (par value: $.01 a share):
Shares authorized		455,000	490,000	1,120,000
Net Asset Value Per Share:
Class A: Net Assets	$ 82,298		$ 37,841	$ 321,555
Shares Issued and Outstanding		12,779	5,239	52,832
Net Asset Value per share	$ 6.44		$ 7.22	$ 6.09
Maximum Offering Price	$ 6.81(c)		$ 7.64(c)	$ 6.44(c)
Class B: Net Assets	$ 5,947		$ 14,273	$ 31,802
Shares Issued and Outstanding		944	2,009	5,381
Net Asset Value per share	$ 6.30(d)		$ 7.10(d)	$ 5.91(d)
Class C: Net Assets	$ 581		$ 922	$ 9,311
Shares Issued and Outstanding		91	129	1,551
Net Asset Value per share	$ 6.38(d)		$ 7.13(d)	$ 6.00(d)
Class J: Net Assets	$ 32,309		$ 93,445	$ 38,641
Shares Issued and Outstanding		5,062	13,319	6,645
Net Asset Value per share	$ 6.38(d)		$ 7.02(d)	$ 5.81(d)
Institutional: Net Assets	$ 565,475		$ 431,434	$ 1,531,200
Shares Issued and Outstanding		87,600	59,658	249,659
Net Asset Value per share	$ 6.46		$ 7.23	$ 6.13
R-1: Net Assets	$ 746		$ 2,511	$ 9,129
Shares Issued and Outstanding		117	350	1,521
Net Asset Value per share	$ 6.39		$ 7.17	$ 6.00
R-2: Net Assets	$ 1,988		$ 13,952	$ 15,819
Shares Issued and Outstanding		309	1,964	2,626
Net Asset Value per share	$ 6.43		$ 7.10	$ 6.03
R-3: Net Assets	$ 1,463		$ 21,349	$ 48,883
Shares Issued and Outstanding		227	2,985	7,733
Net Asset Value per share	$ 6.46		$ 7.15	$ 6.32
R-4: Net Assets	$ 1,694		$ 11,356	$ 28,378
Shares Issued and Outstanding		262	1,577	4,519
Net Asset Value per share	$ 6.47		$ 7.20	$ 6.28
R-5: Net Assets	$ 1,813		$ 24,446	$ 66,974
Shares Issued and Outstanding		279	3,402	10,806
Net Asset Value per share	$ 6.50		$ 7.19	$ 6.20

(a)	Effective June 13, 2008, Partners LargeCap Blend Fund I changed its name to LargeCap Blend Fund I.
(b)	Effective June 13, 2008, Partners LargeCap Blend Fund changed its name to LargeCap Blend Fund II.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

90

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	LargeCap Growth		LargeCap Growth	LargeCap S&P 500
Amounts in thousands, except per share amounts	Fund I(a)		Fund II(b)	Index Fund
Investment in securities--at cost	$ 1,605,058		$ 1,736,128	$ 953,444
Assets
Investment in securities--at value	$ 1,191,624		$ 1,372,899	$ 788,982
Cash		10	21,430	14
Receivables:
Capital Shares sold		1,131	98	1,115
Dividends and interest		777	668	1,131
Expense reimbursement from Underwriter		1	1	11
Foreign currency contracts		–	713	–
Investment securities sold		5,659	6,954	170
Variation margin on futures contracts		–	199	167
Total Assets	1,199,202		1,402,962	791,590
Liabilities
Accrued management and investment advisory fees		757	1,049	102
Accrued administrative service fees		5	4	44
Accrued distribution fees		28	12	148
Accrued service fees		6	6	54
Accrued transfer agent fees		94	11	153
Accrued directors' expenses		1	–	1
Accrued other expenses		59	34	101
Payables:
Capital Shares reacquired		756	464	435
Line of credit		2,580	–	–
Investment securities purchased		659	12,505	459
Total Liabilities		4,945	14,085	1,497
Net Assets Applicable to Outstanding Shares	$ 1,194,257		$ 1,388,877	$ 790,093
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,713,501		$ 1,867,883	$ 971,362
Accumulated undistributed (overdistributed) net investment income (operating loss)		–	5,743	13,357
Accumulated undistributed (overdistributed) net realized gain (loss)		(105,810)	(124,015)	(30,926)
Net unrealized appreciation (depreciation) of investments		(413,434)	(361,447)	(163,700)
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		–	713	–
Total Net Assets	$ 1,194,257		$ 1,388,877	$ 790,093
Capital Stock (par value: $.01 a share):
Shares authorized		640,000	570,000	585,000
Net Asset Value Per Share:
Class A: Net Assets	$ 30,125		$ 1,107	$ 53,542
Shares Issued and Outstanding		5,661	189	7,811
Net Asset Value per share	$ 5.32		$ 5.87	$ 6.85
Maximum Offering Price	$ 5.63(c)		$ 6.21(c)	$ 6.95(d)
Class B: Net Assets	$ 5,467		N/A	N/A
Shares Issued and Outstanding		1,060
Net Asset Value per share	$ 5.16(e)
Class C: Net Assets	$ 415		$ 374	$ 2,428
Shares Issued and Outstanding		78	64	357
Net Asset Value per share	$ 5.32(e)		$ 5.78(e)	$ 6.81(e)
Class J: Net Assets	$ 28,875		$ 19,225	$ 247,433
Shares Issued and Outstanding		5,772	3,510	36,446
Net Asset Value per share	$ 5.00(e)		$ 5.48(e)	$ 6.79(e)
Institutional: Net Assets	$ 1,089,367		$ 1,330,829	$ 112,221
Shares Issued and Outstanding		199,974	221,551	16,338
Net Asset Value per share	$ 5.45		$ 6.01	$ 6.87
R-1: Net Assets	$ 1,049		$ 889	$ 7,825
Shares Issued and Outstanding		199	153	1,149
Net Asset Value per share	$ 5.28		$ 5.80	$ 6.81
R-2: Net Assets	$ 7,234		$ 7,131	$ 41,405
Shares Issued and Outstanding		1,404	1,270	6,056
Net Asset Value per share	$ 5.15		$ 5.62	$ 6.84
R-3: Net Assets	$ 13,763		$ 5,857	$ 118,216
Shares Issued and Outstanding		2,585	1,027	17,246
Net Asset Value per share	$ 5.33		$ 5.71	$ 6.85
R-4: Net Assets	$ 3,767		$ 6,937	$ 67,528
Shares Issued and Outstanding		709	1,194	9,806
Net Asset Value per share	$ 5.31		$ 5.81	$ 6.89
R-5: Net Assets	$ 14,195		$ 16,528	$ 139,495
Shares Issued and Outstanding		2,638	2,816	20,137
Net Asset Value per share	$ 5.38		$ 5.87	$ 6.93

(a)	Effective June 13, 2008, Partners LargeCap Growth Fund I changed its name to LargeCap Growth Fund I.
(b)	Effective June 13, 2008, Partners LargeCap Growth Fund II changed its name to LargeCap Growth Fund II.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Maximum offering price equals net asset value plus a front-end sales charge of 1.50% of the offering price or 1.52% of the net asset value.
(e)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

91

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	LargeCap Value		LargeCap Value	MidCap Blend
Amounts in thousands, except per share amounts	Fund		Fund III(a)	Fund
Investment in securities--at cost	$ 749,166		$ 2,458,193	$ 738,261
Assets
Investment in securities--at value	$ 621,143		$ 1,836,191(b)	$ 586,543
Cash		10	18,413	18
Receivables:
Capital Shares sold		821	1,233	351
Dividends and interest		1,045	3,517	230
Expense reimbursement from Underwriter		1	3	6
Investment securities sold		1,791	16,215	–
Variation margin on futures contracts		120	300	–
Other assets		28	–	6
Total Assets		624,959	1,875,872	587,154
Liabilities
Accrued management and investment advisory fees		237	1,175	328
Accrued administrative service fees		1	20	3
Accrued distribution fees		62	65	166
Accrued service fees		1	25	4
Accrued transfer agent fees		194	93	400
Accrued directors' expenses		1	3	–
Accrued other expenses		80	74	149
Payables:
Capital Shares reacquired		296	308	343
Investment securities purchased		1,754	8,336	483
Collateral obligation on securities loaned, at value		–	1,085	–
Total Liabilities		2,626	11,184	1,876
Net Assets Applicable to Outstanding Shares	$ 622,333		$ 1,864,688	$ 585,278
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 858,790		$ 2,577,346	$ 704,760
Accumulated undistributed (overdistributed) net investment income (operating loss)		12,939	37,209	13
Accumulated undistributed (overdistributed) net realized gain (loss)		(119,214)	(131,168)	32,223
Net unrealized appreciation (depreciation) of investments		(130,182)	(618,699)	(151,718)
Total Net Assets	$ 622,333		$ 1,864,688	$ 585,278
Capital Stock (par value: $.01 a share):
Shares authorized		455,000	550,000	490,000
Net Asset Value Per Share:
Class A: Net Assets	$ 171,897		$ 32,423	$ 362,130
Shares Issued and Outstanding		21,679	3,828	37,949
Net Asset Value per share	$ 7.93		$ 8.47	$ 9.54
Maximum Offering Price	$ 8.39(c)		$ 8.96(c)	$ 10.10(c)
Class B: Net Assets	$ 9,598		$ 10,135	$ 35,769
Shares Issued and Outstanding		1,221	1,203	3,780
Net Asset Value per share	$ 7.87(d)		$ 8.42(d)	$ 9.46(d)
Class C: Net Assets	$ 1,130		$ 884	$ 3,639
Shares Issued and Outstanding		144	105	388
Net Asset Value per share	$ 7.89(d)		$ 8.43(d)	$ 9.38(d)
Class J: Net Assets	$ 38,836		$ 66,714	$ 128,240
Shares Issued and Outstanding		4,960	7,983	13,818
Net Asset Value per share	$ 7.83(d)		$ 8.36(d)	$ 9.28(d)
Institutional: Net Assets	$ 392,068		$ 1,592,265	$ 28,740
Shares Issued and Outstanding		49,321	187,516	2,996
Net Asset Value per share	$ 7.95		$ 8.49	$ 9.59
R-1: Net Assets	$ 647		$ 4,834	$ 954
Shares Issued and Outstanding		82	576	102
Net Asset Value per share	$ 7.88		$ 8.40	$ 9.34
R-2: Net Assets	$ 1,735		$ 25,923	$ 2,552
Shares Issued and Outstanding		220	3,105	273
Net Asset Value per share	$ 7.88		$ 8.35	$ 9.36
R-3: Net Assets	$ 1,969		$ 60,137	$ 7,650
Shares Issued and Outstanding		251	6,961	807
Net Asset Value per share	$ 7.87		$ 8.64	$ 9.48
R-4: Net Assets	$ 1,438		$ 23,519	$ 4,998
Shares Issued and Outstanding		182	2,790	518
Net Asset Value per share	$ 7.89		$ 8.43	$ 9.65
R-5: Net Assets	$ 3,015		$ 47,854	$ 10,606
Shares Issued and Outstanding		379	5,648	1,109
Net Asset Value per share	$ 7.95		$ 8.47	$ 9.56

(a)	Effective June 13, 2008, Partners LargeCap Value Fund changed its name to LargeCap Value Fund III.
(b)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

92

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	MidCap Growth		MidCap Growth	MidCap Stock
Amounts in thousands, except per share amounts	Fund I(a)		Fund III(b)	Fund
Investment in securities--at cost	$ 258,464		$ 669,023	$ 425,116
Assets
Investment in securities--at value	$ 176,431		$ 523,907	$ 395,877
Cash		1,293	2,179	10
Receivables:
Capital Shares sold		61	605	28
Dividends and interest		104	252	140
Expense reimbursement from Manager		–	1	–
Expense reimbursement from Underwriter		–	3	–
Investment securities sold		–	7,765	2,412
Variation margin on futures contracts		–	207	–
Total Assets		177,889	534,919	398,467
Liabilities
Accrued management and investment advisory fees		154	452	253
Accrued administrative service fees		1	7	–
Accrued distribution fees		2	28	23
Accrued service fees		2	9	–
Accrued transfer agent fees		4	59	66
Accrued directors' expenses		1	–	–
Accrued other expenses		37	43	84
Payables:
Capital Shares reacquired		–	340	67
Investment securities purchased		–	4,163	1,910
Total Liabilities		201	5,101	2,403
Net Assets Applicable to Outstanding Shares	$ 177,688		$ 529,818	$ 396,064
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 274,035		$ 777,950	$ 431,035
Accumulated undistributed (overdistributed) net investment income (operating loss)		–	–	2,516
Accumulated undistributed (overdistributed) net realized gain (loss)		(14,314)	(104,310 )	(8,248)
Net unrealized appreciation (depreciation) of investments		(82,033)	(143,822 )	(29,239)
Total Net Assets	$ 177,688		$ 529,818	$ 396,064
Capital Stock (par value: $.01 a share):
Shares authorized		430,000	455,000	600,000
Net Asset Value Per Share:
Class A: Net Assets	$ 1,885		$ 21,252	$ 36,639
Shares Issued and Outstanding		276	3,425	3,198
Net Asset Value per share	$ 6.82		$ 6.20	$ 11.46
Maximum Offering Price	$ 7.22(c)		$ 6.56(c)	$ 12.13(c)
Class B: Net Assets		N/A	$ 5,477	$ 12,453
Shares Issued and Outstanding			907	1,174
Net Asset Value per share			$ 6.04(d)	$ 10.60(d)
Class C: Net Assets	$ 202		$ 778	$ 4,296
Shares Issued and Outstanding		30	126	405
Net Asset Value per share	$ 6.72(d)		$ 6.15(d)	$ 10.60(d)
Class J: Net Assets		N/A	$ 20,178	N/A
Shares Issued and Outstanding			3,399
Net Asset Value per share			$ 5.94(d)
Institutional: Net Assets	$ 164,793		$ 423,812	$ 342,676
Shares Issued and Outstanding		23,500	66,503	29,280
Net Asset Value per share	$ 7.01		$ 6.37	$ 11.70
R-1: Net Assets	$ 1,077		$ 775	N/A
Shares Issued and Outstanding		160	126
Net Asset Value per share	$ 6.73		$ 6.13
R-2: Net Assets	$ 2,035		$ 7,120	N/A
Shares Issued and Outstanding		302	1,146
Net Asset Value per share	$ 6.73		$ 6.21
R-3: Net Assets	$ 2,786		$ 23,848	N/A
Shares Issued and Outstanding		410	3,719
Net Asset Value per share	$ 6.80		$ 6.41
R-4: Net Assets	$ 3,430		$ 17,117	N/A
Shares Issued and Outstanding		498	2,667
Net Asset Value per share	$ 6.88		$ 6.42
R-5: Net Assets	$ 1,480		$ 9,461	N/A
Shares Issued and Outstanding		214	1,453
Net Asset Value per share	$ 6.92		$ 6.51

(a)	Effective June 13, 2008, Partners MidCap Growth Fund I changed its name to MidCap Growth Fund I.
(b)	Effective June 13, 2008, Partners MidCap Growth Fund changed its name to MidCap Growth Fund III.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

93

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	MidCap Value		Money Market	Mortgage
Amounts in thousands, except per share amounts	Fund II(a)		Fund	Securities Fund
Investment in securities--at cost	$ 462,949		$ 2,805,384	$ 1,204,827
Assets
Investment in securities--at value	$ 308,781		$ 2,805,384	$ 1,162,026
Cash		111	390	10
Receivables:
Capital Shares sold		1,043	4,138	4,822
Dividends and interest		689	1,686	5,821
Expense reimbursement from Manager		4	–	4
Expense reimbursement from Underwriter		2	–	–
Investment securities sold		–	7,307	388
Other assets		–	27	–
Total Assets		310,630	2,818,932	1,173,071
Liabilities
Accrued management and investment advisory fees		273	897	558
Accrued administrative service fees		6	38	–
Accrued distribution fees		28	484	57
Accrued service fees		7	91	–
Accrued transfer agent fees		40	510	53
Accrued directors' expenses		1	4	–
Accrued other expenses		53	103	62
Payables:
Capital Shares reacquired		590	8,215	1,003
Dividends payable		–	–	4,663
Total Liabilities		998	10,342	6,396
Net Assets Applicable to Outstanding Shares	$ 309,632		$ 2,808,590	$ 1,166,675
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 539,642		$ 2,812,331	$ 1,244,735
Accumulated undistributed (overdistributed) net investment income (operating loss)		3,905	–	(1,745)
Accumulated undistributed (overdistributed) net realized gain (loss)		(79,747)	(3,741 )	(33,514)
Net unrealized appreciation (depreciation) of investments		(154,168)	–	(42,801)
Total Net Assets	$ 309,632		$ 2,808,590	$ 1,166,675
Capital Stock (par value: $.01 a share):
Shares authorized		440,000	17,575,000	855,000
Net Asset Value Per Share:
Class A: Net Assets	$ 6,097		$ 775,670	$ 83,376
Shares Issued and Outstanding		757	776,617	8,062
Net Asset Value per share	$ 8.06		$ 1.00	$ 10.34
Maximum Offering Price	$ 8.53(b)		$ 1.00	$ 10.83(c)
Class B: Net Assets	$ 1,006		$ 87,353	$ 39,613
Shares Issued and Outstanding		127	87,423	3,832
Net Asset Value per share	$ 7.92(d)		$ 1.00(d)	$ 10.34(d)
Class C: Net Assets	$ 744		$ 42,966	$ 6,118
Shares Issued and Outstanding		93	42,997	593
Net Asset Value per share	$ 7.96(d)		$ 1.00(d)	$ 10.32(d)
Class J: Net Assets	$ 46,916		$ 355,746	N/A
Shares Issued and Outstanding		6,150	356,136
Net Asset Value per share	$ 7.63(d)		$ 1.00(d)
Class S: Net Assets		N/A	$ 951,684	N/A
Shares Issued and Outstanding			953,071
Net Asset Value per share			$ 1.00
Institutional: Net Assets	$ 210,043		$ 276,963	$ 1,037,568
Shares Issued and Outstanding		25,833	277,416	100,278
Net Asset Value per share	$ 8.13		$ 1.00	$ 10.35
R-1: Net Assets	$ 906		$ 11,194	N/A
Shares Issued and Outstanding		114	11,204
Net Asset Value per share	$ 7.97		$ 1.00
R-2: Net Assets	$ 9,892		$ 32,085	N/A
Shares Issued and Outstanding		1,282	32,129
Net Asset Value per share	$ 7.72		$ 1.00
R-3: Net Assets	$ 15,018		$ 85,636	N/A
Shares Issued and Outstanding		1,884	85,741
Net Asset Value per share	$ 7.97		$ 1.00
R-4: Net Assets	$ 6,771		$ 30,868	N/A
Shares Issued and Outstanding		851	30,906
Net Asset Value per share	$ 7.95		$ 1.00
R-5: Net Assets	$ 12,239		$ 158,425	N/A
Shares Issued and Outstanding		1,525	158,691
Net Asset Value per share	$ 8.03		$ 1.00

(a)	Effective June 13, 2008, Partners MidCap Value Fund changed its name to MidCap Value Fund II.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

94

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Preferred		Real Estate	Short-Term Bond
Amounts in thousands, except per share amounts	Securities Fund		Securities Fund	Fund
Investment in securities--at cost	$ 1,663,668		$ 1,530,372	$ 233,377
Assets
Investment in securities--at value	$ 1,225,072		$ 1,192,262	$ 198,349(a)
Cash		1,035	10		189
Receivables:
Capital Shares sold		18,818	1,449		956
Dividends and interest		10,931	1,165	1,908
Expense reimbursement from Manager		123	–		–
Expense reimbursement from Underwriter		1	5		2
Investment securities sold		1,044	252		751
Total Assets	1,257,024		1,195,143	202,155
Liabilities
Accrued management and investment advisory fees		738	871		68
Accrued administrative service fees		1	12		1
Accrued distribution fees		135	86		30
Accrued service fees		1	14		1
Accrued transfer agent fees		83	172		51
Accrued directors' expenses		–	1		–
Accrued other expenses		36	82		50
Payables:
Capital Shares reacquired		1,215	420	1,131
Dividends payable		8,677	–		789
Investment securities purchased		8,792	10,502		–
Collateral obligation on securities loaned, at value		–	–	15,642
Total Liabilities		19,678	12,160	17,763
Net Assets Applicable to Outstanding Shares	$ 1,237,346		$ 1,182,983	$ 184,392
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,819,265		$ 1,738,214	$ 233,020
Accumulated undistributed (overdistributed) net investment income (operating loss)		1,294	2,213	(484)
Accumulated undistributed (overdistributed) net realized gain (loss)		(144,617)	(219,334)	(13,116)
Net unrealized appreciation (depreciation) of investments		(438,596)	(338,110)	(35,028)
Total Net Assets	$ 1,237,346		$ 1,182,983	$ 184,392
Capital Stock (par value: $.01 a share):
Shares authorized		505,000	730,000	655,000
Net Asset Value Per Share:
Class A: Net Assets	$ 190,999		$ 64,787	$ 62,240
Shares Issued and Outstanding		28,577	5,475	7,374
Net Asset Value per share	$ 6.68		$ 11.83	$ 8.44
Maximum Offering Price	$ 6.99(b)		$ 12.52(c)	$ 8.66(d)
Class B: Net Assets		N/A	$ 14,551		N/A
Shares Issued and Outstanding			1,240
Net Asset Value per share			$ 11.74(e)
Class C: Net Assets	$ 116,229		$ 4,382	$ 1,641
Shares Issued and Outstanding		17,387	372		194
Net Asset Value per share	$ 6.68(e)		$ 11.77(e)	$ 8.44(e)
Class J: Net Assets	$ 16,099		$ 107,631	$ 47,917
Shares Issued and Outstanding		2,444	9,277	5,667
Net Asset Value per share	$ 6.59(e)		$ 11.60(e)	$ 8.46(e)
Institutional: Net Assets	$ 909,039		$ 894,685	$ 66,596
Shares Issued and Outstanding		136,530	75,637	7,891
Net Asset Value per share	$ 6.66		$ 11.83	$ 8.44
R-1: Net Assets	$ 593		$ 2,945	$ 433
Shares Issued and Outstanding		89	251		51
Net Asset Value per share	$ 6.65		$ 11.74	$ 8.44
R-2: Net Assets	$ 667		$ 11,889	$ 152
Shares Issued and Outstanding		101	1,038		18
Net Asset Value per share	$ 6.62		$ 11.46	$ 8.46
R-3: Net Assets	$ 1,518		$ 28,885	$ 2,900
Shares Issued and Outstanding		229	2,482		342
Net Asset Value per share	$ 6.63		$ 11.64	$ 8.48
R-4: Net Assets	$ 1,710		$ 12,277	$ 1,330
Shares Issued and Outstanding		258	1,062		159
Net Asset Value per share	$ 6.63		$ 11.56	$ 8.36
R-5: Net Assets	$ 492		$ 40,951	$ 1,183
Shares Issued and Outstanding		74	3,538		141
Net Asset Value per share	$ 6.64		$ 11.57	$ 8.42

(a)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Maximum offering price equals net asset value plus a front-end sales charge of 2.50% of the offering price or 2.56% of the net asset value.
(e)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

95

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Short-Term Income		SmallCap Blend	SmallCap Growth
Amounts in thousands, except per share amounts	Fund		Fund	Fund
Investment in securities--at cost	$ 307,063		$ 249,304	$ 312,120
Assets
Investment in securities--at value	$ 293,129		$ 192,270	$ 224,249
Cash		10	790	48
Receivables:
Capital Shares sold		1,350	17	212
Dividends and interest		3,295	115	31
Expense reimbursement from Manager		2	–	2
Expense reimbursement from Underwriter		–	–	1
Investment securities sold		3,095	34	1,229
Variation margin on futures contracts		28	300	–
Total Assets		300,909	193,526	225,772
Liabilities
Accrued management and investment advisory fees		143	124	141
Accrued administrative service fees		–	1	–
Accrued distribution fees		12	35	19
Accrued service fees		–	1	1
Accrued transfer agent fees		20	146	77
Accrued directors' expenses		1	1	1
Accrued other expenses		29	77	75
Payables:
Capital Shares reacquired		905	91	59
Dividends payable		1,238	–	–
Investment securities purchased		–	15	1,625
Total Liabilities		2,348	491	1,998
Net Assets Applicable to Outstanding Shares	$ 298,561		$ 193,035	$ 223,774
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 318,355		$ 268,282	$ 336,640
Accumulated undistributed (overdistributed) net investment income (operating loss)		19	334	–
Accumulated undistributed (overdistributed) net realized gain (loss)		(5,605)	(18,421 )	(24,995)
Net unrealized appreciation (depreciation) of investments		(14,208)	(57,160 )	(87,871)
Total Net Assets	$ 298,561		$ 193,035	$ 223,774
Capital Stock (par value: $.01 a share):
Shares authorized		550,000	455,000	705,000
Net Asset Value Per Share:
Class A: Net Assets	$ 36,725		$ 66,286	$ 29,467
Shares Issued and Outstanding		3,290	6,401	5,429
Net Asset Value per share	$ 11.16		$ 10.36	$ 5.43
Maximum Offering Price	$ 11.45(a)		$ 10.96(b)	$ 5.75(b)
Class B: Net Assets		N/A	$ 10,021	$ 2,931
Shares Issued and Outstanding			998	551
Net Asset Value per share			$ 10.05(c)	$ 5.32(c)
Class C: Net Assets	$ 4,892		$ 836	$ 1,184
Shares Issued and Outstanding		438	82	221
Net Asset Value per share	$ 11.17(c)		$ 10.22(c)	$ 5.36(c)
Class J: Net Assets		N/A	$ 83,926	$ 21,941
Shares Issued and Outstanding			8,417	4,301
Net Asset Value per share			$ 9.97(c)	$ 5.10(c)
Institutional: Net Assets	$ 256,944		$ 26,459	$ 162,099
Shares Issued and Outstanding		23,006	2,492	29,472
Net Asset Value per share	$ 11.17		$ 10.62	$ 5.50
R-1: Net Assets		N/A	$ 218	$ 312
Shares Issued and Outstanding			21	59
Net Asset Value per share			$ 10.20	$ 5.29
R-2: Net Assets		N/A	$ 1,312	$ 381
Shares Issued and Outstanding			129	71
Net Asset Value per share			$ 10.18	$ 5.38
R-3: Net Assets		N/A	$ 1,050	$ 2,071
Shares Issued and Outstanding			102	380
Net Asset Value per share			$ 10.32	$ 5.45
R-4: Net Assets		N/A	$ 1,746	$ 1,231
Shares Issued and Outstanding			166	221
Net Asset Value per share			$ 10.51	$ 5.58
R-5: Net Assets		N/A	$ 1,181	$ 2,157
Shares Issued and Outstanding			111	384
Net Asset Value per share			$ 10.61	$ 5.62

(a)	Maximum offering price equals net asset value plus a front-end sales charge of 2.50% of the offering price or 2.56% of the net asset value.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.

See accompanying notes.

96

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	SmallCap Growth		SmallCap Value	Tax-Exempt Bond
Amounts in thousands, except per share amounts	Fund II(a)		Fund	Fund(b)
Investment in securities--at cost	$ 439,531		$ 548,463	$ 274,519
Assets
Investment in securities--at value	$ 339,711		$ 444,557	$ 243,116
Cash		9,265	10	97
Receivables:
Capital Shares sold		39	354	777
Custodian credits		–	–	2
Dividends and interest		72	352	4,277
Expense reimbursement from Manager		1	9	5
Expense reimbursement from Underwriter		1	2	–
Investment securities sold		2,144	–	4,614
Variation margin on futures contracts		573	–	–
Other assets		–	–	9
Total Assets		351,806	445,284	252,897
Liabilities
Accrued management and investment advisory fees		310	274	102
Accrued administrative service fees		5	6	–
Accrued distribution fees		16	29	61
Accrued service fees		6	7	–
Accrued transfer agent fees		47	49	36
Accrued directors' expenses		1	–	–
Accrued other expenses		49	35	32
Payables:
Capital Shares reacquired		235	92	72
Dividends payable		–	–	1,026
Interest expense and fees payable		–	–	88
Investment securities purchased		2,581	1,862	2,297
Variation margin on futures contracts		27	–	–
Floating rate notes issued		–	–	12,903
Total Liabilities		3,277	2,354	16,617
Net Assets Applicable to Outstanding Shares	$ 348,529		$ 442,930	$ 236,280
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 485,199		$ 610,581	$ 272,163
Accumulated undistributed (overdistributed) net investment income (operating loss)		–	1,843	575
Accumulated undistributed (overdistributed) net realized gain (loss)		(37,329)	(65,588 )	(5,055)
Net unrealized appreciation (depreciation) of investments		(99,341)	(103,906 )	(31,403)
Total Net Assets	$ 348,529		$ 442,930	$ 236,280
Capital Stock (par value: $.01 a share):
Shares authorized		440,000	830,000	300,000
Net Asset Value Per Share:
Class A: Net Assets	$ 10,302		$ 14,995	$ 220,771
Shares Issued and Outstanding		1,882	1,219	35,000
Net Asset Value per share	$ 5.47		$ 12.30	$ 6.31
Maximum Offering Price	$ 5.79(c)		$ 13.02(c)	$ 6.61(d)
Class B: Net Assets	$ 3,699		$ 2,789	$ 11,837
Shares Issued and Outstanding		695	231	1,876
Net Asset Value per share	$ 5.33(e)		$ 12.08(e)	$ 6.31(e)
Class C: Net Assets	$ 339		$ 3,481	$ 3,672
Shares Issued and Outstanding		63	285	582
Net Asset Value per share	$ 5.40(e)		$ 12.21(e)	$ 6.31(e)
Class J: Net Assets	$ 14,841		$ 43,601	N/A
Shares Issued and Outstanding		2,971	3,661
Net Asset Value per share	$ 4.99(e)		$ 11.91(e)
Institutional: Net Assets	$ 279,437		$ 329,103	N/A
Shares Issued and Outstanding		49,342	26,613
Net Asset Value per share	$ 5.66		$ 12.37
R-1: Net Assets	$ 1,187		$ 1,261	N/A
Shares Issued and Outstanding		217	104
Net Asset Value per share	$ 5.45		$ 12.17
R-2: Net Assets	$ 6,520		$ 5,716	N/A
Shares Issued and Outstanding		1,241	470
Net Asset Value per share	$ 5.25		$ 12.17
R-3: Net Assets	$ 7,908		$ 9,695	N/A
Shares Issued and Outstanding		1,466	788
Net Asset Value per share	$ 5.40		$ 12.30
R-4: Net Assets	$ 5,468		$ 7,085	N/A
Shares Issued and Outstanding		1,000	572
Net Asset Value per share	$ 5.47		$ 12.38
R-5: Net Assets	$ 18,828		$ 25,204	N/A
Shares Issued and Outstanding		3,399	2,025
Net Asset Value per share	$ 5.54		$ 12.44

(a)	Effective June 13, 2008, Partners SmallCap Growth Fund II changed its name to SmallCap Growth Fund II.
(b)	Effective June 13, 2008, Tax-Exempt Bond Fund I changed its name to Tax-Exempt Bond Fund.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(e)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

97

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Ultra Short Bond	West Coast Equity
Amounts in thousands, except per share amounts	Fund	Fund
Investment in securities--at cost	$ 210,150	$ 729,620
Assets
Investment in securities--at value	$ 163,690(a)	$ 907,724
Cash	43	10
Receivables:
Capital Shares sold	535	459
Dividends and interest	1,224	345
Expense reimbursement from Manager	1	–
Expense reimbursement from Underwriter	1	–
Investment securities sold	570	5,523
Variation margin on futures contracts	20	–
Total Assets	166,084	914,061
Liabilities
Accrued management and investment advisory fees	59	441
Accrued administrative service fees	1	–
Accrued distribution fees	13	175
Accrued service fees	2	–
Accrued transfer agent fees	13	297
Accrued directors' expenses	1	1
Accrued other expenses	32	217
Payables:
Capital Shares reacquired	136	876
Dividends payable	475	–
Investment securities purchased	–	8,263
Collateral obligation on securities loaned, at value	485	–
Total Liabilities	1,217	10,270
Net Assets Applicable to Outstanding Shares	$ 164,867	$ 903,791
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 215,072	$ 678,439
Accumulated undistributed (overdistributed) net investment income (operating loss)	113	6,033
Accumulated undistributed (overdistributed) net realized gain (loss)	(3,687)	41,215
Net unrealized appreciation (depreciation) of investments	(46,631)	178,104
Total Net Assets	$ 164,867	$ 903,791
Capital Stock (par value: $.01 a share):
Shares authorized	695,000	600,000
Net Asset Value Per Share:
Class A: Net Assets	$ 5,169	$ 390,075
Shares Issued and Outstanding	668	12,704
Net Asset Value per share	$ 7.73	$ 30.71
Maximum Offering Price	$ 7.81(b)	$ 32.50(c)
Class B: Net Assets	N/A	$ 92,828
Shares Issued and Outstanding		3,493
Net Asset Value per share		$ 26.58(d)
Class C: Net Assets	$ 1,090	$ 12,632
Shares Issued and Outstanding	141	472
Net Asset Value per share	$ 7.73(d)	$ 26.71(d)
Class J: Net Assets	$ 22,179	N/A
Shares Issued and Outstanding	2,891
Net Asset Value per share	$ 7.67(d)
Institutional: Net Assets	$ 126,881	$ 408,256
Shares Issued and Outstanding	16,428	13,121
Net Asset Value per share	$ 7.72	$ 31.12
R-1: Net Assets	$ 9	N/A
Shares Issued and Outstanding	1
Net Asset Value per share	$ 7.67
R-2: Net Assets	$ 6,142	N/A
Shares Issued and Outstanding	801
Net Asset Value per share	$ 7.67
R-3: Net Assets	$ 2,413	N/A
Shares Issued and Outstanding	314
Net Asset Value per share	$ 7.69
R-4: Net Assets	$ 9	N/A
Shares Issued and Outstanding	1
Net Asset Value per share	$ 7.65
R-5: Net Assets	$ 975	N/A
Shares Issued and Outstanding	127
Net Asset Value per share	$ 7.71

(a)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 1.00% of the offering price or 1.01% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

98

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
				Disciplined
	Bond & Mortgage		California Municipal	LargeCap Blend
Amounts in thousands	Securities Fund		Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 4,236		$ –	$ 61,479
Interest		154,031	21,829	263
Securities lending		5,083	–	334
Total Income		163,350	21,829	62,076
Expenses:
Management and investment advisory fees		14,022	1,902	17,493
Distribution fees - Class A		366	724	1,077
Distribution fees - Class B		202	827	440
Distribution fees - Class C		27	85	21
Distribution fees - Class J		1,059	N/A	N/A
Distribution fees - R-1		26	N/A	5
Distribution fees - R-2		108	N/A	7
Distribution fees - R-3		153	N/A	21
Distribution fees - R-4		29	N/A	5
Administrative service fees - R-1		20	N/A	4
Administrative service fees - R-2		72	N/A	5
Administrative service fees - R-3		92	N/A	13
Administrative service fees - R-4		38	N/A	6
Administrative service fees - R-5		109	N/A	2
Registration fees - Class A		16	23	21
Registration fees - Class B		16	25	15
Registration fees - Class C		16	18	15
Registration fees - Class J		21	N/A	N/A
Service fees - R-1		18	N/A	4
Service fees - R-2		90	N/A	6
Service fees - R-3		104	N/A	14
Service fees - R-4		44	N/A	7
Service fees - R-5		149	N/A	3
Shareholder reports - Class A		48	42	266
Shareholder reports - Class B		11	16	51
Shareholder reports - Class C		1	1	1
Shareholder reports - Class J		43	N/A	N/A
Transfer agent fees - Class A		383	147	667
Transfer agent fees - Class B		84	40	149
Transfer agent fees - Class C		13	8	12
Transfer agent fees - Class J		293	N/A	N/A
Custodian fees		13	–	12
Directors' expenses		18	15	18
Interest expense and fees		–	916	–
Professional fees		17	16	17
Other expenses		69	16	58
Total Gross Expenses		17,790	4,821	20,435
Less: Custodian credits		–	5	–
Less: Reimbursement from Manager - Class A		192	4	166
Less: Reimbursement from Manager - Class B		94	4	8
Less: Reimbursement from Manager - Class C		24	10	23
Less: Reimbursement from Underwriter - Class J		115	N/A	N/A
Total Net Expenses		17,365	4,798	20,238
Net Investment Income (Operating Loss)		145,985	17,031	41,838
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(49,622)	(10,093 )	(332,555)
Futures contracts		(2,023)	(728 )	(7,863)
Swap agreements		(4,096)	–	–
Change in unrealized appreciation/depreciation of:
Investments		(515,096)	(62,782)	(1,008,585)
Futures contracts		(276)	(70)	999
Swap agreements		(2,013)	–	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(573,126)	(73,673)	(1,348,004)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (427,141)		$ (56,642)	$ (1,306,166)

See accompanying notes.

99

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Diversified			Global Real Estate
Amounts in thousands	International Fund		Equity Income Fund	Securities Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 62,799		$ 99,442	$ 237
Withholding tax		(7,298)	–	(21)
Interest		481	2,908	13
Securities lending		2,274	1,948	–
Total Income		58,256	104,298	229
Expenses:
Management and investment advisory fees		18,330	17,555	60
Distribution fees - Class A		1,249	3,247	9
Distribution fees - Class B		551	2,897	N/A
Distribution fees - Class C		202	2,214	14
Distribution fees - Class J		1,151	N/A	N/A
Distribution fees - R-1		34	N/A	N/A
Distribution fees - R-2		98	N/A	N/A
Distribution fees - R-3		229	N/A	N/A
Distribution fees - R-4		49	N/A	N/A
Administrative service fees - R-1		27	N/A	N/A
Administrative service fees - R-2		65	N/A	N/A
Administrative service fees - R-3		138	N/A	N/A
Administrative service fees - R-4		63	N/A	N/A
Administrative service fees - R-5		120	N/A	N/A
Registration fees - Class A		23	66	29
Registration fees - Class B		16	25	N/A
Registration fees - Class C		16	23	29
Registration fees - Class J		23	N/A	N/A
Service fees - R-1		24	N/A	N/A
Service fees - R-2		81	N/A	N/A
Service fees - R-3		156	N/A	N/A
Service fees - R-4		74	N/A	N/A
Service fees - R-5		164	N/A	N/A
Shareholder reports - Class A		154	580	1
Shareholder reports - Class B		38	204	N/A
Shareholder reports - Class C		10	79	–
Shareholder reports - Class J		38	N/A	N/A
Transfer agent fees - Class A		995	1,580	14
Transfer agent fees - Class B		170	585	N/A
Transfer agent fees - Class C		53	306	7
Transfer agent fees - Class J		328	N/A	N/A
Custodian fees		1,073	–	42
Directors' expenses		36	55	2
Professional fees		50	23	23
Other expenses		64	61	1
Total Gross Expenses		25,892	29,500	231
Less: Reimbursement from Manager - Class A		138	–	71
Less: Reimbursement from Manager - Class C		50	–	46
Less: Reimbursement from Manager - Institutional		36	–	15
Less: Reimbursement from Manager - R-2		2	N/A	N/A
Less: Reimbursement from Manager - R-3		4	N/A	N/A
Less: Reimbursement from Manager - R-4		2	N/A	N/A
Less: Reimbursement from Manager - R-5		5	N/A	N/A
Less: Reimbursement from Underwriter - Class J		126	N/A	N/A
Total Net Expenses		25,529	29,500	99
Net Investment Income (Operating Loss)		32,727	74,798	130
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions (net of foreign tax refund of $37, $0 and $0,
respectively)		(235,388)	(280,808)	(1,687)
Foreign currency transactions		(855)	–	(16)
Change in unrealized appreciation/depreciation of:
Investments		(1,092,613)	(1,161,488)	(2,535)
Translation of assets and liabilities in foreign currencies		(31)	–	57
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(1,328,887)	(1,442,296)	(4,181)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (1,296,160)		$ (1,367,498)	$ (4,051)

See accompanying notes.

100

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Government & High
Amounts in thousands	Quality Bond Fund		High Yield Fund	Income Fund
Net Investment Income (Operating Loss)
Income:
Dividends from affiliates	$ –		$ 1,922	$ –
Dividends		–	8,149	440
Withholding tax		–	(222 )	(16)
Interest		19,360	123,898	71,101
Securities lending		751	722	716
Total Income		20,111	134,469	72,241
Expenses:
Management and investment advisory fees		1,486	8,346	5,811
Distribution fees - Class A		464	2,070	374
Distribution fees - Class B		333	718	702
Distribution fees - Class C		31	1,407	147
Distribution fees - Class J		473	N/A	N/A
Distribution fees - R-1		4	N/A	N/A
Distribution fees - R-2		31	N/A	N/A
Distribution fees - R-3		33	N/A	N/A
Distribution fees - R-4		4	N/A	N/A
Administrative service fees - R-1		3	N/A	N/A
Administrative service fees - R-2		20	N/A	N/A
Administrative service fees - R-3		20	N/A	N/A
Administrative service fees - R-4		5	N/A	N/A
Administrative service fees - R-5		18	N/A	N/A
Registration fees - Class A		18	61	19
Registration fees - Class B		16	17	16
Registration fees - Class C		15	22	16
Registration fees - Class J		17	N/A	N/A
Service fees - R-1		3	N/A	N/A
Service fees - R-2		25	N/A	N/A
Service fees - R-3		23	N/A	N/A
Service fees - R-4		6	N/A	N/A
Service fees - R-5		24	N/A	N/A
Shareholder reports - Class A		50	351	55
Shareholder reports - Class B		13	34	39
Shareholder reports - Class C		1	48	5
Shareholder reports - Class J		21	N/A	N/A
Transfer agent fees - Class A		378	749	162
Transfer agent fees - Class B		96	94	83
Transfer agent fees - Class C		9	170	23
Transfer agent fees - Class J		156	N/A	N/A
Custodian fees		4	28	4
Directors' expenses		11	29	11
Professional fees		17	15	15
Other expenses		11	117	21
Total Gross Expenses		3,839	14,276	7,503
Less: Reimbursement from Manager - Class A		–	–	20
Less: Reimbursement from Manager - Class B		–	18	43
Less: Reimbursement from Manager - Class C		18	8	23
Less: Reimbursement from Underwriter - Class J		51	N/A	N/A
Total Net Expenses		3,770	14,250	7,417
Net Investment Income (Operating Loss)		16,341	120,219	64,824
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		4,594	5,828	6,535
Foreign currency transactions		–	(286 )	(9)
Futures contracts		(990)	–	–
Options and swaptions		96	–	–
Swap agreements		1,131	(9,336 )	–
Change in unrealized appreciation/depreciation of:
Investments		(33,400)	(516,400 )	(152,183)
Investments in affiliates		–	(15,882 )	–
Futures contracts		233	–	–
Options and swaptions		4	–	–
Swap agreements		(264)	518	–
Translation of assets and liabilities in foreign currencies		–	(815 )	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(28,596)	(536,373)	(145,657)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (12,255)		$ (416,154)	$ (80,833)

See accompanying notes.

101

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
			International
	Inflation Protection		Emerging Markets	International
Amounts in thousands		Fund	Fund	Growth Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ –		$ 35,970	$ 56,119
Withholding tax		–	(3,812 )	(6,354)
Interest		29,676	235	641
Securities lending		1,799	772	2,550
Total Income		31,475	33,165	52,956
Expenses:
Management and investment advisory fees		1,979	15,148	21,118
Distribution fees - Class A		20	471	5
Distribution fees - Class B		N/A	267	N/A
Distribution fees - Class C		17	114	3
Distribution fees - Class J		45	1,108	310
Distribution fees - R-1		1	23	11
Distribution fees - R-2		2	41	39
Distribution fees - R-3		3	70	84
Distribution fees - R-4		–	18	19
Administrative service fees - R-1		1	18	9
Administrative service fees - R-2		1	28	26
Administrative service fees - R-3		2	42	50
Administrative service fees - R-4		1	24	24
Administrative service fees - R-5		1	37	27
Registration fees - Class A		15	28	25
Registration fees - Class B		N/A	18	N/A
Registration fees - Class C		15	17	25
Registration fees - Class J		15	25	18
Service fees - R-1		1	16	7
Service fees - R-2		2	34	33
Service fees - R-3		2	48	57
Service fees - R-4		1	27	28
Service fees - R-5		1	51	36
Shareholder reports - Class A		2	95	1
Shareholder reports - Class B		N/A	17	N/A
Shareholder reports - Class C		–	7	–
Shareholder reports - Class J		2	31	10
Transfer agent fees - Class A		18	449	13
Transfer agent fees - Class B		N/A	90	N/A
Transfer agent fees - Class C		8	36	6
Transfer agent fees - Class J		42	287	76
Custodian fees		6	781	386
Directors' expenses		10	15	21
Professional fees		14	20	14
Other expenses		13	40	63
Total Gross Expenses		2,240	19,541	22,544
Less: Reimbursement from Manager - Class A		16	–	31
Less: Reimbursement from Manager - Class C		20	–	31
Less: Reimbursement from Manager - Class J		25	–	–
Less: Reimbursement from Underwriter - Class J		5	121	34
Total Net Expenses		2,174	19,420	22,448
Net Investment Income (Operating Loss)		29,301	13,745	30,508
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions (net of foreign taxes of $0, $504 and $0, respectively)		(7,577)	(192,166 )	(341,890)
Foreign currency transactions		–	(4,358 )	(869)
Futures contracts		–	–	(755)
Swap agreements		9,419	–	–
Change in unrealized appreciation/depreciation of:
Investments		(101,876)	(776,780)	(1,039,297)
Futures contracts		–	–	(1,195)
Options and swaptions		5	–	–
Swap agreements		(16,287)	–	–
Translation of assets and liabilities in foreign currencies		–	(193 )	184
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(116,316)	(973,497)	(1,383,822)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (87,015)		$ (959,752)	$ (1,353,314)

See accompanying notes.

102

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	LargeCap Blend		LargeCap Blend	LargeCap Growth
Amounts in thousands		Fund I	Fund II	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 17,549		$ 17,946	$ 34,583
Interest		118	49	3,970
Securities lending		210	208	388
Total Income		17,877	18,203	38,941
Expenses:
Management and investment advisory fees		3,821	6,889	20,057
Distribution fees - Class A		295	139	1,160
Distribution fees - Class B		99	221	625
Distribution fees - Class C		8	13	122
Distribution fees - Class J		209	623	235
Distribution fees - R-1		3	11	43
Distribution fees - R-2		10	72	66
Distribution fees - R-3		7	74	153
Distribution fees - R-4		3	16	31
Administrative service fees - R-1		3	9	35
Administrative service fees - R-2		7	48	44
Administrative service fees - R-3		4	45	92
Administrative service fees - R-4		3	20	40
Administrative service fees - R-5		5	47	100
Registration fees - Class A		14	14	21
Registration fees - Class B		13	14	13
Registration fees - Class C		15	15	16
Registration fees - Class J		16	22	19
Service fees - R-1		2	8	31
Service fees - R-2		8	60	55
Service fees - R-3		5	50	104
Service fees - R-4		4	24	46
Service fees - R-5		7	64	137
Shareholder reports - Class A		56	23	312
Shareholder reports - Class B		7	9	87
Shareholder reports - Class C		2	1	4
Shareholder reports - Class J		5	17	11
Transfer agent fees - Class A		422	159	1,236
Transfer agent fees - Class B		42	66	220
Transfer agent fees - Class C		6	8	29
Transfer agent fees - Class J		54	129	122
Custodian fees		5	6	5
Directors' expenses		7	21	29
Professional fees		18	17	33
Other expenses		5	23	64
Total Gross Expenses		5,190	8,977	25,397
Less: Reimbursement from Manager - Class C		20	18	–
Less: Reimbursement from Underwriter - Class J		23	68	25
Total Net Expenses		5,147	8,891	25,372
Net Investment Income (Operating Loss)		12,730	9,312	13,569
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(106,271)	(48,294)	(61,162)
Futures contracts		(6,444)	(2,312 )	–
Change in unrealized appreciation/depreciation of:
Investments		(279,092)	(342,448)	(1,350,438)
Futures contracts		(2,265)	345	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(394,072)	(392,709)	(1,411,600)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (381,342)		$ (383,397)	$ (1,398,031)

See accompanying notes.

103

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	LargeCap Growth		LargeCap Growth	LargeCap S&P 500
Amounts in thousands		Fund I	Fund II	Index Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 11,843		$ 16,277	$ 22,323
Interest		171	492	721
Securities lending		301	293	235
Total Income		12,315	17,062	23,279
Expenses:
Management and investment advisory fees		12,178	13,682	1,574
Distribution fees - Class A		113	3	112
Distribution fees - Class B		93	N/A	N/A
Distribution fees - Class C		6	5	28
Distribution fees - Class J		199	124	1,617
Distribution fees - R-1		5	4	44
Distribution fees - R-2		42	35	178
Distribution fees - R-3		51	21	395
Distribution fees - R-4		5	16	72
Administrative service fees - R-1		4	3	35
Administrative service fees - R-2		28	23	118
Administrative service fees - R-3		31	13	237
Administrative service fees - R-4		7	21	94
Administrative service fees - R-5		28	27	228
Registration fees - Class A		15	14	16
Registration fees - Class B		14	N/A	N/A
Registration fees - Class C		16	16	16
Registration fees - Class J		17	16	30
Service fees - R-1		3	3	31
Service fees - R-2		35	29	148
Service fees - R-3		35	15	269
Service fees - R-4		8	24	108
Service fees - R-5		39	36	311
Shareholder reports - Class A		30	1	28
Shareholder reports - Class B		6	N/A	N/A
Shareholder reports - Class C		–	–	1
Shareholder reports - Class J		12	5	48
Transfer agent fees - Class A		220	11	213
Transfer agent fees - Class B		49	N/A	N/A
Transfer agent fees - Class C		7	5	11
Transfer agent fees - Class J		92	45	334
Custodian fees		4	6	9
Directors' expenses		24	20	24
Professional fees		17	14	17
Other expenses		22	16	29
Total Gross Expenses		13,455	14,253	6,375
Less: Reimbursement from Manager - Class A		–	19	–
Less: Reimbursement from Manager - Class C		20	19	24
Less: Reimbursement from Underwriter - Class J		22	13	176
Total Net Expenses		13,413	14,202	6,175
Net Investment Income (Operating Loss)		(1,098)	2,860	17,104
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(98,136)	(117,177 )	(15,698)
Foreign currency transactions		–	3,189	–
Futures contracts		–	(5,979 )	(11,873)
Change in unrealized appreciation/depreciation of:
Investments		(710,701)	(491,859)	(437,321)
Futures contracts		–	1,747	539
Translation of assets and liabilities in foreign currencies		–	738	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(808,837)	(609,341)	(464,353)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (809,935)		$ (606,481)	$ (447,249)

See accompanying notes.

104

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	LargeCap Value		LargeCap Value
Amounts in thousands		Fund	Fund III	MidCap Blend Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 20,965		$ 70,369	$ 7,336
Interest		651	331	679
Securities lending		92	622	340
Total Income		21,708	71,322	8,355
Expenses:
Management and investment advisory fees		3,508	17,054	5,317
Distribution fees - Class A		610	128	1,298
Distribution fees - Class B		153	169	563
Distribution fees - Class C		12	13	43
Distribution fees - Class J		235	474	854
Distribution fees - R-1		3	25	4
Distribution fees - R-2		7	135	10
Distribution fees - R-3		7	254	27
Distribution fees - R-4		2	42	6
Administrative service fees - R-1		3	20	3
Administrative service fees - R-2		5	90	7
Administrative service fees - R-3		4	152	16
Administrative service fees - R-4		2	54	8
Administrative service fees - R-5		6	106	22
Registration fees - Class A		17	15	33
Registration fees - Class B		13	14	14
Registration fees - Class C		15	15	15
Registration fees - Class J		18	22	20
Service fees - R-1		2	18	3
Service fees - R-2		6	112	9
Service fees - R-3		4	173	18
Service fees - R-4		3	63	9
Service fees - R-5		8	144	30
Shareholder reports - Class A		76	23	151
Shareholder reports - Class B		8	9	30
Shareholder reports - Class C		1	1	2
Shareholder reports - Class J		9	17	33
Transfer agent fees - Class A		564	166	1,022
Transfer agent fees - Class B		57	65	171
Transfer agent fees - Class C		8	9	17
Transfer agent fees - Class J		93	120	247
Custodian fees		4	2	7
Directors' expenses		11	39	19
Professional fees		14	14	14
Other expenses		11	53	19
Total Gross Expenses		5,499	19,810	10,061
Less: Reimbursement from Manager - Class A		–	–	394
Less: Reimbursement from Manager - Class B		–	–	302
Less: Reimbursement from Manager - Class C		21	19	21
Less: Reimbursement from Underwriter - Class J		26	51	93
Total Net Expenses		5,452	19,740	9,251
Net Investment Income (Operating Loss)		16,256	51,582	(896)
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(110,911)	(117,507)	32,299
Foreign currency transactions		–	–	8
Futures contracts		(6,733)	(13,328 )	–
Change in unrealized appreciation/depreciation of:
Investments		(225,705)	(1,090,664)	(341,511)
Futures contracts		(2,854)	2,973	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(346,203)	(1,218,526)	(309,204)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (329,947)		$ (1,166,944)	$ (310,100)

See accompanying notes.

105

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	MidCap Growth		MidCap Growth
Amounts in thousands		Fund I	Fund III	MidCap Stock Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 2,586		$ 4,171	$ 10,348
Interest		5	229	520
Securities lending		165	578	451
Total Income		2,756	4,978	11,319
Expenses:
Management and investment advisory fees		2,857	7,315	4,417
Distribution fees - Class A		7	86	249
Distribution fees - Class B		N/A	99	206
Distribution fees - Class C		3	14	71
Distribution fees - Class J		N/A	150	N/A
Distribution fees - R-1		5	4	N/A
Distribution fees - R-2		10	37	N/A
Distribution fees - R-3		11	80	N/A
Distribution fees - R-4		5	25	N/A
Administrative service fees - R-1		4	3	N/A
Administrative service fees - R-2		7	25	N/A
Administrative service fees - R-3		6	48	N/A
Administrative service fees - R-4		6	33	N/A
Administrative service fees - R-5		5	19	N/A
Registration fees - Class A		13	14	20
Registration fees - Class B		N/A	13	16
Registration fees - Class C		15	15	16
Registration fees - Class J		N/A	17	N/A
Service fees - R-1		4	3	N/A
Service fees - R-2		8	31	N/A
Service fees - R-3		7	54	N/A
Service fees - R-4		7	38	N/A
Service fees - R-5		6	26	N/A
Shareholder meeting expense - Institutional		15	–	–
Shareholder meeting expense - R-4		1	–	N/A
Shareholder reports - Class A		2	19	123
Shareholder reports - Class B		N/A	6	30
Shareholder reports - Class C		–	1	7
Shareholder reports - Class J		N/A	6	N/A
Transfer agent fees - Class A		15	131	169
Transfer agent fees - Class B		N/A	41	63
Transfer agent fees - Class C		6	9	24
Transfer agent fees - Class J		N/A	64	N/A
Custodian fees		4	5	4
Directors' expenses		9	15	8
Professional fees		20	17	15
Other expenses		10	11	27
Total Gross Expenses		3,068	8,474	5,465
Less: Reimbursement from Manager - Class A		16	–	32
Less: Reimbursement from Manager - Class B		N/A	11	14
Less: Reimbursement from Manager - Class C		19	18	12
Less: Reimbursement from Underwriter - Class J		N/A	16	N/A
Total Net Expenses		3,033	8,429	5,407
Net Investment Income (Operating Loss)		(277)	(3,451)	5,912
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(14,101)	(93,964 )	(6,064)
Futures contracts		–	(8,458 )	–
Change in unrealized appreciation/depreciation of:
Investments		(117,409)	(300,825)	(230,490)
Futures contracts		–	1,294	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(131,510)	(401,953)	(236,554)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (131,787)		$ (405,404)	$ (230,642)

See accompanying notes.

106

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	MidCap Value Fund			Mortgage Securities
Amounts in thousands		II	Money Market Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 11,479		$ –	$ –
Interest		19	98,160	80,687
Securities lending		242	–	118
Total Income		11,740	98,160	80,805
Expenses:
Management and investment advisory fees		5,440	10,671	7,641
Distribution fees - Class A		24	–	217
Distribution fees - Class B		16	469	495
Distribution fees - Class C		12	197	63
Distribution fees - Class J		357	617	N/A
Distribution fees - Class S		N/A	1,273	N/A
Distribution fees - R-1		5	22	N/A
Distribution fees - R-2		54	71	N/A
Distribution fees - R-3		66	148	N/A
Distribution fees - R-4		16	19	N/A
Administrative service fees - R-1		4	18	N/A
Administrative service fees - R-2		36	47	N/A
Administrative service fees - R-3		40	89	N/A
Administrative service fees - R-4		21	24	N/A
Administrative service fees - R-5		24	168	N/A
Registration fees - Class A		16	79	16
Registration fees - Class B		14	7	17
Registration fees - Class C		16	7	15
Registration fees - Class J		19	28	N/A
Service fees - Class S		N/A	199	N/A
Service fees - R-1		3	16	N/A
Service fees - R-2		45	59	N/A
Service fees - R-3		45	101	N/A
Service fees - R-4		25	28	N/A
Service fees - R-5		32	228	N/A
Shareholder reports - Class A		6	530	39
Shareholder reports - Class B		1	5	41
Shareholder reports - Class C		1	2	2
Shareholder reports - Class J		15	180	N/A
Shareholder reports - Class S		N/A	150	N/A
Transfer agent fees - Class A		40	1,248	106
Transfer agent fees - Class B		13	39	57
Transfer agent fees - Class C		9	–	10
Transfer agent fees - Class J		103	366	N/A
Transfer agent fees - Class S		N/A	106	N/A
Custodian fees		7	7	5
Directors' expenses		14	77	8
Professional fees		14	15	15
Other expenses		34	151	20
Total Gross Expenses		6,587	17,461	8,767
Less: Reimbursement from Manager - Class A		16	–	25
Less: Reimbursement from Manager - Class B		20	–	42
Less: Reimbursement from Manager - Class C		19	–	20
Less: Reimbursement from Underwriter - Class J		39	–	N/A
Total Net Expenses		6,493	17,461	8,680
Net Investment Income (Operating Loss)		5,247	80,699	72,125
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(78,109)	(3,741 )	72
Change in unrealized appreciation/depreciation of:
Investments		(188,302)	–	(18,772)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(266,411)	(3,741)	(18,700)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (261,164)		$ 76,958	$ 53,425

See accompanying notes.

107

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Preferred Securities		Real Estate	Short-Term Bond
Amounts in thousands		Fund	Securities Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 67,725		$ 40,983	$ –
Interest		28,070	1,660	14,393
Securities lending		381	268	298
Total Income		96,176	42,911	14,691
Expenses:
Management and investment advisory fees		9,446	12,346	1,050
Distribution fees - Class A		441	235	118
Distribution fees - Class B		N/A	224	N/A
Distribution fees - Class C		811	62	19
Distribution fees - Class J		109	711	266
Distribution fees - R-1		2	13	1
Distribution fees - R-2		2	53	1
Distribution fees - R-3		5	92	26
Distribution fees - R-4		2	15	2
Administrative service fees - R-1		2	10	1
Administrative service fees - R-2		1	35	–
Administrative service fees - R-3		3	55	15
Administrative service fees - R-4		3	20	3
Administrative service fees - R-5		1	62	3
Registration fees - Class A		26	15	18
Registration fees - Class B		N/A	14	N/A
Registration fees - Class C		18	16	17
Registration fees - Class J		17	18	18
Service fees - R-1		2	9	1
Service fees - R-2		2	44	–
Service fees - R-3		3	62	17
Service fees - R-4		3	23	3
Service fees - R-5		1	85	4
Shareholder reports - Class A		29	18	19
Shareholder reports - Class C		10	4	1
Shareholder reports - Class J		5	32	10
Transfer agent fees - Class A		194	259	135
Transfer agent fees - Class B		N/A	78	N/A
Transfer agent fees - Class C		110	24	8
Transfer agent fees - Class J		53	228	83
Custodian fees		10	4	6
Directors' expenses		13	22	8
Professional fees		14	15	17
Other expenses		8	22	13
Total Gross Expenses		11,346	14,925	1,883
Less: Reimbursement from Manager - Class A		228	112	–
Less: Reimbursement from Manager - Class B		–	35	N/A
Less: Reimbursement from Manager - Class C		129	35	21
Less: Reimbursement from Underwriter - Class J		12	78	29
Total Net Expenses		10,977	14,665	1,833
Net Investment Income (Operating Loss)		85,199	28,246	12,858
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(135,447)	(217,246)	(3,875)
Futures contracts		–	–	856
Swap agreements		–	–	(190)
Change in unrealized appreciation/depreciation of:
Investments		(402,700)	(445,865)	(31,608)
Futures contracts		–	–	(5)
Options and swaptions		–	–	3
Swap agreements		–	–	21
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(538,147)	(663,111)	(34,798)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (452,948)		$ (634,865)	$ (21,940)

See accompanying notes.

108

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Short-Term Income		SmallCap Blend	SmallCap Growth
Amounts in thousands		Fund	Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ –		$ 3,306	$ 1,572
Interest		21,013	166	207
Securities lending		298	304	393
Total Income		21,311	3,776	2,172
Expenses:
Management and investment advisory fees		2,185	2,097	2,441
Distribution fees - Class A		97	237	165
Distribution fees - Class B		N/A	160	53
Distribution fees - Class C		49	12	18
Distribution fees - Class J		N/A	186	156
Distribution fees - R-1		N/A	1	1
Distribution fees - R-2		N/A	6	2
Distribution fees - R-3		N/A	4	7
Distribution fees - R-4		N/A	2	1
Administrative service fees - R-1		N/A	1	1
Administrative service fees - R-2		N/A	4	1
Administrative service fees - R-3		N/A	2	4
Administrative service fees - R-4		N/A	3	1
Administrative service fees - R-5		N/A	2	3
Registration fees - Class A		16	17	16
Registration fees - Class B		N/A	13	16
Registration fees - Class C		16	16	15
Registration fees - Class J		N/A	17	17
Service fees - R-1		N/A	1	1
Service fees - R-2		N/A	5	2
Service fees - R-3		N/A	3	4
Service fees - R-4		N/A	3	1
Service fees - R-5		N/A	3	4
Shareholder reports - Class A		19	49	106
Shareholder reports - Class B		N/A	10	13
Shareholder reports - Class C		2	1	1
Shareholder reports - Class J		N/A	20	7
Transfer agent fees - Class A		64	352	204
Transfer agent fees - Class B		N/A	67	34
Transfer agent fees - Class C		10	9	12
Transfer agent fees - Class J		N/A	112	58
Custodian fees		4	6	6
Directors' expenses		5	9	6
Professional fees		15	17	32
Other expenses		3	8	6
Total Gross Expenses		2,485	3,455	3,415
Less: Reimbursement from Manager - Class A		14	–	–
Less: Reimbursement from Manager - Class B		N/A	–	20
Less: Reimbursement from Manager - Class C		18	20	21
Less: Reimbursement from Manager - Institutional		–	–	9
Less: Reimbursement from Underwriter - Class J		N/A	–	17
Total Net Expenses		2,453	3,435	3,348
Net Investment Income (Operating Loss)		18,858	341	(1,176)
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(1,526)	(18,217 )	(23,222)
Futures contracts		(853)	–	–
Change in unrealized appreciation/depreciation of:
Investments		(11,860)	(102,871 )	(146,332)
Futures contracts		(206)	(126 )	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(14,445)	(121,214)	(169,554)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ 4,413		$ (120,873)	$ (170,730)

See accompanying notes.

109

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	SmallCap Growth		SmallCap Value	Tax-Exempt Bond
Amounts in thousands		Fund II	Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ 1,324		$ 7,507	$ –
Interest		120	540	16,520
Securities lending		819	337	–
Total Income		2,263	8,384	16,520
Expenses:
Management and investment advisory fees		5,478	3,771	1,415
Distribution fees - Class A		38	47	657
Distribution fees - Class B		59	35	167
Distribution fees - Class C		5	42	33
Distribution fees - Class J		102	262	N/A
Distribution fees - R-1		6	5	N/A
Distribution fees - R-2		33	21	N/A
Distribution fees - R-3		34	29	N/A
Distribution fees - R-4		8	8	N/A
Administrative service fees - R-1		5	4	N/A
Administrative service fees - R-2		22	14	N/A
Administrative service fees - R-3		20	18	N/A
Administrative service fees - R-4		10	10	N/A
Administrative service fees - R-5		35	35	N/A
Registration fees - Class A		17	16	27
Registration fees - Class B		14	14	16
Registration fees - Class C		16	15	17
Registration fees - Class J		16	17	N/A
Service fees - R-1		4	3	N/A
Service fees - R-2		27	17	N/A
Service fees - R-3		23	20	N/A
Service fees - R-4		12	12	N/A
Service fees - R-5		47	48	N/A
Shareholder reports - Class A		12	13	32
Shareholder reports - Class B		4	5	4
Shareholder reports - Class C		1	3	–
Shareholder reports - Class J		8	10	N/A
Transfer agent fees - Class A		85	71	118
Transfer agent fees - Class B		34	24	15
Transfer agent fees - Class C		7	18	8
Transfer agent fees - Class J		71	92	N/A
Custodian fees		10	6	4
Directors' expenses		14	8	11
Interest expense and fees		–	–	668
Professional fees		17	15	15
Other expenses		17	8	8
Total Gross Expenses		6,311	4,736	3,215
Less: Custodian credits		–	–	5
Less: Reimbursement from Manager - Class A		8	36	183
Less: Reimbursement from Manager - Class B		12	23	96
Less: Reimbursement from Manager - Class C		19	24	20
Less: Reimbursement from Manager - Institutional		–	9	N/A
Less: Reimbursement from Manager - R-5		–	1	N/A
Less: Reimbursement from Underwriter - Class J		11	29	N/A
Total Net Expenses		6,261	4,614	2,911
Net Investment Income (Operating Loss)		(3,998)	3,770	13,609
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(31,848)	(64,073 )	(4,107)
Futures contracts		(4,639)	–	–
Change in unrealized appreciation/depreciation of:
Investments		(240,925)	(110,626)	(39,253)
Futures contracts		479	–	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(276,933)	(174,699)	(43,360)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (280,931)		$ (170,929)	$ (29,751)

See accompanying notes.

110

STATEMENTS OF OPERATIONS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Ultra Short Bond		West Coast Equity
Amounts in thousands		Fund	Fund
Net Investment Income (Operating Loss)
Income:
Dividends	$ –		$ 19,468
Interest		9,721	604
Securities lending		10	1,014
Total Income		9,731	21,086
Expenses:
Management and investment advisory fees		753	7,221
Distribution fees - Class A		15	1,627
Distribution fees - Class B		N/A	1,424
Distribution fees - Class C		18	180
Distribution fees - Class J		128	N/A
Distribution fees - R-2		22	N/A
Distribution fees - R-3		7	N/A
Administrative service fees - R-2		15	N/A
Administrative service fees - R-3		4	N/A
Administrative service fees - R-5		1	N/A
Registration fees - Class A		10	31
Registration fees - Class B		N/A	19
Registration fees - Class C		15	16
Registration fees - Class J		17	N/A
Service fees - R-2		18	N/A
Service fees - R-3		5	N/A
Service fees - R-5		2	N/A
Shareholder reports - Class A		3	354
Shareholder reports - Class B		N/A	161
Shareholder reports - Class C		–	12
Shareholder reports - Class J		5	N/A
Transfer agent fees - Class A		16	695
Transfer agent fees - Class B		N/A	346
Transfer agent fees - Class C		8	44
Transfer agent fees - Class J		47	N/A
Custodian fees		4	16
Directors' expenses		5	24
Professional fees		14	15
Other expenses		2	19
Total Gross Expenses		1,134	12,204
Less: Reimbursement from Manager - Class A		6	–
Less: Reimbursement from Manager - Class B		N/A	6
Less: Reimbursement from Manager - Class C		21	8
Less: Reimbursement from Underwriter - Class J		14	N/A
Total Net Expenses		1,093	12,190
Net Investment Income (Operating Loss)		8,638	8,896
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions		(2,342)	43,403
Futures contracts		(410)	–
Swap agreements		(51)	–
Change in unrealized appreciation/depreciation of:
Investments		(36,473)	(583,144 )
Futures contracts		(171)	–
Options and swaptions		1	–
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies		(39,446)	(539,741)
Net Increase (Decrease) in Net Assets Resulting from Operations	$ (30,808)		$ (530,845)

See accompanying notes.

111

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands												Bond & Mortgage Securities Fund
												Year Ended				Year Ended
												October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)												$ 145,985				$ 120,039
Net realized gain (loss) from investment transactions and foreign currency transactions														(55,741 )				(6,432)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies														(517,385)				(34,336)
			Net Increase (Decrease) in Net Assets Resulting from Operations											(427,141)				79,271
Dividends and Distributions to Shareholders
From net investment income														(140,512 )			(120,154)
						Total Dividends and Distributions								(140,512)			(120,154)
Capital Share Transactions
Net increase (decrease) in capital share transactions														514,951				517,572
Redemption fees - Class A														–				3
Redemption fees - Class J														4				3
						Total increase (decrease) in net assets								(52,698)				476,695
Net Assets
Beginning of period													2,517,121				2,040,426
End of period (including undistributed net investment income as set forth below)												$ 2,464,423				$ 2,517,121
Undistributed (overdistributed) net investment income (operating loss)												$ 5,426				$ 1,140
		Class A	Class B	Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 10,893 $		2,505 $	1,087	$ 28,403		$ 685,046		$ 3,311		$ 6,382		$ 15,045		$ 11,813		$ 29,061
Reinvested		6,557	817	104		10,496		110,568		321		1,631		2,880		1,413		4,990
Redeemed		(35,444 )	(7,234 )	(831)		(59,208)	(209,422)			(2,251)		(10,718 )		(19,819 )		(13,443)		(60,002)
Net Increase (Decrease)	$ (17,994) $		(3,912) $	360	$ (20,309) $			586,192	$ 1,381		$ (2,705) $			(1,894) $		(217) $		(25,951)
Shares:
Sold		1,094	245	110		2,830		67,683		338		639		1,501		1,159		2,920
Reinvested		663	82	10		1,057		11,261		32		166		293		142		506
Redeemed		(3,617 )	(740 )	(87)		(6,008)		(21,750)		(229)		(1,112 )		(2,054 )		(1,368)		(6,175)
Net Increase (Decrease)		(1,860 )	(413 )	33		(2,121)		57,194		141		(307 )		(260 )		(67)		(2,749)
Year Ended October 31, 2007
Dollars:
Sold	$ 25,305 $		2,904 $	2,632	$ 54,124		$ 746,962		$ 3,722		$ 8,738		$ 21,858		$ 16,484		$ 44,187
Reinvested		7,607	1,006	47		11,596		87,642		262		1,896		2,885		1,199		5,338
Redeemed		(36,255 )	(6,279 )	(213)		(47,453)	(372,923)			(1,288)		(14,684 )		(11,526 )		(6,468)		(31,733)
Net Increase (Decrease)	$ (3,343) $		(2,369) $	2,466	$ 18,267		$ 461,681		$ 2,696		$ (4,050) $			13,217	$ 11,215		$ 17,792
Shares:
Sold		2,380	274	249		5,076		70,352		353		830		2,060		1,536		4,176
Reinvested		719	95	4		1,092		8,294		25		180		274		113		507
Redeemed		(3,419 )	(592 )	(20)		(4,462)		(35,296)		(122)		(1,390 )		(1,089 )		(604)		(3,008)
Net Increase (Decrease)		(320 )	(223 )	233		1,706		43,350		256		(380 )		1,245		1,045		1,675
Distributions:
Year Ended October 31, 2008
From net investment income $		(7,081) $	(843) $	(108) $		(10,600) $ (110,640) $				(321) $		(1,631) $		(2,880) $		(1,413) $		(4,995)
From net realized gain on
investments		–	–	–		–		–		–		–		–		–		–
Total Dividends and Distributions $		(7,081) $	(843) $	(108) $		(10,600) $ (110,640) $				(321) $		(1,631) $		(2,880) $		(1,413) $		(4,995)
Year Ended October 31, 2007
From net investment income $		(8,215) $	(1,029) $	(47) $		(11,635) $		(87,645) $		(262) $		(1,896) $		(2,885) $		(1,199) $		(5,341)
From net realized gain on
investments		–	–	–		–		–		–		–		–		–		–
Total Dividends and Distributions $		(8,215) $	(1,029) $	(47) $		(11,635) $		(87,645) $		(262) $		(1,896) $		(2,885) $		(1,199) $		(5,341)

See accompanying notes.

112

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands					California Municipal Fund
					Year Ended	Year Ended
					October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)					$ 17,031	$ 15,738
Net realized gain (loss) from investment transactions and foreign currency transactions					(10,821 )	(1,712)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies					(62,852)	(16,143)
			Net Increase (Decrease) in Net Assets Resulting from Operations		(56,642)	(2,117)
Dividends and Distributions to Shareholders
From net investment income					(16,686 )	(15,564)
From net realized gain on investments					–	(2,473)
From tax return of capital					–	(80)
				Total Dividends and Distributions	(16,686)	(18,117)
Capital Share Transactions
Net increase (decrease) in capital share transactions					29,811	(18,663)
Redemption fees - Class A					4	11
Redemption fees - Class B					3	–
				Total increase (decrease) in net assets	(43,510)	(38,886)
Net Assets
Beginning of period					362,815	401,701
End of period (including undistributed net investment income as set forth below)					$ 319,305	$ 362,815
Undistributed (overdistributed) net investment income (operating loss)					$ 614	$ 332
		Class A	Class B	Class C
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 50,595 $		2,081 $	4,021
Issued in acquisitions		47,939	27,057	4,750
Reinvested		7,980	2,098	226
Redeemed		(73,381)	(39,193 )	(4,362)
Net Increase (Decrease)	$ 33,133 $		(7,957) $	4,635
Shares:
Sold		4,939	206	391
Issued in acquisitions		4,621	2,609	458
Reinvested		796	209	23
Redeemed		(7,348)	(3,893 )	(438)
Net Increase (Decrease)		3,008	(869 )	434
Year Ended October 31, 2007
Dollars:
Sold	$ 71,906 $		2,263 $	1,958
Reinvested		8,120	3,078	124
Redeemed		(57,056)	(47,942 )	(1,114)
Net Increase (Decrease)	$ 22,970 $		(42,601) $	968
Shares:
Sold		6,503	206	177
Reinvested		734	277	11
Redeemed		(5,181)	(4,354 )	(101)
Net Increase (Decrease)		2,056	(3,871 )	87
Distributions:
Year Ended October 31, 2008
From net investment income $		(13,240) $	(3,132) $	(314)
From net realized gain on
investments		–	–	–
Total Dividends and Distributions $		(13,240) $	(3,132) $	(314)
Year Ended October 31, 2007
From net investment income $		(11,541) $	(3,855) $	(168)
From net realized gain on
investments		(1,646)	(798 )	(29)
From tax return of capital		(59)	(20)	(1)
Total Dividends and Distributions $		(13,246) $	(4,673) $	(198)

See accompanying notes.

113

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands											Disciplined LargeCap Blend Fund
											Year Ended		Year Ended
										October 31, 2008			October 31, 2007
Operations
Net investment income (operating loss)										$ 41,838			$ 30,094
Net realized gain (loss) from investment transactions and foreign currency transactions												(340,418 )		416,449
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies											(1,007,586)			(63,496)
			Net Increase (Decrease) in Net Assets Resulting from Operations								(1,306,166)			383,047
Dividends and Distributions to Shareholders
From net investment income												(37,989 )		(11,432)
From net realized gain on investments												(415,096 )		(23,879)
						Total Dividends and Distributions						(453,085)		(35,311)
Capital Share Transactions
Net increase (decrease) in capital share transactions												(153,945 )		2,489,807
Redemption fees - Class A												–		1
						Total increase (decrease) in net assets					(1,913,196)			2,837,544
Net Assets
Beginning of period											3,936,149			1,098,605
End of period (including undistributed net investment income as set forth below)										$ 2,022,953			$ 3,936,149
Undistributed (overdistributed) net investment income (operating loss)										$ 31,050			$ 27,219
		Class A	Class B		Class C Institutional			R-1	R-2	R-3		R-4	R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 21,618 $		1,836	$ 468		$ 504,487	$ 796 $		521 $	1,528 $		691 $	495
Reinvested		76,568	6,300		252	364,838		177	297	1,176		618	236
Redeemed		(313,091 )	(19,721 )		(500)	(799,502)		(452)	(508)	(1,689 )		(1,095)	(289)
Net Increase (Decrease)	$ (214,905 ) $		(11,585 ) $		220	$ 69,823	$ 521 $		310 $	1,015 $		214 $	442
Shares:
Sold		1,570	136		35	36,389		60	38	126		51	36
Reinvested		4,924	411		16	23,480		12	19		76	40	15
Redeemed		(23,147 )	(1,475 )		(36)	(59,567)		(37)	(37)	(123 )		(86)	(22)
Net Increase (Decrease)		(16,653)	(928)		15	302		35	20		79	5	29
Year Ended October 31, 2007
Dollars:
Sold	$ 35,790 $		2,637	$ 856		$ 583,274	$ 276 $		972 $	5,588 $		773 $	732
Issued in acquisitions		580,594	63,177		2,266	1,705,094		–	–		–	–	–
Reinvested		2,719	297		–	31,787		33	56	177		160	50
Redeemed		(88,592 )	(23,395 )		(854)	(409,956)		(249)	(576)	(1,947 )		(1,348)	(584)
Net Increase (Decrease)	$ 530,511 $		42,716	$ 2,268		$ 1,910,199	$ 60 $		452 $	3,818 $		(415) $	198
Shares:
Sold		2,128	159		51	34,314		17	59	341		47	43
Issued in acquisitions		35,725	3,905		139	105,189		–	–		–	–	–
Reinvested		169	19		–	1,973		2	4		11	10	3
Redeemed		(5,275 )	(1,399 )		(50)	(24,941)		(15)	(35)	(117 )		(82)	(35)
Net Increase (Decrease)		32,747	2,684		140	116,535		4	28	235		(25)	11
Distributions:
Year Ended October 31, 2008
From net investment income $		(5,697) $	–	$ –		$ (32,157) $		(5) $	(11) $	(60 ) $		(41 ) $	(18)
From net realized gain on
investments		(73,221)	(6,561)		(264)	(332,681)		(172)	(286)	(1,116)		(577)	(218)
Total Dividends and Distributions $		(78,918) $	(6,561 ) $		(264) $ (364,838) $			(177) $	(297) $	(1,176 ) $		(618 ) $	(236)
Year Ended October 31, 2007
From net investment income $		(545) $	–	$ –		$ (10,784) $		(3) $	(9) $	(36 ) $		(41 ) $	(14)
From net realized gain on
investments		(2,203)	(300)		–	(21,003)		(30)	(47)	(141)		(119)	(36)
Total Dividends and Distributions $		(2,748) $	(300) $		–	$ (31,787) $		(33) $	(56) $	(177 ) $		(160 ) $	(50)

See accompanying notes.

114

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands														Diversified International Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 32,727				$ 22,779
Net realized gain (loss) from investment transactions and foreign currency transactions																(236,243 )				308,524
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(1,092,644)					258,761
				Net Increase (Decrease) in Net Assets Resulting from Operations											(1,296,160)					590,064
Dividends and Distributions to Shareholders
From net investment income																(23,601 )				(7,963)
From net realized gain on investments																(301,880 )				(71,320)
								Total Dividends and Distributions								(325,481)				(79,283)
Capital Share Transactions
Net increase (decrease) in capital share transactions																243,691			1,314,905
Redemption fees - Class A																6				15
Redemption fees - Class C																1				–
Redemption fees - Class J																3				1
								Total increase (decrease) in net assets							(1,377,940)				1,825,702
Net Assets
Beginning of period															2,619,427					793,725
End of period (including undistributed net investment income as set forth below)														$ 1,241,487				$ 2,619,427
Undistributed (overdistributed) net investment income (operating loss)														$ 29,054				$ 19,923
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 73,466		$ 8,088		$ 9,716		$ 52,103		$ 165,291		$ 4,002		$ 8,077		$ 35,557		$ 36,976		$ 40,768
Reinvested		80,975		7,992		2,336		37,489		148,624		1,360		4,629		13,394		5,208		17,890
Redeemed		(209,371)		(21,046)		(8,228)		(59,241)		(122,214)		(2,258)		(8,100)		(19,977)		(8,928)		(50,887)
Net Increase (Decrease)	$ (54,930) $			(4,966) $		3,824	$ 30,351		$ 191,701		$ 3,104		$ 4,606		$ 28,974		$ 33,256		$ 7,771
Shares:
Sold		5,712		619		743		4,142		13,558		329		622		2,694		2,895		3,156
Reinvested		5,862		584		171		2,744		10,745		99		340		975		373		1,295
Redeemed		(17,267)		(1,799)		(708)		(5,092)		(9,393)		(193)		(730)		(1,723)		(767)		(4,224)
Net Increase (Decrease)		(5,693)		(596)		206		1,794		14,910		235		232		1,946		2,501		227
Year Ended October 31, 2007
Dollars:
Sold	$ 132,142		$ 13,884		$ 15,063		$ 86,419		$ 2,831		$ 6,079		$ 12,063		$ 42,142		$ 21,466		$ 80,654
Issued in acquisitions		127,394		12,523		6,538		–		1,106,021		–		–		–		–		–
Reinvested		35,608		4,308		–		19,408		4,687		400		2,332		4,571		1,687		5,568
Redeemed		(88,894)		(17,440)		(2,189)		(43,271)		(233,331)		(1,191)		(5,280)		(7,869)		(4,327)		(25,091)
Net Increase (Decrease)	$ 206,250		$ 13,275		$ 19,412		$ 62,556		$ 880,208		$ 5,288		$ 9,115		$ 38,844		$ 18,826		$ 61,131
Shares:
Sold		8,812		923		993		5,858		195		410		812		2,864		1,438		5,357
Issued in acquisitions		9,310		915		478		–		81,049		–		–		–		–		–
Reinvested		2,588		315		–		1,425		340		29		172		334		121		404
Redeemed		(5,948)		(1,176)		(144)		(2,933)		(16,138)		(82)		(359)		(545)		(282)		(1,684)
Net Increase (Decrease)		14,762		977		1,327		4,350		65,446		357		625		2,653		1,277		4,077
Distributions:
Year Ended October 31, 2008
From net investment income $		(5,462) $		–	$ –		$ (1,728) $			(13,865) $		(33) $		(162) $		(659) $		(361) $		(1,331)
From net realized gain on
investments		(80,007)		(8,583)		(2,825)		(35,765)		(134,764)		(1,327)		(4,468)		(12,735)		(4,847)		(16,559)
Total Dividends and Distributions $		(85,469) $		(8,583) $		(2,825) $		(37,493)                $ (148,629) $				(1,360) $		(4,630) $		(13,394) $		(5,208) $		(17,890)
Year Ended October 31, 2007
From net investment income $		(3,794) $		(106) $		–	$ (1,675) $			(717) $		(28) $		(186) $		(514) $		(201) $		(742)
From net realized gain on
investments		(32,495)		(4,233)		–		(17,735)		(3,970)		(372)		(2,146)		(4,057)		(1,486)		(4,826)
Total Dividends and Distributions $		(36,289) $		(4,339) $		–	$ (19,410) $			(4,687) $		(400) $		(2,332) $		(4,571) $		(1,687) $		(5,568)

See accompanying notes.

115

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands								Equity Income Fund(a)
								Year Ended	Year Ended
								October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)								$ 74,798	$ 70,943
Net realized gain (loss) from investment transactions and foreign currency transactions								(280,808 )	367,678
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies								(1,161,488)	106,018
			Net Increase (Decrease) in Net Assets Resulting from Operations					(1,367,498)	544,639
Dividends and Distributions to Shareholders
From net investment income								(73,144 )	(63,348)
From net realized gain on investments								(384,022 )	(203,872)
							Total Dividends and Distributions	(457,166)	(267,220)
Capital Share Transactions
Net increase (decrease) in capital share transactions								(621,450 )	541,851
Redemption fees - Class A								9	16
Redemption fees - Class B								2	–
							Total increase (decrease) in net assets	(2,446,103)	819,286
Net Assets
Beginning of period								4,602,663	3,783,377
End of period (including undistributed net investment income as set forth below)								$ 2,156,560	$ 4,602,663
Undistributed (overdistributed) net investment income (operating loss)								$ 12,493	$ 9,636
	Class A		Class B		Class C	Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 171,645	$ 18,192		$ 21,663		$ 57,124
Reinvested	161,379		30,708		22,432		204,971
Redeemed	(819,926)		(108,781 )		(91,480)		(289,377)
Net Increase (Decrease)	$ (486,902 ) $		(59,881) $		(47,385) $		(27,282)
Shares:
Sold	8,981		958		1,126		3,283
Reinvested	7,746		1,482		1,093		9,947
Redeemed	(44,704 )		(6,031 )		(5,085)		(15,986)
Net Increase (Decrease)	(27,977 )		(3,591 )		(2,866)		(2,756)
Year Ended October 31, 2007
Dollars:
Sold	$ 472,412	$ 74,832		$ 70,231		$ 269,364
Issued in acquisitions	109,905		14,395		–		–
Reinvested	90,948		15,980		12,541		122,975
Redeemed	(405,559)		(67,459)		(52,067)		(186,647)
Net Increase (Decrease)	$ 267,706	$ 37,748		$ 30,705		$ 205,692
Shares:
Sold	20,692		3,306		3,131		12,082
Issued in acquisitions	4,930		651		–		–
Reinvested	4,104		731		578		5,542
Redeemed	(17,695 )		(2,965 )		(2,311)		(8,157)
Net Increase (Decrease)	12,031		1,723		1,398		9,467
Distributions:
Year Ended October 31, 2008
From net investment income             $ (26,157)           $			(3,717) $		(3,095) $		(40,175)
From net realized gain on
investments	(160,120)		(33,312)		(25,793)		(164,797)
Total Dividends and Distributions $ (186,277) $			(37,029) $		(28,888)                                                                   $ (204,972)
Year Ended October 31, 2007
From net investment income            $ (25,542) $			(2,320) $		(2,001) $		(33,485)
From net realized gain on
investments	(82,357 )		(18,130 )		(13,895)		(89,490)
Total Dividends and Distributions $ (107,899) $			(20,450) $		(15,896)                                                                   $ (122,975)
(a) Effective June 13, 2008, Equity Income Fund I changed its name to Equity Income Fund.

See accompanying notes.

116

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands					Global Real Estate Securities Fund
					Year Ended	Period Ended
					October 31, 2008	October 31, 2007(a)
Operations
Net investment income (operating loss)					$ 130	$ 5
Net realized gain (loss) from investment transactions and foreign currency transactions					(1,703 )	(11)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies					(2,478)	59
			Net Increase (Decrease) in Net Assets Resulting from Operations		(4,051)	53
Dividends and Distributions to Shareholders
From net investment income					(138 )	–
				Total Dividends and Distributions	(138)	–
Capital Share Transactions
Net increase (decrease) in capital share transactions					3,130	5,648
				Total increase (decrease) in net assets	(1,059)	5,701
Net Assets
Beginning of period					5,701	–
End of period (including undistributed net investment income as set forth below)					$ 4,642	$ 5,701
Undistributed (overdistributed) net investment income (operating loss)					$ (14)	$ 5
		Class A              Class C                                                                         Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 3,272 $		379 $	–
Reinvested		49	3	–
Redeemed		(480 )	(93 )	–
Net Increase (Decrease)	$ 2,841 $		289 $	–
Shares:
Sold		386	45	–
Reinvested		6	1	–
Redeemed		(67)	(13)	–
Net Increase (Decrease)		325	33	–
Periods Ended October 31, 2007
Dollars:
Sold	$ 2,117 $		1,536 $	2,000
Redeemed		(5)	–	–
Net Increase (Decrease)	$ 2,112 $		1,536 $	2,000
Shares:
Sold		213	154	200
Redeemed		(1)	–	–
Net Increase (Decrease)		212	154	200
Distributions:
Year Ended October 31, 2008
From net investment income $		(79) $	(23) $	(36)
From net realized gain on
investments		–	–	–
Total Dividends and Distributions $		(79) $	(23) $	(36)
(a) Period from October 1, 2007, date operations commenced, through October 31, 2007

See accompanying notes.

117

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
									Government & High Quality Bond
Amounts in thousands										Fund
									Year Ended		Year Ended
									October 31, 2008		October 31, 2007
Operations
Net investment income (operating loss)									$ 16,341		$ 16,105
Net realized gain (loss) from investment transactions and foreign currency transactions										4,831		(2,385)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies									(33,427)			(3)
		Net Increase (Decrease) in Net Assets Resulting from Operations							(12,255)			13,717
Dividends and Distributions to Shareholders
From net investment income									(15,489 )			(16,284)
					Total Dividends and Distributions				(15,489)			(16,284)
Capital Share Transactions
Net increase (decrease) in capital share transactions										16,681		(13,861)
Redemption fees - Class A										5		4
Redemption fees - Class B										3		1
Redemption fees - Class C										3		–
Redemption fees - Class J										11		1
				Total increase (decrease) in net assets					(11,041)			(16,422)
Net Assets
Beginning of period									371,432			387,854
End of period (including undistributed net investment income as set forth below)									$ 360,391		$ 371,432
Undistributed (overdistributed) net investment income (operating loss)									$ 844		$ 12
	Class A	Class B            Class C		Class J        Institutional                 R-1				R-2	R-3	R-4	R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 37,842 $	13,208 $	8,076 $	33,340 $	4,593	$ 990 $		4,696 $	7,950 $	3,187 $	9,050
Reinvested	7,143	1,061	89	4,188	78		42	413	567	167	728
Redeemed	(54,953)	(12,790)	(1,599)	(29,751)	(476)		(506)	(2,926)	(6,516)	(1,026)	(10,184)
Net Increase (Decrease)	$ (9,968) $	1,479 $	6,566 $	7,777 $	4,195	$ 526 $		2,183 $	2,001 $	2,328 $	(406)
Shares:
Sold	3,814	1,334	824	3,357	462		101	476	803	325	909
Reinvested	723	107	9	423	8		4	42	58	17	74
Redeemed	(5,547 )	(1,297 )	(164)	(3,007)	(49)		(52)	(297)	(669 )	(106 )	(1,033)
Net Increase (Decrease)	(1,010)	144	669	773	421		53	221	192	236	(50)
Year Ended October 31, 2007
Dollars:
Sold	$ 19,995 $	3,406 $	1,651 $	14,149 $	6	$ 451 $		2,638 $	5,283 $	1,781 $	4,774
Reinvested	8,120	1,232	20	4,300	–		28	393	433	124	670
Redeemed	(44,120 )	(8,730 )	(163)	(21,165)	–		(275)	(2,126)	(2,656 )	(1,171 )	(2,909)
Net Increase (Decrease)	$ (16,005) $	(4,092) $	1,508 $	(2,716) $	6	$ 204 $		905 $	3,060 $	734 $	2,535
Shares:
Sold	1,980	338	164	1,399	1		45	263	527	177	475
Reinvested	807	122	2	426	–		3	39	43	12	67
Redeemed	(4,374 )	(866 )	(16)	(2,095)	–		(28)	(213)	(265 )	(116 )	(290)
Net Increase (Decrease)	(1,587)	(406)	150	(270)	1		20	89	305	73	252
Distributions:
Year Ended October 31, 2008
From net investment
income	$ (8,010 ) $	(1,137) $	(106) $	(4,234) $	(78) $		(42) $	(413) $	(567) $	(168) $	(734)
From net realized gain on
investments	–	–	–	–	–		–	–	–	–	–
Total Dividends and
Distributions	$ (8,010 ) $	(1,137) $	(106) $	(4,234) $	(78) $		(42) $	(413) $	(567) $	(168) $	(734)
Year Ended October 31, 2007
From net investment
income	$ (9,012 ) $	(1,289) $	(21) $	(4,313) $	–	$ (29) $		(393) $	(433) $	(124) $	(670)
From net realized gain on
investments	–	–	–	–	–		–	–	–	–	–
Total Dividends and
Distributions	$ (9,012 ) $	(1,289) $	(21) $	(4,313) $	–	$ (29) $		(393) $	(433) $	(124) $	(670)

See accompanying notes.

118

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands								High Yield Fund(a)
								Year Ended	Year Ended
								October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)								$ 120,219	$ 102,443
Net realized gain (loss) from investment transactions and foreign currency transactions								(3,794 )		53,481
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies								(532,579)		(25,138)
				Net Increase (Decrease) in Net Assets Resulting from Operations				(416,154)		130,786
Dividends and Distributions to Shareholders
From net investment income								(120,215 )		(114,073)
From net realized gain on investments								(44,394 )		(24,846)
							Total Dividends and Distributions	(164,609)		(138,919)
Capital Share Transactions
Net increase (decrease) in capital share transactions								248,526		566,609
Redemption fees - Class A								380		33
Redemption fees - Class B								1		–
Redemption fees - Class C								2		–
							Total increase (decrease) in net assets	(331,854)		558,509
Net Assets
Beginning of period								1,712,143		1,153,634
End of period (including undistributed net investment income as set forth below)								$ 1,380,289	$ 1,712,143
Undistributed (overdistributed) net investment income (operating loss)								$ (1,354)	$ (2,342)
	Class A			Class B	Class C	Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 823,315		$ 12,573 $		71,833	$ 128,193
Reinvested		58,569		3,879	7,343		62,220
Redeemed	(611,782)			(25,693)	(46,739)	(235,185)
Net Increase (Decrease)	$ 270,102		$ (9,241) $		32,437	$ (44,772)
Shares:
Sold	104,590			1,581	9,065		17,128
Reinvested		7,425		480	918		7,821
Redeemed	(78,410 )			(3,350 )	(6,135)		(29,520)
Net Increase (Decrease)		33,605		(1,289)	3,848		(4,571)
Year Ended October 31, 2007
Dollars:
Sold	$ 690,143		$ 17,298 $		82,738	$ 224,824
Reinvested		34,648		3,803	4,979		64,518
Redeemed	(336,496)			(21,663)	(24,459)	(173,724)
Net Increase (Decrease)	$ 388,295		$ (562) $		63,258	$ 115,618
Shares:
Sold		78,984		1,950	9,379		25,541
Reinvested		3,964		433	567		7,396
Redeemed	(38,577 )			(2,463 )	(2,799)		(20,026)
Net Increase (Decrease)		44,371		(80)	7,147		12,911
Distributions:
Year Ended October 31, 2008
From net investment income $		(61,325) $		(4,759) $	(9,252) $		(44,879)
From net realized gain on
investments	(20,511)			(2,249)	(3,835)		(17,799)
Total Dividends and Distributions $		(81,836) $		(7,008) $	(13,087) $		(62,678)
Year Ended October 31, 2007
From net investment income $		(45,704) $		(5,777) $	(7,969) $		(54,623)
From net realized gain on
investments		(9,395)		(1,761)	(1,805)		(11,885)
Total Dividends and Distributions $		(55,099) $		(7,538) $	(9,774) $		(66,508)
(a) Effective June 13, 2008, High Yield Fund II changed its name to High Yield Fund.

See accompanying notes.

119

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands							Income Fund
							Year Ended		Year Ended
							October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)							$ 64,824	$ 64,824
Net realized gain (loss) from investment transactions and foreign currency transactions							6,526		(189)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies							(152,183)		(8,675)
			Net Increase (Decrease) in Net Assets Resulting from Operations				(80,833)		55,960
Dividends and Distributions to Shareholders
From net investment income							(66,976 )		(69,219)
						Total Dividends and Distributions	(66,976)		(69,219)
Capital Share Transactions
Net increase (decrease) in capital share transactions							(130,790 )		(6,979)
Redemption fees - Class A							1		2
Redemption fees - Class B							4		1
Redemption fees - Class C							1		–
						Total increase (decrease) in net assets	(278,593)		(20,235)
Net Assets
Beginning of period							1,196,844		1,217,079
End of period (including undistributed net investment income as set forth below)							$ 918,251	$ 1,196,844
Undistributed (overdistributed) net investment income (operating loss)							$ (8,726)	$ (7,684)
		Class A	Class B	Class C	Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 44,748 $		9,661 $	10,440	$ 100,017
Reinvested		5,919	2,276	550		54,680
Redeemed		(54,738 )	(30,150 )	(5,817)		(268,376)
Net Increase (Decrease)	$ (4,071) $		(18,213) $	5,173	$ (113,679)
Shares:
Sold		5,018	1,085	1,179		11,161
Reinvested		674	258	63		6,210
Redeemed		(6,262 )	(3,443 )	(661)		(31,061)
Net Increase (Decrease)		(570 )	(2,100 )	581		(13,690)
Year Ended October 31, 2007
Dollars:
Sold	$ 38,536 $		5,200 $	4,741	$ 49,441
Reinvested		5,116	2,621	379		54,223
Redeemed		(39,660 )	(28,686 )	(3,306)		(95,584)
Net Increase (Decrease)	$ 3,992 $		(20,865) $	1,814	$ 8,080
Shares:
Sold		4,263	572	524		5,466
Reinvested		567	289	42		5,997
Redeemed		(4,390 )	(3,170 )	(365)		(10,549)
Net Increase (Decrease)		440	(2,309)	201		914
Distributions:
Year Ended October 31, 2008
From net investment income $		(8,249) $	(3,329) $	(704) $		(54,694)
From net realized gain on
investments		–	–	–		–
Total Dividends and Distributions $		(8,249) $	(3,329) $	(704) $		(54,694)
Year Ended October 31, 2007
From net investment income $		(7,843) $	(4,254) $	(522) $		(56,600)
From net realized gain on
investments		–	–	–		–
Total Dividends and Distributions $		(7,843) $	(4,254) $	(522) $		(56,600)

See accompanying notes.

120

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Inflation Protection Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 29,301				$ 18,338
Net realized gain (loss) from investment transactions and foreign currency transactions																1,842			(3,495)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(118,158)			(2,063)
				Net Increase (Decrease) in Net Assets Resulting from Operations												(87,015)			12,780
Dividends and Distributions to Shareholders
From net investment income																(40,806 )			(17,260)
From tax return of capital																(7,447)			–
								Total Dividends and Distributions								(48,253)			(17,260)
Capital Share Transactions
Net increase (decrease) in capital share transactions																67,549			357,744
Redemption fees - Class A																5			–
Redemption fees - Class J																2			–
								Total increase (decrease) in net assets								(67,712)			353,264
Net Assets
Beginning of period																475,571			122,307
End of period (including undistributed net investment income as set forth below)														$ 407,859				$ 475,571
Undistributed (overdistributed) net investment income (operating loss)														$ (29)				$ 1,655
		Class A		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 11,040		$ 2,108		$ 12,408		$ 97,863		$ 666		$ 279		$ 833		$ 729		$ 1,117
Reinvested		606		68		825		46,263		27		60		113		28		94
Redeemed		(7,318 )		(631 )		(8,269)		(88,520)		(233)		(121)		(1,000 )		(540 )		(946)
Net Increase (Decrease)	$ 4,328		$ 1,545		$ 4,964		$ 55,606		$ 460		$ 218		$ (54) $			217	$ 265
Shares:
Sold		1,191		231		1,354		10,875		76		32		93		82		124
Reinvested		67		8		92		5,142		3		7		12		3		10
Redeemed		(838 )		(74 )		(956)		(9,918)		(27)		(14)		(113 )		(60 )		(110)
Net Increase (Decrease)		420		165		490		6,099		52		25		(8)		25		24
Year Ended October 31, 2007
Dollars:
Sold	$ 3,317		$ 888		$ 2,489		$ 364,195		$ 95		$ 210		$ 819		$ 53		$ 867
Reinvested		181		4		240		16,716		3		24		46		11		11
Redeemed		(3,051 )		(60 )		(2,267)		(25,954)		(51)		(144)		(348 )		(179 )		(371)
Net Increase (Decrease)	$ 447		$ 832		$ 462		$ 354,957		$ 47		$ 90		$ 517		$ (115) $			507
Shares:
Sold		346		93		262		38,230		10		22		86		6		92
Reinvested		19		1		25		1,771		–		3		5		1		1
Redeemed		(320 )		(6 )		(240)		(2,757)		(5)		(16)		(37 )		(19 )		(39)
Net Increase (Decrease)		45		88		47		37,244		5		9		54		(12)		54
Distributions:
Year Ended October 31, 2008
From net investment income $		(579) $		(102) $		(728) $		(39,124) $		(23) $		(51) $		(95) $		(24) $		(80)
From net realized gain on
investments		–		–		–		–		–		–		–		–		–
From tax return of capital		(106)		(19)		(133)		(7,139)		(4)		(9)		(18)		(4)		(15)
Total Dividends and Distributions $		(685) $		(121) $		(861) $		(46,263) $		(27) $		(60) $		(113) $		(28) $		(95)
Year Ended October 31, 2007
From net investment income $		(195) $		(11) $		(242) $		(16,717) $		(3) $		(24) $		(46) $		(11) $		(11)
From net realized gain on
investments		–		–		–		–		–		–		–		–		–
Total Dividends and Distributions $		(195) $		(11) $		(242) $		(16,717) $		(3) $		(24) $		(46) $		(11) $		(11)

See accompanying notes.

121

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands														International Emerging Markets Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 13,745				$ 10,713
Net realized gain (loss) from investment transactions and foreign currency transactions																(196,524 )				221,153
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(776,973)				292,911
				Net Increase (Decrease) in Net Assets Resulting from Operations												(959,752)				524,777
Dividends and Distributions to Shareholders
From net investment income																(8,981 )				(2,308)
From net realized gain on investments																(224,073 )				(27,638)
								Total Dividends and Distributions								(233,054)				(29,946)
Capital Share Transactions
Net increase (decrease) in capital share transactions																400,714				668,768
Redemption fees - Class A																19				7
Redemption fees - Class J																20				4
								Total increase (decrease) in net assets								(792,053)			1,163,610
Net Assets
Beginning of period															1,496,294					332,684
End of period (including undistributed net investment income as set forth below)														$ 704,241				$ 1,496,294
Undistributed (overdistributed) net investment income (operating loss)														$ 8,091				$ 7,651
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 90,430		$ 8,906		$ 9,637		$ 61,697		$ 236,390		$ 3,365		$ 5,768		$ 14,567		$ 13,086		$ 17,319
Reinvested		32,750		4,853		1,679		47,378		124,220		1,108		2,494		5,129		2,699		7,554
Redeemed		(90,000 )		(10,059 )		(4,613)		(80,879)		(59,461)		(2,138)		(4,827 )		(9,132 )		(4,084)		(25,122)
Net Increase (Decrease)	$ 33,180		$ 3,700		$ 6,703		$ 28,196		$ 301,149		$ 2,335		$ 3,435		$ 10,564		$ 11,701		$ (249)
Shares:
Sold		3,446		311		340		2,281		9,737		121		198		528		488		607
Reinvested		1,086		164		56		1,625		4,110		37		84		172		90		251
Redeemed		(4,036 )		(420 )		(197)		(3,395)		(2,531)		(83)		(201 )		(379 )		(175)		(940)
Net Increase (Decrease)		496		55		199		511		11,316		75		81		321		403		(82)
Year Ended October 31, 2007
Dollars:
Sold	$ 103,651		$ 12,019		$ 8,707		$ 94,923		$ 492,496		$ 4,152		$ 8,788		$ 18,355		$ 11,144		$ 25,155
Reinvested		6,261		1,043		–		10,961		9,286		125		361		512		238		1,073
Redeemed		(38,056 )		(4,971 )		(622)		(46,682)		(35,958)		(675)		(1,877 )		(3,581 )		(1,173)		(6,887)
Net Increase (Decrease)	$ 71,856		$ 8,091		$ 8,085		$ 59,202		$ 465,824		$ 3,602		$ 7,272		$ 15,286		$ 10,209		$ 19,341
Shares:
Sold		3,339		396		280		3,294		18,441		137		302		620		373		847
Reinvested		249		42		–		449		368		5		14		21		9		43
Redeemed		(1,281 )		(175 )		(19)		(1,654)		(1,165)		(26)		(62 )		(134 )		(39)		(236)
Net Increase (Decrease)		2,307		263		261		2,089		17,644		116		254		507		343		654
Distributions:
Year Ended October 31, 2008
From net investment income $		(673) $		–	$ –		$ (774) $			(7,056) $		–	$ (13) $			(89) $		(85) $		(291)
From net realized gain on
investments		(33,464 )		(5,238 )		(1,758)		(46,616)	(118,487)			(1,108)		(2,485 )		(5,040 )		(2,614)		(7,263)
Total Dividends and Distributions $		(34,137) $		(5,238) $		(1,758) $		(47,390) $ (125,543) $				(1,108) $		(2,498) $		(5,129) $		(2,699) $		(7,554)
Year Ended October 31, 2007
From net investment income $		(300) $		–	$ –		$ (442) $			(1,387) $		(2) $		(12) $		(33) $		(21) $		(111)
From net realized gain on
investments		(6,036 )		(1,054 )		–		(10,519)		(7,899)		(123)		(349 )		(479 )		(217)		(962)
Total Dividends and Distributions $		(6,336) $		(1,054) $		–	$ (10,961) $			(9,286) $		(125) $		(361) $		(512) $		(238) $		(1,073)

See accompanying notes.

122

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															International Growth Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 30,508				$ 21,539
Net realized gain (loss) from investment transactions and foreign currency transactions																(343,514 )			200,772
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(1,040,308)				260,398
				Net Increase (Decrease) in Net Assets Resulting from Operations											(1,353,314)				482,709
Dividends and Distributions to Shareholders
From net investment income																(18,610 )			(13,222)
From net realized gain on investments																(198,877 )			(126,025)
								Total Dividends and Distributions								(217,487)			(139,247)
Capital Share Transactions
Net increase (decrease) in capital share transactions																422,493			855,776
Redemption fees - Class A																1			–
Redemption fees - Class J																1			2
								Total increase (decrease) in net assets							(1,148,306)				1,199,240
Net Assets
Beginning of period																2,471,391			1,272,151
End of period (including undistributed net investment income as set forth below)														$ 1,323,085				$ 2,471,391
Undistributed (overdistributed) net investment income (operating loss)														$ 29,625				$ 18,601
	Class A			Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 3,765		$ 661		$ 9,746		$ 361,524		$ 998		$ 2,203		$ 6,406		$ 4,136		$ 14,369
Reinvested		106		16		7,183		200,494		280		1,480		3,252		2,160		2,469
Redeemed		(976 )		(221 )		(18,946)		(137,843)		(870)		(5,291)		(7,286 )		(11,612 )		(15,710)
Net Increase (Decrease)	$ 2,895		$ 456		$ (2,017) $			424,175	$ 408		$ (1,608) $			2,372	$ (5,316) $			1,128
Shares:
Sold		310		54		841		30,097		84		179		544		358		1,180
Reinvested		8		1		548		14,944		21		114		235		163		186
Redeemed		(89)		(20)		(1,720)		(12,979)		(83)		(500)		(651 )		(979 )		(1,467)
Net Increase (Decrease)		229		35		(331)		32,062		22		(207)		128		(458)		(101)
Periods Ended October 31, 2007
Dollars:
Sold	$ 364		$ 21		$ 17,901		$ 756,973		$ 737		$ 3,988		$ 9,536		$ 7,457		$ 12,666
Reinvested		–		–		6,433		124,658		231		1,380		2,776		1,826		1,937
Redeemed		(1)		–		(14,528)		(56,913)		(411)		(4,559)		(5,264 )		(3,389 )		(8,043)
Net Increase (Decrease)	$ 363		$ 21		$ 9,806		$ 824,718		$ 557		$ 809		$ 7,048		$ 5,894		$ 6,560
Shares:
Sold		24		1		1,331		55,449		54		300		676		558		931
Reinvested		–		–		523		9,872		19		113		215		147		155
Redeemed		–		–		(1,087)		(4,267)		(31)		(342)		(382 )		(253 )		(588)
Net Increase (Decrease)		24		1		767		61,054		42		71		509		452		498
Distributions:
Year Ended October 31, 2008
From net investment income $		(4) $		–	$ (180) $			(18,045) $		–	$ (19) $			(94) $		(113) $		(155)
From net realized gain on
investments		(103 )		(17 )		(7,013)		(182,484)		(280)		(1,461)		(3,158 )		(2,047 )		(2,314)
Total Dividends and Distributions $		(107) $		(17) $		(7,193) $ (200,529) $				(280) $		(1,480) $		(3,252) $		(2,160) $		(2,469)
Year Ended October 31, 2007
From net investment income $		–	$ –		$ (157) $			(12,669) $		(1) $		(31) $		(109) $		(112) $		(143)
From net realized gain on
investments		–		–		(6,282)		(111,989)		(230)		(1,349)		(2,667)		(1,714)		(1,794)
Total Dividends and Distributions $		–	$ –		$ (6,439) $ (124,658) $					(231) $		(1,380) $		(2,776) $		(1,826) $		(1,937)

See accompanying notes.

123

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands														LargeCap Blend Fund I(a)
													Year Ended			Year Ended
													October 31, 2008			October 31, 2007
Operations
Net investment income (operating loss)													$ 12,730			$ 7,347
Net realized gain (loss) from investment transactions and foreign currency transactions															(112,715 )			27,971
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(281,357)			40,751
			Net Increase (Decrease) in Net Assets Resulting from Operations												(381,342)			76,069
Dividends and Distributions to Shareholders
From net investment income															(9,106 )			(1,893)
From net realized gain on investments															(24,506 )			–
							Total Dividends and Distributions								(33,612)			(1,893)
Capital Share Transactions
Net increase (decrease) in capital share transactions															202,949			516,670
Redemption fees - Class A															–			1
							Total increase (decrease) in net assets								(212,005)			590,847
Net Assets
Beginning of period															906,319			315,472
End of period (including undistributed net investment income as set forth below)													$ 694,314			$ 906,319
Undistributed (overdistributed) net investment income (operating loss)													$ 10,046			$ 6,461
		Class A	Class B		Class C		Class J Institutional				R-1		R-2		R-3	R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 8,443 $		665	$ 327		$ 5,165		$ 220,870		$ 420		$ 683		$ 988 $		545	$ 1,007
Reinvested		4,365	356		28		1,755		26,411		31		125		122	131		216
Redeemed		(20,462)	(4,192)		(347)		(9,175)		(25,327)		(255)		(1,572)		(2,381)	(1,970)		(4,023)
Net Increase (Decrease)	$ (7,654) $		(3,171) $		8	$ (2,255) $			221,954	$ 196		$ (764) $			(1,271) $	(1,294) $		(2,800)
Shares:
Sold		968	78		37		612		24,966		49		76		114	61		112
Reinvested		447	37		3		182		2,710		3		13		13	14		22
Redeemed		(2,379)	(494)		(41)		(1,085)		(3,295)		(32)		(181)		(274)	(212)		(473)
Net Increase (Decrease)		(964)	(379)		(1)		(291)		24,381		20		(92)		(147)	(137)		(339)
Year Ended October 31, 2007
Dollars:
Sold	$ 14,310 $		1,268	$ 959		$ 9,874		$ 530,391		$ 457		$ 1,161		$ 1,287 $		2,420	$ 3,444
Reinvested		97	–		–		20		1,736		–		–		6	8		23
Redeemed		(23,755)	(6,938)		(29)		(8,196)		(6,044)		(188)		(1,772)		(1,564)	(1,001)		(1,304)
Net Increase (Decrease)	$ (9,348) $		(5,670) $		930	$ 1,698		$ 526,083		$ 269		$ (611) $			(271) $	1,427	$ 2,163
Shares:
Sold		1,420	128		95		993		53,608		45		119		130	241		338
Reinvested		10	–		–		2		178		–		–		1	1		2
Redeemed		(2,357)	(696)		(3)		(819)		(608)		(19)		(179)		(156)	(99)		(128)
Net Increase (Decrease)		(927)	(568)		92		176		53,178		26		(60)		(25)	143		212
Distributions:
Year Ended October 31, 2008
From net investment income $		(681) $	–	$ –		$ (299) $			(8,002) $		(3) $		(16) $		(22) $	(29) $		(54)
From net realized gain on
investments		(3,753)	(358)		(28)		(1,456)		(18,410)		(28)		(109)		(100)	(102)		(162)
Total Dividends and Distributions $		(4,434) $	(358) $		(28) $		(1,755) $		(26,412) $		(31) $		(125) $		(122) $	(131) $		(216)
Year Ended October 31, 2007
From net investment income $		(99) $	–	$ –		$ (21) $			(1,736) $		–	$ –		$ (6) $		(8) $		(23)
From net realized gain on
investments		–	–		–		–		–		–		–		–	–		–
Total Dividends and Distributions $		(99) $	–	$ –		$ (21) $			(1,736) $		–	$ –		$ (6) $		(8) $		(23)
(a) Effective June 13, 2008, Partners LargeCap Blend Fund I changed its name to LargeCap Blend Fund I.

See accompanying notes.

124

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands										LargeCap Blend Fund II(a)
										Year Ended		Year Ended
										October 31, 2008		October 31, 2007
Operations
Net investment income (operating loss)										$ 9,312		$ 7,752
Net realized gain (loss) from investment transactions and foreign currency transactions											(50,606 )		92,066
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies											(342,103)		48,019
			Net Increase (Decrease) in Net Assets Resulting from Operations								(383,397)		147,837
Dividends and Distributions to Shareholders
From net investment income											(7,658 )		(8,232)
From net realized gain on investments											(92,994 )		(47,079)
						Total Dividends and Distributions					(100,652)		(55,311)
Capital Share Transactions
Net increase (decrease) in capital share transactions											34,310		62,349
Redemption fees - Class A											–		1
Redemption fees - Class B											–		1
						Total increase (decrease) in net assets					(449,739)		154,877
Net Assets
Beginning of period										1,101,268			946,391
End of period (including undistributed net investment income as set forth below)										$ 651,529		$ 1,101,268
Undistributed (overdistributed) net investment income (operating loss)										$ 7,188		$ 5,536
		Class A	Class B	Class C		Class J               Institutional		R-1		R-2	R-3	R-4	R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 6,512 $		1,161 $	506	$ 19,450 $		73,240 $	1,531	$ 2,752 $		12,158 $	5,121 $	3,255
Reinvested		5,803	2,301	101		14,319	65,606	296		2,644	3,098	1,499	4,870
Redeemed		(14,225 )	(5,429 )	(207)		(29,707)	(101,330)	(1,041)		(10,039 )	(8,352 )	(4,585)	(16,998)
Net Increase (Decrease)	$ (1,910) $		(1,967) $	400	$ 4,062 $		37,516 $	786	$ (4,643) $		6,904 $	2,035 $	(8,873)
Shares:
Sold		651	118	48		1,948	7,373	154		273	1,159	511	326
Reinvested		535	214	10		1,359	6,042	27		248	288	139	451
Redeemed		(1,480 )	(581 )	(24)		(3,199)	(10,411)	(108)		(1,060 )	(880 )	(462)	(1,830)
Net Increase (Decrease)		(294 )	(249 )	34		108	3,004	73		(539 )	567	188	(1,053)
Year Ended October 31, 2007
Dollars:
Sold	$ 14,119 $		2,366 $	1,336	$ 52,868 $		84,047 $	1,191	$ 3,464 $		8,017 $	7,538 $	19,862
Reinvested		3,158	1,276	–		6,254	37,814	121		1,646	1,860	634	2,489
Redeemed		(13,713 )	(3,733 )	(211)		(21,125)	(102,350)	(490)		(8,420 )	(17,056 )	(3,069)	(17,544)
Net Increase (Decrease)	$ 3,564 $		(91) $	1,125	$ 37,997 $		19,511 $	822	$ (3,310) $		(7,179) $	5,103 $	4,807
Shares:
Sold		1,216	204	113		4,647	7,210	100		302	685	661	1,690
Reinvested		281	115	–		573	3,366	11		149	167	57	223
Redeemed		(1,170 )	(321 )	(18)		(1,849)	(8,775)	(41)		(730 )	(1,477 )	(261)	(1,503)
Net Increase (Decrease)		327	(2)	95		3,371	1,801	70		(279)	(625)	457	410
Distributions:
Year Ended October 31, 2008
From net investment income $		(156) $	– $	–	$ (493) $		(6,418) $	–	$ (44) $		(114) $	(87) $	(346)
From net realized gain on
investments		(5,706 )	(2,318 )	(114)		(13,834)	(59,202)	(296)		(2,600 )	(2,985 )	(1,412)	(4,527)
Total Dividends and Distributions $		(5,862) $	(2,318) $	(114) $		(14,327) $	(65,620) $	(296) $		(2,644) $	(3,099) $	(1,499) $	(4,873)
Year Ended October 31, 2007
From net investment income $		(233) $	– $	–	$ (466) $		(6,841) $	(4) $		(92) $	(165) $	(78) $	(353)
From net realized gain on
investments		(2,971 )	(1,284 )	–		(5,791)	(30,974)	(118)		(1,554 )	(1,695 )	(556)	(2,136)
Total Dividends and Distributions $		(3,204) $	(1,284) $	–	$ (6,257) $		(37,815) $	(122) $		(1,646) $	(1,860) $	(634) $	(2,489)
(a) Effective June 13, 2008, Partners LargeCap Blend Fund changed its name to LargeCap Blend Fund II.

See accompanying notes.

125

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands																LargeCap Growth Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 13,569				$ 9,147
Net realized gain (loss) from investment transactions and foreign currency transactions																(61,162 )				330,863
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(1,350,438)					539,047
				Net Increase (Decrease) in Net Assets Resulting from Operations											(1,398,031)					879,057
Dividends and Distributions to Shareholders
From net investment income																(11,511 )				(4,154)
From net realized gain on investments																(52,872 )				(12,172)
From tax return of capital																(8,589)				–
								Total Dividends and Distributions								(72,972)				(16,326)
Capital Share Transactions
Net increase (decrease) in capital share transactions																(846,323 )			2,603,787
Redemption fees - Class A																29				3
Redemption fees - Class J																2				–
								Total increase (decrease) in net assets							(2,317,295)				3,466,521
Net Assets
Beginning of period															4,418,987					952,466
End of period (including undistributed net investment income as set forth below)														$ 2,101,692				$ 4,418,987
Undistributed (overdistributed) net investment income (operating loss)														$ –				$ 7,266
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 143,608		$ 7,449		$ 10,349		$ 23,634		$ 417,047		$ 5,454		$ 5,426		$ 28,395		$ 24,940		$ 35,232
Reinvested		9,015		1,502		145		979		56,242		231		417		1,086		493		1,894
Redeemed		(153,339)		(43,882)		(3,524)		(14,156)		(1,353,757)		(3,497)		(4,305)		(11,327)		(7,231)		(24,843)
Net Increase (Decrease)	$ (716 ) $			(34,931 ) $		6,970	$ 10,457		$ (880,468)		$ 2,188		$ 1,538		$ 18,154		$ 18,202		$ 12,283
Shares:
Sold		16,741		886		1,200		2,889		50,133		652		629		3,207		2,812		4,000
Reinvested		941		160		15		107		5,841		24		44		109		50		195
Redeemed		(18,627)		(5,317)		(476)		(1,810)		(156,545)		(430)		(528)		(1,364)		(876)		(2,959)
Net Increase (Decrease)		(945)		(4,271)		739		1,186		(100,571)		246		145		1,952		1,986		1,236
Year Ended October 31, 2007
Dollars:
Sold	$ 68,231		$ 5,832		$ 4,673		$ 13,265		$ 299,795		$ 6,097		$ 5,813		$ 18,730		$ 8,236		$ 46,785
Issued in acquisitions		140,361		77,359		2,933		–		2,248,006		–		–		–		–		–
Reinvested		3,862		361		–		462		8,892		85		234		486		258		835
Redeemed		(67,124)		(37,267)		(607)		(6,632)		(213,026)		(1,567)		(3,592)		(7,296)		(2,729)		(17,964)
Net Increase (Decrease)	$ 145,330		$ 46,285		$ 6,999		$ 7,095		$ 2,343,667		$ 4,615		$ 2,455		$ 11,920		$ 5,765		$ 29,656
Shares:
Sold		7,950		691		525		1,587		35,618		705		703		2,138		970		5,554
Issued in acquisitions		17,249		9,627		360		–		275,930		–		–		–		–		–
Reinvested		484		46		–		60		1,113		11		30		59		32		103
Redeemed		(8,005)		(4,467)		(73)		(822)		(24,743)		(192)		(438)		(834)		(318)		(2,045)
Net Increase (Decrease)		17,678		5,897		812		825		287,918		524		295		1,363		684		3,612
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ –		$ –		$ –		$ (11,336) $			–	$ –		$ –		$ (9) $			(166)
From net realized gain on
investments		(7,987)		(1,352)		(149)		(842)		(39,147)		(199)		(359)		(934)		(416)		(1,487)
From tax return of capital		(1,297)		(220)		(24)		(137)		(6,359)		(32)		(58)		(152)		(68)		(242)
Total Dividends and Distributions $		(9,284) $		(1,572) $		(173) $		(979) $		(56,842)	$ (231) $			(417) $		(1,086) $		(493) $		(1,895)
Year Ended October 31, 2007
From net investment income $		(352) $		–	$ –		$ –		$ (3,498) $			–	$ –		$ (35) $			(51) $		(218)
From net realized gain on
investments		(3,571)		(365)		–		(462)		(6,179)		(85)		(234)		(451)		(208)		(617)
Total Dividends and Distributions $		(3,923) $		(365) $		–	$ (462) $			(9,677)	$ (85) $			(234) $		(486 ) $		(259) $		(835)

See accompanying notes.

126

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands												LargeCap Growth Fund I(a)
												Year Ended		Year Ended
												October 31, 2008		October 31, 2007
Operations
Net investment income (operating loss)												$ (1,098 )		$ 2,584
Net realized gain (loss) from investment transactions and foreign currency transactions													(98,136 )			83,419
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies													(710,701)			198,841
			Net Increase (Decrease) in Net Assets Resulting from Operations										(809,935)			284,844
Dividends and Distributions to Shareholders
From net investment income													(1,304 )			(5,217)
From net realized gain on investments													(79,454 )			(54,217)
						Total Dividends and Distributions							(80,758)			(59,434)
Capital Share Transactions
Net increase (decrease) in capital share transactions													208,705			544,115
Redemption fees - Class A													–			1
Redemption fees - Class J													2			–
						Total increase (decrease) in net assets							(681,986)			769,526
Net Assets
Beginning of period												1,876,243			1,106,717
End of period (including undistributed net investment income as set forth below)												$ 1,194,257		$ 1,876,243
Undistributed (overdistributed) net investment income (operating loss)												$ –		$ 1,183
		Class A	Class B	Class C		Class J Institutional				R-1		R-2	R-3	R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 5,496 $		942 $	384	$ 7,601		$ 292,170		$ 550		$ 1,359 $		3,717 $	1,781	$ 5,656
Reinvested		2,308	530	29		2,364		71,821		67		782	1,069	268		1,478
Redeemed		(9,178)	(3,613)	(328)		(9,879)	(139,972)			(327)		(5,963)	(6,440)	(1,685)		(14,282)
Net Increase (Decrease)	$ (1,374) $		(2,141) $	85	$ 86		$ 224,019		$ 290		$ (3,822) $		(1,654) $	364	$ (7,148)
Shares:
Sold		716	127	50		1,044		36,962		76		180	501	238		727
Reinvested		271	64	3		296		8,295		8		95	126	32		172
Redeemed		(1,220)	(499)	(44)		(1,433)		(19,207)		(42)		(849)	(838)	(234)		(1,885)
Net Increase (Decrease)		(233)	(308)	9		(93)		26,050		42		(574)	(211)	36		(986)
Year Ended October 31, 2007
Dollars:
Sold	$ 9,682 $		1,337 $	668	$ 14,339		$ 579,235		$ 531		$ 2,349 $		5,244 $	2,683	$ 10,367
Reinvested		2,146	604	–		1,827		51,267		42		800	1,275	170		1,273
Redeemed		(12,041)	(4,564)	(67)		(7,882)		(88,241)		(90)		(6,034)	(12,217)	(1,084)		(9,504)
Net Increase (Decrease)	$ (213) $		(2,623) $	601	$ 8,284		$ 542,261		$ 483		$ (2,885) $		(5,698) $	1,769	$ 2,136
Shares:
Sold		1,125	158	76		1,772		67,288		62		274	609	323		1,184
Reinvested		261	74	–		237		6,165		5		101	156	21		155
Redeemed		(1,394)	(539)	(7)		(968)		(10,346)		(11)		(729)	(1,448)	(127)		(1,112)
Net Increase (Decrease)		(8)	(307)	69		1,041		63,107		56		(354)	(683)	217		227
Distributions:
Year Ended October 31, 2008
From net investment income $		– $	– $	–	$ –		$ (1,304) $			–	$ – $		– $	–	$ –
From net realized gain on
investments		(2,342)	(536)	(29)		(2,365)		(70,518)		(67)		(782)	(1,069)	(268)		(1,478)
Total Dividends and Distributions $		(2,342) $	(536) $	(29) $		(2,365) $		(71,822) $		(67) $		(782) $	(1,069) $	(268) $		(1,478)
Year Ended October 31, 2007
From net investment income $		– $	– $	–	$ –		$ (5,157) $			–	$ – $		– $	(4) $		(56)
From net realized gain on
investments		(2,171)	(607)	–		(1,828)		(46,110)		(42)		(800)	(1,275)	(166)		(1,218)
Total Dividends and Distributions $		(2,171) $	(607) $	–	$ (1,828) $			(51,267) $		(42) $		(800) $	(1,275) $	(170) $		(1,274)
(a) Effective June 13, 2008, Partners LargeCap Growth Fund I changed its name to LargeCap Growth Fund I.

See accompanying notes.

127

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															LargeCap Growth Fund II(a)
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 2,860				$ 958
Net realized gain (loss) from investment transactions and foreign currency transactions																(119,967 )			98,710
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(489,374)			43,200
				Net Increase (Decrease) in Net Assets Resulting from Operations												(606,481)			142,868
Dividends and Distributions to Shareholders
From net investment income																–			(814)
From net realized gain on investments																(99,992 )			(57,319)
								Total Dividends and Distributions								(99,992)			(58,133)
Capital Share Transactions
Net increase (decrease) in capital share transactions															1,240,556				(68,603)
								Total increase (decrease) in net assets								534,083			16,132
Net Assets
Beginning of period																854,794			838,662
End of period (including undistributed net investment income as set forth below)														$ 1,388,877				$ 854,794
Undistributed (overdistributed) net investment income (operating loss)														$ 5,743				$ –
	Class A			Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 1,062		$ 328		$ 5,758		$ 1,284,746		$ 456		$ 2,585		$ 2,472		$ 2,145		$ 19,056
Reinvested		129		48		3,014		89,749		161		1,391		1,016		2,096		2,380
Redeemed		(612)		(177)		(6,469)		(130,357)		(766)		(5,394)		(3,311)		(12,899)		(18,051)
Net Increase (Decrease)	$ 579		$ 199		$ 2,303		$ 1,244,138		$ (149) $			(1,418) $		177	$ (8,658) $			3,385
Shares:
Sold		127		40		763		153,823		57		327		304		266		2,332
Reinvested		15		5		365		9,972		18		164		119		240		270
Redeemed		(78)		(23)		(881)		(16,866)		(98)		(707)		(421 )		(1,572 )		(2,306)
Net Increase (Decrease)		64		22		247		146,929		(23)		(216)		2		(1,066)		296
Year Ended October 31, 2007
Dollars:
Sold	$ 705		$ 384		$ 5,661		$ 173,492		$ 1,137		$ 1,238		$ 1,648		$ 3,342		$ 8,670
Issued in acquisitions		–		–		10,790		117,492		348		1,962		1,541		18		18
Reinvested		50		–		1,216		52,155		35		1,041		691		1,483		1,462
Redeemed		(233)		(17)		(4,625)		(433,059)		(347)		(4,129)		(3,446)		(3,970)		(5,356)
Net Increase (Decrease)	$ 522		$ 367		$ 13,042		$ (89,920) $			1,173	$ 112		$ 434		$ 873		$ 4,794
Shares:
Sold		79		44		674		19,708		124		146		191		390		963
Issued in acquisitions		–		–		1,348		13,671		41		239		186		2		2
Reinvested		6		–		155		6,173		4		129		85		180		176
Redeemed		(27)		(2)		(560)		(50,179)		(40)		(481)		(408 )		(449 )		(601)
Net Increase (Decrease)		58		42		1,617		(10,627)		129		33		54		123		540
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(133)		(48)		(3,014)		(89,749)		(161)		(1,391)		(1,016)		(2,098)		(2,382)
Total Dividends and Distributions $		(133) $		(48) $		(3,014) $		(89,749) $		(161) $		(1,391) $		(1,016) $		(2,098) $		(2,382)
Year Ended October 31, 2007
From net investment income $		–	$ –		$ –		$ (814) $			–	$ –		$ –		$ –		$ –
From net realized gain on
investments		(50)		–		(1,216)		(51,341)		(35)		(1,041)		(691 )		(1,483 )		(1,462)
Total Dividends and Distributions $		(50) $		–	$ (1,216) $			(52,155) $		(35) $		(1,041) $		(691) $		(1,483) $		(1,462)
(a) Effective June 13, 2008, Partners LargeCap Growth Fund II changed its name to LargeCap Growth Fund II.

See accompanying notes.

128

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands											LargeCap S&P 500 Index Fund
											Year Ended				Year Ended
											October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)											$ 17,104				$ 14,359
Net realized gain (loss) from investment transactions and foreign currency transactions													(27,571 )			15,111
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies													(436,782)			106,869
			Net Increase (Decrease) in Net Assets Resulting from Operations										(447,249)			136,339
Dividends and Distributions to Shareholders
From net investment income													(15,259 )			(11,410)
From net realized gain on investments													(12,577 )			(3,300)
						Total Dividends and Distributions							(27,836)			(14,710)
Capital Share Transactions
Net increase (decrease) in capital share transactions													81,507			120,373
Redemption fees - Class A													6			2
Redemption fees - Class J													5			5
						Total increase (decrease) in net assets							(393,567)			242,009
Net Assets
Beginning of period												1,183,660				941,651
End of period (including undistributed net investment income as set forth below)											$ 790,093				$ 1,183,660
Undistributed (overdistributed) net investment income (operating loss)											$ 13,357				$ 11,600
		Class A	Class C		Class J      Institutional			R-1		R-2	R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 13,931 $		1,782	$ 45,226          $ 111,968			$ 4,973		$ 8,621 $		44,872	$ 48,757		$ 45,890
Reinvested		2,042	48		9,438	2,582		270		1,458	4,084		1,510		6,358
Redeemed		(18,940 )	(806 )		(72,769)	(37,261)		(5,090)		(13,327)	(40,632 )		(12,247 )		(71,231)
Net Increase (Decrease)	$ (2,967) $		1,024	$ (18,105) $		77,289	$ 153		$ (3,248) $		8,324	$ 38,020		$ (18,983)
Shares:
Sold		1,566	196		4,951	12,119		544		937	4,895		5,245		4,828
Reinvested		197	5		919	249		26		141	394		145		608
Redeemed		(2,121 )	(89 )		(8,100)	(3,962)		(645)		(1,457)	(4,441 )		(1,298 )		(7,687)
Net Increase (Decrease)		(358)	112		(2,230)	8,406		(75)		(379)	848		4,092		(2,251)
Year Ended October 31, 2007
Dollars:
Sold	$ 16,759 $		2,712	$ 61,322 $		65,224	$ 6,266		$ 11,291 $		55,614	$ 28,334		$ 85,447
Reinvested		1,193	–		5,200	675		84		935	2,021		700		3,881
Redeemed		(16,358 )	(159 )		(60,660)	(15,406)		(988)		(20,088)	(23,423 )		(12,462 )		(77,741)
Net Increase (Decrease)	$ 1,594 $		2,553	$ 5,862 $		50,493	$ 5,362		$ (7,862) $		34,212	$ 16,572		$ 11,587
Shares:
Sold		1,604	260		5,948	6,287		588		1,094	5,280		2,739		8,142
Reinvested		119	–		523	67		8		93	201		70		383
Redeemed		(1,567 )	(15 )		(5,875)	(1,470)		(95)		(1,911)	(2,246 )		(1,182 )		(7,528)
Net Increase (Decrease)		156	245		596	4,884		501		(724)	3,235		1,627		997
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,115) $	(18) $		(4,943) $	(1,605) $		(124) $		(712) $	(2,158) $		(855) $		(3,729)
From net realized gain on
investments		(950 )	(31 )		(4,503)	(986)		(146)		(746)	(1,926 )		(655 )		(2,634)
Total Dividends and Distributions $		(2,065) $	(49) $		(9,446) $	(2,591) $		(270) $		(1,458) $	(4,084) $		(1,510) $		(6,363)
Year Ended October 31, 2007
From net investment income $		(934) $	–	$ (3,897) $		(565) $		(60) $		(686) $	(1,572) $		(558) $		(3,138)
From net realized gain on
investments		(273)	–		(1,307)	(112)		(25)		(249)	(449)		(142)		(743)
Total Dividends and Distributions $		(1,207) $	–	$ (5,204) $		(677) $		(85) $		(935) $	(2,021) $		(700) $		(3,881)

See accompanying notes.

129

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands													LargeCap Value Fund
												Year Ended			Year Ended
												October 31, 2008			October 31, 2007
Operations
Net investment income (operating loss)												$ 16,256			$ 12,798
Net realized gain (loss) from investment transactions and foreign currency transactions													(117,644 )				67,120
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies													(228,559)				(7,982)
			Net Increase (Decrease) in Net Assets Resulting from Operations										(329,947)				71,936
Dividends and Distributions to Shareholders
From net investment income													(13,362 )				(11,030)
From net realized gain on investments													(67,190 )				(34,028)
						Total Dividends and Distributions							(80,552)				(45,058)
Capital Share Transactions
Net increase (decrease) in capital share transactions													165,262				97,809
Redemption fees - Class A													–				6
Redemption fees - Class J													2				1
						Total increase (decrease) in net assets							(245,235)				124,694
Net Assets
Beginning of period													867,568				742,874
End of period (including undistributed net investment income as set forth below)												$ 622,333			$ 867,568
Undistributed (overdistributed) net investment income (operating loss)												$ 12,939			$ 10,047
		Class A	Class B	Class C		Class J Institutional				R-1		R-2	R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 12,913 $		1,018 $	1,337	$ 12,805		$ 138,054		$ 574		$ 1,077 $		922	$ 1,543		$ 3,113
Reinvested		25,827	1,584	89		5,364		45,498		87		322	274		171		686
Redeemed		(39,802)	(5,440)	(711)		(13,409)		(16,085)		(595)		(1,939)	(1,088)		(1,283)		(7,644)
Net Increase (Decrease)	$ (1,062) $		(2,838) $	715	$ 4,760		$ 167,467		$ 66		$ (540) $		108	$ 431		$ (3,845)
Shares:
Sold		1,218	96	128		1,249		12,772		57		101	89		144		299
Reinvested		2,151	133	8		453		3,791		7		27	23		14		57
Redeemed		(3,784)	(522)	(70)		(1,301)		(1,692)		(57)		(176)	(104)		(119)		(676)
Net Increase (Decrease)		(415)	(293)	66		401		14,871		7		(48)	8		39		(320)
Year Ended October 31, 2007
Dollars:
Sold	$ 22,211 $		2,230 $	1,079	$ 17,382		$ 95,553		$ 565		$ 621 $		1,345	$ 992		$ 5,129
Reinvested		16,973	1,096	–		2,937		22,204		41		289	172		76		699
Redeemed		(45,433)	(6,752)	(54)		(11,798)		(19,008)		(317)		(2,380)	(1,305)		(482)		(6,256)
Net Increase (Decrease)	$ (6,249) $		(3,426) $	1,025	$ 8,521		$ 98,749		$ 289		$ (1,470) $		212	$ 586		$ (428)
Shares:
Sold		1,685	170	82		1,334		7,161		43		47	103		77		389
Reinvested		1,324	86	–		232		1,730		3		23	14		6		54
Redeemed		(3,446)	(513)	(4)		(903)		(1,476)		(24)		(183)	(98)		(38)		(464)
Net Increase (Decrease)		(437)	(257)	78		663		7,415		22		(113)	19		45		(21)
Distributions:
Year Ended October 31, 2008
From net investment income $		(3,771) $	(54) $	(8) $		(697) $		(8,609) $		(9) $		(38) $	(37) $		(26) $		(113)
From net realized gain on
investments		(22,689)	(1,543)	(81)		(4,670)		(36,890)		(78)		(284)	(237)		(145)		(573)
Total Dividends and Distributions $		(26,460) $	(1,597) $	(89) $		(5,367) $		(45,499) $		(87) $		(322) $	(274) $		(171) $		(686)
Year Ended October 31, 2007
From net investment income $		(3,891) $	(48) $	–	$ (529) $			(6,275) $		(6) $		(52) $	(35) $		(18) $		(176)
From net realized gain on
investments		(13,531)	(1,056)	–		(2,408)		(16,042)		(35)		(237)	(137)		(59)		(523)
Total Dividends and Distributions $		(17,422) $	(1,104) $	–	$ (2,937) $			(22,317) $		(41) $		(289) $	(172) $		(77) $		(699)

See accompanying notes.

130

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands														LargeCap Value Fund III(a)
													Year Ended				Year Ended
													October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)													$ 51,582				$ 45,996
Net realized gain (loss) from investment transactions and foreign currency transactions															(130,835 )				161,956
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies														(1,087,691)					(4,733)
				Net Increase (Decrease) in Net Assets Resulting from Operations										(1,166,944)					203,219
Dividends and Distributions to Shareholders
From net investment income															(50,200 )				(38,660)
From net realized gain on investments															(161,500 )			(114,675)
							Total Dividends and Distributions								(211,700)			(153,335)
Capital Share Transactions
Net increase (decrease) in capital share transactions															452,616				199,426
Redemption fees - Class A															1				2
Redemption fees - Class J															2				–
							Total increase (decrease) in net assets								(926,025)				249,312
Net Assets
Beginning of period															2,790,713			2,541,401
End of period (including undistributed net investment income as set forth below)													$ 1,864,688				$ 2,790,713
Undistributed (overdistributed) net investment income (operating loss)													$ 37,209				$ 35,816
		Class A		Class B	Class C		Class J      Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 6,200		$ 750 $		679	$ 13,559		$ 746,251		$ 1,830		$ 2,753		$ 6,257		$ 12,936		$ 13,062
Reinvested		4,820		1,454	99		9,666		166,612		628		4,447		9,759		4,265		9,820
Redeemed		(16,522 )		(5,086 )	(470)		(26,190)	(377,618)			(2,092)		(17,791 )		(34,182 )		(28,890)		(54,390)
Net Increase (Decrease)	$ (5,502) $			(2,882) $	308	$ (2,965)             $ 535,245				$ 366		$ (10,591) $			(18,166) $		(11,689) $		(31,508)
Shares:
Sold		513		61	53		1,087		71,831		147		235		500		1,031		1,042
Reinvested		341		103	7		693		11,789		45		318		676		303		695
Redeemed		(1,382 )		(434 )	(41)		(2,242)		(31,668)		(173)		(1,507 )		(2,833 )		(2,339)		(4,661)
Net Increase (Decrease)		(528 )		(270 )	19		(462)		51,952		19		(954 )		(1,657 )		(1,005)		(2,924)
Year Ended October 31, 2007
Dollars:
Sold	$ 13,727		$ 2,651 $		1,512	$ 41,792		$ 343,775		$ 4,721		$ 11,120		$ 61,892		$ 24,414		$ 37,728
Reinvested		3,528		1,119	–		5,999		124,170		315		3,444		5,144		2,580		6,955
Redeemed		(14,351 )		(4,322 )	(135)		(22,355)	(377,955)			(2,309)		(13,930 )		(23,675 )		(10,537)		(27,591)
Net Increase (Decrease)	$ 2,904		$ (552) $		1,377	$ 25,436		$ 89,990		$ 2,727		$ 634		$ 43,361		$ 16,457		$ 17,092
Shares:
Sold		872		168	95		2,676		21,773		301		713		3,845		1,536		2,373
Reinvested		230		73	–		397		8,086		21		228		330		169		454
Redeemed		(907 )		(273 )	(9)		(1,432)		(24,218)		(146)		(895 )		(1,453 )		(668)		(1,744)
Net Increase (Decrease)		195		(32)	86		1,641		5,641		176		46		2,722		1,037		1,083
Distributions:
Year Ended October 31, 2008
From net investment income $		(901) $		(139) $	(9) $		(1,835) $		(41,624) $		(102) $		(780) $		(1,871) $		(748) $		(2,191)
From net realized gain on
investments		(4,015 )		(1,335 )	(90)		(7,841)	(124,992)			(526)		(3,667 )		(7,888 )		(3,517)		(7,629)
Total Dividends and Distributions $		(4,916) $		(1,474) $	(99) $		(9,676)             $ (166,616) $				(628) $		(4,447) $		(9,759) $		(4,265) $		(9,820)
Year Ended October 31, 2007
From net investment income $		(631) $		(65) $	–	$ (1,026) $			(33,163) $		(44) $		(552) $		(985) $		(558) $		(1,636)
From net realized gain on
investments		(2,966 )		(1,063 )	–		(4,975)		(91,007)		(271)		(2,892 )		(4,160 )		(2,022)		(5,319)
Total Dividends and Distributions $		(3,597) $		(1,128) $	–	$ (6,001)                   (124,170) $					(315) $		(3,444) $		(5,145) $		(2,580) $		(6,955)
(a) Effective June 13, 2008, Partners LargeCap Value Fund changed its name to LargeCap Value Fund III.

See accompanying notes.

131

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															MidCap Blend Fund
													Year Ended				Year Ended
													October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)													$ (896 )				$ (424)
Net realized gain (loss) from investment transactions and foreign currency transactions															32,307				86,633
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(341,511)				59,289
				Net Increase (Decrease) in Net Assets Resulting from Operations											(310,100)				145,498
Dividends and Distributions to Shareholders
From net investment income															–				(1,198)
From net realized gain on investments															(86,226 )				(77,285)
							Total Dividends and Distributions								(86,226)				(78,483)
Capital Share Transactions
Net increase (decrease) in capital share transactions															49,743				54,601
Redemption fees - Class A															3				14
Redemption fees - Class B															–				1
Redemption fees - Class J															3				4
							Total increase (decrease) in net assets								(346,577)				121,635
Net Assets
Beginning of period															931,855				810,220
End of period (including undistributed net investment income as set forth below)													$ 585,278				$ 931,855
Undistributed (overdistributed) net investment income (operating loss)													$ 13				$ –
		Class A		Class B	Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 44,988		$ 4,807 $		2,706	$ 27,795		$ 42,800		$ 539		$ 1,630		$ 4,650		$ 2,966		$ 6,169
Reinvested		53,899		6,258	386		20,143		122		123		318		948		579		2,442
Redeemed		(85,634 )		(17,802 )	(1,233)		(42,998)		(4,071)		(425)		(1,056 )		(3,256 )		(2,067)		(15,983)
Net Increase (Decrease)	$ 13,253		$ (6,737) $		1,859	$ 4,940		$ 38,851		$ 237		$ 892		$ 2,342		$ 1,478		$ (7,372)
Shares:
Sold		3,438		371	211		2,148		3,223		42		124		356		220		475
Reinvested		3,831		446	28		1,470		9		9		23		68		41		174
Redeemed		(6,664 )		(1,395 )	(98)		(3,444)		(322)		(33)		(85 )		(252 )		(153)		(1,190)
Net Increase (Decrease)		605		(578)	141		174		2,910		18		62		172		108		(541)
Year Ended October 31, 2007
Dollars:
Sold	$ 50,940		$ 7,363 $		4,055	$ 54,040		$ 1,356		$ 939		$ 1,103		$ 5,120		$ 1,746		$ 8,787
Reinvested		52,029		6,323	–		15,553		–		61		252		578		500		2,175
Redeemed		(99,599 )		(17,419 )	(326)		(29,027)		(8)		(208)		(894 )		(2,714 )		(1,504)		(6,620)
Net Increase (Decrease)	$ 3,370		$ (3,733) $		3,729	$ 40,566		$ 1,348		$ 792		$ 461		$ 2,984		$ 742		$ 4,342
Shares:
Sold		3,393		489	268		3,670		86		62		74		350		116		587
Reinvested		3,693		450	–		1,129		–		4		18		41		35		154
Redeemed		(6,641 )		(1,162 )	(21)		(1,970)		(1)		(14)		(60 )		(186 )		(97)		(435)
Net Increase (Decrease)		445		(223)	247		2,829		85		52		32		205		54		306
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(54,757)		(6,357)	(401)		(20,165)		(130)		(123)		(318)		(948)		(579)		(2,448)
Total Dividends and Distributions $		(54,757) $		(6,357) $	(401) $		(20,165) $		(130) $		(123) $		(318) $		(948) $		(579) $		(2,448)
Year Ended October 31, 2007
From net investment income $		(1,117) $		– $	–	$ –		$ –		$ –		$ –		$ –		$ (10) $			(71)
From net realized gain on
investments		(51,835)		(6,401)	–		(15,563)		(1)		(61)		(252)		(578)		(490)		(2,104)
Total Dividends and Distributions $		(52,952) $		(6,401) $	–	$ (15,563) $			(1) $		(61) $		(252) $		(578) $		(500) $		(2,175)

See accompanying notes.

132

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															MidCap Growth Fund I(a)
														Year Ended			Year Ended
														October 31, 2008			October 31, 2007
Operations
Net investment income (operating loss)														$ (277 )			$ (2)
Net realized gain (loss) from investment transactions and foreign currency transactions																(14,101 )	35,378
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(117,409)	11,344
				Net Increase (Decrease) in Net Assets Resulting from Operations												(131,787)	46,720
Dividends and Distributions to Shareholders
From net realized gain on investments																(35,454 )	(31,579)
								Total Dividends and Distributions								(35,454)	(31,579)
Capital Share Transactions
Net increase (decrease) in capital share transactions																12,788	59,194
								Total increase (decrease) in net assets								(154,453)	74,335
Net Assets
Beginning of period																332,141	257,806
End of period (including undistributed net investment income as set forth below)														$ 177,688			$ 332,141
Undistributed (overdistributed) net investment income (operating loss)														$ –			$ 46
	Class A			Class C Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 1,178		$ 162		$ 18,943		$ 966		$ 726		$ 4,500		$ 3,796		$ 4,174
Reinvested		379		38		33,113		129		405		421		377		585
Redeemed		(1,384 )		(145 )		(43,787)		(286)		(888)		(3,060)		(1,759 )		(5,795 )
Net Increase (Decrease)	$ 173		$ 55		$ 8,269		$ 809		$ 243		$ 1,861		$ 2,414		$ (1,036)
Shares:
Sold		116		16		1,683		93		69		428		361		385
Reinvested		33		4		2,835		11		36		37		33		51
Redeemed		(146 )		(15 )		(4,376)		(29)		(88)		(310)		(170 )		(594 )
Net Increase (Decrease)		3		5		142		75		17		155		224		(158)
Year Ended October 31, 2007
Dollars:
Sold	$ 3,213		$ 320		$ 44,338		$ 876		$ 2,434		$ 2,899		$ 2,733		$ 3,789
Reinvested		235		–		30,489		29		204		341		132		148
Redeemed		(1,773 )		(5 )		(27,031)		(79)		(836)		(2,461)		(421 )		(380 )
Net Increase (Decrease)	$ 1,675		$ 315		$ 47,796		$ 826		$ 1,802		$ 779		$ 2,444		$ 3,557
Shares:
Sold		259		26		3,492		70		197		230		212		288
Reinvested		20		–		2,577		3		18		29		11		12
Redeemed		(142 )		(1 )		(2,179)		(6)		(68)		(210)		(33 )		(30 )
Net Increase (Decrease)		137		25		3,890		67		147		49		190		270
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(386 )		(38 )		(33,113)		(129)		(405)		(421)		(377 )		(585 )
Total Dividends and Distributions $		(386) $		(38) $		(33,113) $		(129) $		(405) $		(421) $		(377) $		(585)
Year Ended October 31, 2007
From net investment income $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(235)		–		(30,489)		(30)		(204)		(341)		(132)		(148)
Total Dividends and Distributions $		(235) $		–	$ (30,489) $			(30) $		(204) $		(341) $		(132) $		(148)
(a) Effective June 13, 2008, Partners MidCap Growth Fund I changed its name to MidCap Growth Fund I.

See accompanying notes.

133

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands													MidCap Growth Fund III(a)
													Year Ended			Year Ended
													October 31, 2008			October 31, 2007
Operations
Net investment income (operating loss)													$ (3,451 )			$ (3,474)
Net realized gain (loss) from investment transactions and foreign currency transactions														(102,422 )				53,603
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies														(299,531)				110,075
				Net Increase (Decrease) in Net Assets Resulting from Operations										(405,404)				160,204
Dividends and Distributions to Shareholders
From net realized gain on investments														(47,607 )				(14,443)
From tax return of capital														(294)				–
							Total Dividends and Distributions							(47,901)				(14,443)
Capital Share Transactions
Net increase (decrease) in capital share transactions														257,856				102,385
Redemption fees - Class A														3				1
							Total increase (decrease) in net assets							(195,446)				248,147
Net Assets
Beginning of period														725,264				477,117
End of period (including undistributed net investment income as set forth below)													$ 529,818			$ 725,264
Undistributed (overdistributed) net investment income (operating loss)													$ –			$ –
		Class A		Class B	Class C		Class J Institutional				R-1		R-2	R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 9,396		$ 1,402 $		1,312	$ 6,361		$ 273,307		$ 825		$ 2,785 $		14,236	$ 7,774		$ 12,491
Reinvested		2,594		818	103		2,590		35,472		70		952	2,151		1,730		1,347
Redeemed		(9,502 )		(3,697 )	(903)		(7,773)		(69,589)		(346)		(4,335 )	(5,048 )		(4,174)		(14,493)
Net Increase (Decrease)	$ 2,488		$ (1,477) $		512	$ 1,178		$ 239,190		$ 549		$ (598) $		11,339	$ 5,330		$ (655)
Shares:
Sold		935		143	128		677		27,134		85		284	1,423		751		1,212
Reinvested		236		76	9		246		3,159		7		86	189		152		117
Redeemed		(1,031 )		(407 )	(100)		(871)		(7,754)		(39)		(468 )	(550 )		(451)		(1,517)
Net Increase (Decrease)		140		(188)	37		52		22,539		53		(98)	1,062		452		(188)
Year Ended October 31, 2007
Dollars:
Sold	$ 10,453		$ 2,219 $		980	$ 7,977		$ 162,050		$ 416		$ 4,050 $		7,980	$ 9,110		$ 10,091
Reinvested		809		308	–		858		9,967		17		354	830		509		775
Redeemed		(7,614 )		(2,752 )	(23)		(5,947)		(65,325)		(250)		(4,408 )	(12,532 )		(5,396)		(23,121)
Net Increase (Decrease)	$ 3,648		$ (225) $		957	$ 2,888		$ 106,692		$ 183		$ (4) $		(3,722) $		4,223	$ (12,255)
Shares:
Sold		988		209	91		779		15,532		40		384	746		855		908
Reinvested		83		32	–		93		1,017		2		37	83		51		77
Redeemed		(738 )		(269 )	(2)		(604)		(6,510)		(25)		(425 )	(1,186 )		(516)		(2,111)
Net Increase (Decrease)		333		(28)	89		268		10,039		17		(4)	(357)		390		(1,126)
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ – $		–	$ –		$ –
From net realized gain on
investments		(2,628 )		(834 )	(104)		(2,574)		(35,254)		(70)		(947 )	(2,138 )		(1,719)		(1,339)
From tax return of capital		(16)		(5)	(1)		(16)		(218)		–		(6)	(13)		(11)		(8)
Total Dividends and Distributions $		(2,644) $		(839) $	(105) $		(2,590) $		(35,472) $		(70) $		(953) $	(2,151) $		(1,730) $		(1,347)
Year Ended October 31, 2007
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ – $		–	$ –		$ –
From net realized gain on
investments		(822 )		(311 )	–		(858)		(9,967)		(17)		(354 )	(830 )		(509)		(775)
Total Dividends and Distributions $		(822) $		(311) $	–	$ (858) $			(9,967) $		(17) $		(354) $	(830) $		(509) $		(775)
(a) Effective June 13, 2008, Partners MidCap Growth Fund changed its name to MidCap Growth Fund III.

See accompanying notes.

134

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands						MidCap Stock Fund
						Year Ended	Year Ended
						October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)						$ 5,912	$ 8,271
Net realized gain (loss) from investment transactions and foreign currency transactions						(6,064 )		102,638
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies						(230,490)		(70,737)
			Net Increase (Decrease) in Net Assets Resulting from Operations			(230,642)		40,172
Dividends and Distributions to Shareholders
From net investment income						(8,374 )		(6,899)
From net realized gain on investments						(102,047 )		(44,854)
					Total Dividends and Distributions	(110,421)		(51,753)
Capital Share Transactions
Net increase (decrease) in capital share transactions						(115,515 )		(115,305)
Redemption fees - Class A						8		1
					Total increase (decrease) in net assets	(456,570)		(126,885)
Net Assets
Beginning of period						852,634		979,519
End of period (including undistributed net investment income as set forth below)						$ 396,064	$ 852,634
Undistributed (overdistributed) net investment income (operating loss)						$ 2,516	$ 6,111
		Class A	Class B	Class C                                                         Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 15,064 $		905 $	1,090 $	27,263
Reinvested		25,356	3,672	1,131	77,749
Redeemed		(188,080)	(9,389)	(4,067)	(66,209)
Net Increase (Decrease)	$ (147,660 ) $		(4,812 ) $	(1,846) $	38,803
Shares:
Sold		943	63	73	1,883
Reinvested		1,504	235	72	4,537
Redeemed		(11,525 )	(653 )	(280)	(4,008)
Net Increase (Decrease)		(9,078 )	(355 )	(135)	2,412
Year Ended October 31, 2007
Dollars:
Sold	$ 85,593 $		5,479 $	6,029 $	6,435
Reinvested		10,660	1,294	317	38,515
Redeemed		(53,308 )	(7,368 )	(3,617)	(205,334)
Net Increase (Decrease)	$ 42,945 $		(595 ) $	2,729                                                             $ (160,384)
Shares:
Sold		3,952	268	294	299
Reinvested		509	66	16	1,814
Redeemed		(2,503 )	(365 )	(180)	(9,563)
Net Increase (Decrease)		1,958	(31)	130	(7,450)
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,687) $	(42) $	(23) $	(6,622)
From net realized gain on
investments		(25,422 )	(4,087 )	(1,411)	(71,127)
Total Dividends and Distributions $		(27,109) $	(4,129 ) $	(1,434) $	(77,749)
Year Ended October 31, 2007
From net investment income $		(1,237) $	(2) $	(1) $	(5,659)
From net realized gain on
investments		(10,079 )	(1,505 )	(414)	(32,856)
Total Dividends and Distributions $		(11,316) $	(1,507 ) $	(415) $	(38,515)

See accompanying notes.

135

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands												MidCap Value Fund II(a)
											Year Ended		Year Ended
											October 31, 2008		October 31, 2007
Operations
Net investment income (operating loss)											$ 5,247		$ 4,920
Net realized gain (loss) from investment transactions and foreign currency transactions												(78,109 )		69,564
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies												(188,302)		(15,888)
			Net Increase (Decrease) in Net Assets Resulting from Operations									(261,164)		58,596
Dividends and Distributions to Shareholders
From net investment income												(4,560 )		(4,130)
From net realized gain on investments												(70,206 )		(54,948)
							Total Dividends and Distributions					(74,766)		(59,078)
Capital Share Transactions
Net increase (decrease) in capital share transactions												(74,388 )		49,804
Redemption fees - Class J												–		1
							Total increase (decrease) in net assets					(410,318)		49,323
Net Assets
Beginning of period												719,950		670,627
End of period (including undistributed net investment income as set forth below)											$ 309,632		$ 719,950
Undistributed (overdistributed) net investment income (operating loss)											$ 3,905		$ 3,218
	Class A		Class B		Class C		Class J              Institutional		R-1		R-2	R-3	R-4	R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 2,195 $		298	$ 548		$ 6,317 $		51,833 $	372	$ 1,521 $		4,433 $	2,454 $	15,923
Reinvested		1,188	207		142		10,528	51,248	195		2,475	3,590	2,422	2,721
Redeemed		(3,460 )	(539 )		(508)		(19,891)	(156,916)	(666)		(7,055 )	(12,123 )	(12,384)	(21,456)
Net Increase (Decrease)	$ (77) $		(34) $		182	$ (3,046) $		(53,835) $	(99) $		(3,059) $	(4,100) $	(7,508) $	(2,812)
Shares:
Sold		178	24		43		545	4,303	31		135	378	201	1,326
Reinvested		86	15		11		807	3,692	14		187	263	179	198
Redeemed		(282 )	(45 )		(44)		(1,759)	(12,875)	(54)		(619 )	(1,006 )	(1,017)	(1,814)
Net Increase (Decrease)		(18)	(6)		10		(407)	(4,880)	(9)		(297 )	(365 )	(637)	(290)
Year Ended October 31, 2007
Dollars:
Sold	$ 7,167 $		1,109	$ 1,443		$ 15,676 $		91,486 $	1,120	$ 4,364 $		10,158 $	10,219 $	17,204
Reinvested		779	112		–		8,158	41,525	112		2,005	2,624	1,668	2,069
Redeemed		(4,871 )	(424 )		(123)		(19,997)	(108,891)	(619)		(6,140 )	(9,027 )	(5,058)	(14,044)
Net Increase (Decrease)	$ 3,075 $		797	$ 1,320		$ 3,837 $		24,120 $	613	$ 229 $		3,755 $	6,829 $	5,229
Shares:
Sold		449	70		91		1,024	5,758	69		283	643	647	1,060
Reinvested		50	7		–		554	2,660	7		134	171	109	134
Redeemed		(306 )	(27 )		(8)		(1,317)	(6,799)	(39)		(399 )	(569 )	(321)	(874)
Net Increase (Decrease)		193	50		83		261	1,619	37		18	245	435	320
Distributions:
Year Ended October 31, 2008
From net investment income $		(17) $	–	$ –		$ (310) $		(3,852) $	–	$ (35) $		(99) $	(107) $	(140)
From net realized gain on
investments		(1,200 )	(210 )		(143)		(10,230)	(47,400)	(195)		(2,441 )	(3,491 )	(2,315)	(2,581)
Total Dividends and Distributions $		(1,217) $	(210) $		(143) $		(10,540) $	(51,252) $	(195) $		(2,476) $	(3,590) $	(2,422) $	(2,721)
Year Ended October 31, 2007
From net investment income $		– $	–	$ –		$ – $		(3,873) $	–	$ – $		(55) $	(76) $	(126)
From net realized gain on
investments		(795 )	(112 )		–		(8,166)	(37,654)	(112)		(2,005 )	(2,569 )	(1,592)	(1,943)
Total Dividends and Distributions $		(795) $	(112) $		–	$ (8,166) $		(41,527) $	(112) $		(2,005) $	(2,624) $	(1,668) $	(2,069 )
(a) Effective June 13, 2008, Partners MidCap Value Fund changed its name to MidCap Value Fund II.

See accompanying notes.

136

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands																Money Market Fund
															Year Ended				Year Ended
															October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)															$ 80,699				$ 98,162
Net realized gain (loss) from investment transactions and foreign currency transactions																	(3,741 )				–
				Net Increase (Decrease) in Net Assets Resulting from Operations													76,958				98,162
Dividends and Distributions to Shareholders
From net investment income																(80,699 )				(98,162)
										Total Dividends and Distributions						(80,699)				(98,162)
Capital Share Transactions
Net increase (decrease) in capital share transactions																270,331				1,848,919
									Total increase (decrease) in net assets							266,590				1,848,919
Net Assets
Beginning of period																2,542,000				693,081
End of period (including undistributed net investment income as set forth below)															$ 2,808,590				$ 2,542,000
Undistributed (overdistributed) net investment income (operating loss)															$ –				$ –
		Class A	Class B           Class C            Class J							Class S           Institutional             R-1					R-2		R-3		R-4		R-5
Capital Share
Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 1,360,383		$ 101,427          $ 57,949				$ 338,953		$ 1,402,124            $ 565,039			$ 29,849		$ 51,998		$ 210,539		$ 106,350          $ 310,028
Reinvested		50,052		685		320		6,153		6,984	8,183		129		526		1,359		472		4,009
Redeemed		(2,587,292 )	(47,954 )			(26,486 )		(175,216)		(456,037)	(512,794)		(22,342)		(35,382 )		(148,402 )		(89,857)		(241,418)
Net Increase (Decrease)	$ (1,176,857 ) $			54,158	$ 31,783		$ 169,890		$ 953,071 $		60,428	$ 7,636		$ 17,142		$ 63,496		$ 16,965		$ 72,619
Shares:
Sold		1,360,383	101,427			57,949		338,953		1,402,124	565,039		29,849		51,998		210,539		106,350		310,028
Reinvested		50,052		685		320		6,153		6,984	8,183		129		526		1,359		472		4,009
Redeemed		(2,587,292 )	(47,954 )			(26,486 )		(175,216)		(456,037)	(512,794)		(22,342)		(35,382 )		(148,402 )		(89,857)		(241,418)
Net Increase (Decrease)	(1,176,857)		54,158			31,783		169,890		953,071	60,428		7,636		17,142		63,496		16,965		72,619
Year Ended October 31, 2007
Dollars:
Sold	$ 1,721,034		$ 23,143		$ 15,879		$ 125,082			N/A       $ 385,893		$ 36,760		$ 62,497		$ 123,442		$ 97,580		$ 199,900
Issued in acquisitions		1,098,364	33,680			6,724		–		N/A	185,502		–		–		–		–		–
Reinvested		74,095		896		204		7,260		N/A	8,471		154		677		933		459		3,093
Redeemed		(1,371,714 )	(27,430 )			(11,593 )		(103,582)		N/A	(389,281)		(34,924)		(57,704 )		(117,410 )		(90,712)		(158,453)
Net Increase (Decrease)	$ 1,521,779		$ 30,289		$ 11,214		$ 28,760			N/A       $ 190,585		$ 1,990		$ 5,470		$ 6,965		$ 7,327		$ 44,540
Shares:
Sold		1,721,034	23,143			15,879		125,082		N/A	385,893		36,760		62,497		123,442		97,580		199,900
Issued in acquisitions		1,098,364	33,680			6,724		–		N/A	185,502		–		–		–		–		–
Reinvested		74,095		896		204		7,260		N/A	8,471		154		677		933		459		3,093
Redeemed		(1,371,714 )	(27,430 )			(11,593 )		(103,582)		N/A	(389,281)		(34,924)		(57,704 )		(117,410 )		(90,712)		(158,453)
Net Increase (Decrease)		1,521,779	30,289			11,214		28,760		N/A	190,585		1,990		5,470		6,965		7,327		44,540
Distributions:
Year Ended October 31, 2008
From net investment
income	$ (50,632 )		$ (877) $			(363 ) $		(6,181) $		(6,984) $	(9,167) $		(129) $		(526 ) $		(1,359) $		(472) $		(4,009)
From net realized
gain on investments .		–		–		–		–		–	–		–		–		–		–		–
Total Dividends and
Distributions	$ (50,632 )		$ (877) $			(363 ) $		(6,181) $		(6,984) $	(9,167) $		(129) $		(526 ) $		(1,359) $		(472) $		(4,009)
Year Ended October 31, 2007
From net investment
income	$ (74,669 )		$ (1,068) $			(231 ) $		(7,366)		N/A $	(9,503) $		(154) $		(678 ) $		(934) $		(459) $		(3,100)
From net realized
gain on investments .		–		–		–		–		–	–		–		–		–		–		–
Total Dividends and
Distributions	$ (74,669 )		$ (1,068) $			(231 ) $		(7,366)		N/A $	(9,503) $		(154) $		(678 ) $		(934) $		(459) $		(3,100)

See accompanying notes.

137

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands						Mortgage Securities Fund
						Year Ended	Year Ended
						October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)						$ 72,125	$ 80,180
Net realized gain (loss) from investment transactions and foreign currency transactions						72	(1,062)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies						(18,772)	2,431
			Net Increase (Decrease) in Net Assets Resulting from Operations			53,425	81,549
Dividends and Distributions to Shareholders
From net investment income						(75,056 )	(81,954)
From tax return of capital						(355)	–
					Total Dividends and Distributions	(75,411)	(81,954)
Capital Share Transactions
Net increase (decrease) in capital share transactions						(464,317 )	(59,791)
Redemption fees - Class A						3	–
Redemption fees - Class B						6	–
					Total increase (decrease) in net assets	(486,294)	(60,196)
Net Assets
Beginning of period						1,652,969	1,713,165
End of period (including undistributed net investment income as set forth below)						$ 1,166,675	$ 1,652,969
Undistributed (overdistributed) net investment income (operating loss)						$ (1,745)	$ (916)
		Class A	Class B	Class C                                                            Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 16,803 $		3,836 $	1,431 $	49,841
Reinvested		3,081	1,584	167	69,247
Redeemed		(25,089 )	(23,340 )	(2,658)	(559,220)
Net Increase (Decrease)	$ (5,205) $		(17,920) $	(1,060)                                                               $ (440,132)
Shares:
Sold		1,589	362	137	4,680
Reinvested		291	149	16	6,530
Redeemed		(2,371 )	(2,206 )	(251)	(52,927)
Net Increase (Decrease)		(491 )	(1,695 )	(98)	(41,717)
Year Ended October 31, 2007
Dollars:
Sold	$ 9,943 $		1,275 $	887 $	38,648
Reinvested		3,101	2,135	209	71,437
Redeemed		(20,933 )	(30,803 )	(1,783)	(133,907)
Net Increase (Decrease)	$ (7,889) $		(27,393) $	(687) $	(23,822)
Shares:
Sold		946	121	84	3,681
Reinvested		295	203	20	6,801
Redeemed		(1,992 )	(2,936 )	(170)	(12,726)
Net Increase (Decrease)		(751 )	(2,612 )	(66)	(2,244)
Distributions:
Year Ended October 31, 2008
From net investment income $		(3,976) $	(1,912) $	(243) $	(68,925)
From net realized gain on
investments		–	–	–	–
From tax return of capital		(19)	(9)	(1)	(326)
Total Dividends and Distributions $		(3,995) $	(1,921) $	(244) $	(69,251)
Year Ended October 31, 2007
From net investment income $		(4,284) $	(2,739) $	(300) $	(74,631)
From net realized gain on
investments		–	–	–	–
Total Dividends and Distributions $		(4,284) $	(2,739) $	(300) $	(74,631)

See accompanying notes.

138

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Preferred Securities Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 85,199				$ 38,376
Net realized gain (loss) from investment transactions and foreign currency transactions																(135,447 )			(4,555)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(402,700)			(36,953)
				Net Increase (Decrease) in Net Assets Resulting from Operations												(452,948)			(3,132)
Dividends and Distributions to Shareholders
From net investment income																(84,591 )			(41,009)
								Total Dividends and Distributions								(84,591)			(41,009)
Capital Share Transactions
Net increase (decrease) in capital share transactions																929,922			275,706
Redemption fees - Class A																6			2
Redemption fees - Class C																1			–
Redemption fees - Class J																1			–
								Total increase (decrease) in net assets								392,391			231,567
Net Assets
Beginning of period																844,955			613,388
End of period (including undistributed net investment income as set forth below)														$ 1,237,346				$ 844,955
Undistributed (overdistributed) net investment income (operating loss)														$ 1,294				$ 721
		Class A		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 307,835		$ 152,027		$ 7,560		$ 620,116		$ 794		$ 686		$ 1,281		$ 2,964		$ 689
Reinvested		5,623		1,233		1,361		66,165		38		44		118		145		41
Redeemed		(115,872)		(15,408)		(9,277)		(95,011)		(492)		(439)		(964)		(793)		(542)
Net Increase (Decrease)	$ 197,586		$ 137,852		$ (356) $ 591,270				$ 340		$ 291		$ 435		$ 2,316		$ 188
Shares:
Sold		34,553		17,074		811		69,452		92		81		141		307		74
Reinvested		658		148		156		7,614		4		5		14		17		5
Redeemed		(14,693 )		(1,987 )		(1,077)		(11,279)		(61)		(53)		(116 )		(89 )		(62)
Net Increase (Decrease)		20,518		15,235		(110)		65,787		35		33		39		235		17
Year Ended October 31, 2007
Dollars:
Sold	$ 82,586		$ 22,941		$ 7,092		$ 226,802		$ 540		$ 724		$ 1,721		$ 312		$ 861
Reinvested		1,374		174		1,359		37,180		20		17		69		7		16
Redeemed		(7,846 )		(624 )		(6,185)		(92,395)		(156)		(53)		(442 )		(81 )		(307)
Net Increase (Decrease)	$ 76,114		$ 22,491		$ 2,266		$ 171,587		$ 404		$ 688		$ 1,348		$ 238		$ 570
Shares:
Sold		8,027		2,196		676		21,659		51		69		165		30		82
Reinvested		134		17		132		3,572		2		2		7		–		1
Redeemed		(762 )		(61 )		(597)		(8,603)		(15)		(5)		(43 )		(8 )		(29)
Net Increase (Decrease)		7,399		2,152		211		16,628		38		66		129		22		54
Distributions:
Year Ended October 31, 2008
From net investment income $		(11,639) $		(4,925) $		(1,366) $		(66,274) $		(38) $		(44) $		(118) $		(146) $		(41)
From net realized gain on
investments		–		–		–		–		–		–		–		–		–
Total Dividends and Distributions $		(11,639) $		(4,925) $		(1,366) $		(66,274) $		(38) $		(44) $		(118) $		(146) $		(41)
Year Ended October 31, 2007
From net investment income $		(1,856) $		(430) $		(1,373) $		(37,220) $		(21) $		(17) $		(69) $		(7) $		(16)
From net realized gain on
investments		–		–		–		–		–		–		–		–		–
Total Dividends and Distributions $		(1,856) $		(430) $		(1,373) $		(37,220) $		(21) $		(17) $		(69) $		(7) $		(16)

See accompanying notes.

139

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															Real Estate Securities Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 28,246				$ 14,849
Net realized gain (loss) from investment transactions and foreign currency transactions																(217,246 )				374,205
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(445,865)			(443,197)
				Net Increase (Decrease) in Net Assets Resulting from Operations												(634,865)				(54,143)
Dividends and Distributions to Shareholders
From net investment income																(31,823 )				(11,143)
From net realized gain on investments																(373,992 )			(103,352)
								Total Dividends and Distributions								(405,815)			(114,495)
Capital Share Transactions
Net increase (decrease) in capital share transactions																595,149				425,711
Redemption fees - Class A																1				4
Redemption fees - Class J																7				2
								Total increase (decrease) in net assets								(445,523)				257,079
Net Assets
Beginning of period															1,628,506				1,371,427
End of period (including undistributed net investment income as set forth below)														$ 1,182,983				$ 1,628,506
Undistributed (overdistributed) net investment income (operating loss)														$ 2,213				$ 3,706
		Class A		Class B		Class C		Class J      Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 15,852		$ 2,002		$ 2,060		$ 21,142		$ 364,168		$ 1,639		$ 5,725		$ 13,526		$ 7,242		$ 23,221
Reinvested		28,277		6,862		1,627		47,197	280,920			920		5,012		10,172		4,041		18,435
Redeemed		(34,173 )		(8,519 )		(2,697)		(43,117)	(118,752)			(934)		(8,757 )		(11,013 )		(4,581)		(32,348)
Net Increase (Decrease)	$ 9,956		$ 345		$ 990		$ 25,222		$ 526,336		$ 1,625		$ 1,980		$ 12,685		$ 6,702		$ 9,308
Shares:
Sold		982		125		126		1,316		22,408		102		358		856		457		1,428
Reinvested		1,618		395		93		2,753		16,126		53		296		592		237		1,078
Redeemed		(2,109 )		(529 )		(168)		(2,744)		(7,384)		(59)		(541 )		(674 )		(294)		(1,990)
Net Increase (Decrease)		491		(9)		51		1,325		31,150		96		113		774		400		516
Year Ended October 31, 2007
Dollars:
Sold	$ 43,320		$ 6,040		$ 6,216		$ 50,686		$ 276,513		$ 2,793		$ 7,715		$ 17,710		$ 9,892		$ 37,067
Issued in acquisitions		36,102		13,838		6,490		–	444,876			–		–		–		–		–
Reinvested		9,758		2,174		–		18,489		65,850		235		2,870		4,569		1,545		8,622
Redeemed		(72,518 )		(15,736 )		(3,976)		(79,715)	(351,903)			(1,716)		(19,347 )		(31,514 )		(9,919)		(61,315)
Net Increase (Decrease)	$ 16,662		$ 6,316		$ 8,730		$ (10,540)           $ 435,336				$ 1,312		$ (8,762) $			(9,235) $		1,518	$ (15,626)
Shares:
Sold		1,623		226		240		1,946		10,735		108		289		668		369		1,402
Issued in acquisitions		1,338		513		241		–		16,501		–		–		–		–		–
Reinvested		367		82		–		705		2,487		9		110		174		59		330
Redeemed		(2,895 )		(626 )		(160)		(3,195)		(13,185)		(68)		(780 )		(1,265 )		(400)		(2,467)
Net Increase (Decrease)		433		195		321		(544)		16,538		49		(381)		(423)		28		(735)
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,701) $		(236) $		(71) $		(2,621) $		(24,769) $		(51) $		(284) $		(642) $		(295) $		(1,153)
From net realized gain on
investments		(27,644 )		(6,959 )		(1,787)		(44,613)	(256,834)			(869)		(4,728 )		(9,530 )		(3,746)		(17,282)
Total Dividends and Distributions $		(29,345) $		(7,195) $		(1,858) $		(47,234)                $ (281,603) $				(920) $		(5,012) $		(10,172) $		(4,041) $		(18,435)
Year Ended October 31, 2007
From net investment income $		(599) $		(48) $		–	$ (740) $			(8,638) $		(7) $		(101) $		(216) $		(110) $		(684)
From net realized gain on
investments		(9,465 )		(2,187 )		–		(17,757)		(57,220)		(228)		(2,769 )		(4,353 )		(1,435)		(7,938)
Total Dividends and Distributions $		(10,064) $		(2,235) $		–	$ (18,497) $			(65,858) $		(235) $		(2,870) $		(4,569) $		(1,545) $		(8,622)

See accompanying notes.

140

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands									Short-Term Bond Fund
								Year Ended		Year Ended
								October 31, 2008		October 31, 2007
Operations
Net investment income (operating loss)								$ 12,858		$ 11,957
Net realized gain (loss) from investment transactions and foreign currency transactions									(3,209 )		(1,093)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies									(31,589)		(2,110)
			Net Increase (Decrease) in Net Assets Resulting from Operations						(21,940)		8,754
Dividends and Distributions to Shareholders
From net investment income									(13,283 )		(12,646)
					Total Dividends and Distributions				(13,283)		(12,646)
Capital Share Transactions
Net increase (decrease) in capital share transactions									(75,919 )		80,112
Redemption fees - Class A									1		1
Redemption fees - Class J									2		1
					Total increase (decrease) in net assets				(111,139)		76,222
Net Assets
Beginning of period									295,531		219,309
End of period (including undistributed net investment income as set forth below)								$ 184,392		$ 295,531
Undistributed (overdistributed) net investment income (operating loss)								$ (484)		$ (494)
		Class A	Class C	Class J Institutional		R-1	R-2	R-3	R-4	R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 6,835 $		1,354 $	9,480 $	47,558 $	390 $	96 $	8,515 $	1,687 $	2,788
Reinvested		3,702	67	2,675	5,756	15	6	481	104	118
Redeemed		(26,844 )	(1,086 )	(18,866)	(87,211)	(71)	(8)	(25,949 )	(2,474 )	(5,037)
Net Increase (Decrease)	$ (16,307) $		335 $	(6,711) $	(33,897) $	334 $	94 $	(16,953) $	(683) $	(2,131)
Shares:
Sold		729	142	1,000	5,028	41	9	875	181	297
Reinvested		397	7	287	616	2	1	50	11	13
Redeemed		(2,884 )	(117 )	(2,025)	(9,463)	(8)	(1)	(2,718 )	(269 )	(537)
Net Increase (Decrease)		(1,758)	32	(738)	(3,819)	35	9	(1,793)	(77)	(227)
Year Ended October 31, 2007
Dollars:
Sold	$ 17,773 $		1,984 $	20,749 $	65,106 $	112 $	17,878 $	19,845 $	8,095 $	12,631
Reinvested		4,287	24	2,733	4,631	4	137	252	93	186
Redeemed		(25,317 )	(408 )	(13,758)	(15,834)	(30)	(18,042)	(1,085 )	(6,719 )	(15,215)
Net Increase (Decrease)	$ (3,257) $		1,600 $	9,724 $	53,903 $	86 $	(27) $	19,012 $	1,469 $	(2,398)
Shares:
Sold		1,795	201	2,092	6,577	11	1,819	1,998	822	1,277
Reinvested		434	2	276	469	1	14	25	10	19
Redeemed		(2,558 )	(41 )	(1,389)	(1,599)	(3)	(1,832)	(110 )	(683 )	(1,536)
Net Increase (Decrease)		(329)	162	979	5,447	9	1	1,913	149	(240)
Distributions:
Year Ended October 31, 2008
From net investment income $		(3,927) $	(76) $	(2,720) $	(5,833) $	(15) $	(6) $	(483) $	(104) $	(119)
From net realized gain on
investments		–	–	–	–	–	–	–	–	–
Total Dividends and Distributions $		(3,927) $	(76) $	(2,720) $	(5,833) $	(15) $	(6) $	(483) $	(104) $	(119)
Year Ended October 31, 2007
From net investment income $		(4,550) $	(26) $	(2,755) $	(4,641) $	(5) $	(137) $	(253) $	(93) $	(186)
From net realized gain on
investments		–	–	–	–	–	–	–	–	–
Total Dividends and Distributions $		(4,550) $	(26) $	(2,755) $	(4,641) $	(5) $	(137) $	(253) $	(93) $	(186)

See accompanying notes.

141

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands								Short-Term Income Fund
								Year Ended	Year Ended
								October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)								$ 18,858	$ 9,855
Net realized gain (loss) from investment transactions and foreign currency transactions								(2,379 )	(354)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies								(12,066)	548
			Net Increase (Decrease) in Net Assets Resulting from Operations					4,413	10,049
Dividends and Distributions to Shareholders
From net investment income								(18,888 )	(9,926)
							Total Dividends and Distributions	(18,888)	(9,926)
Capital Share Transactions
Net increase (decrease) in capital share transactions								102,894	(27,364)
Redemption fees - Class A								–	1
							Total increase (decrease) in net assets	88,419	(27,240)
Net Assets
Beginning of period								210,142	237,382
End of period (including undistributed net investment income as set forth below)								$ 298,561	$ 210,142
Undistributed (overdistributed) net investment income (operating loss)								$ 19	$ 75
		Class A	Class B(a)		Class C	Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 23,016		N/A	$ 2,642		$ 334,621
Reinvested		1,171	N/A		124		17,301
Redeemed		(22,593)	N/A		(2,632)		(250,756)
Net Increase (Decrease)	$ 1,594		N/A	$ 134		$ 101,166
Shares:
Sold		1,975	N/A		227		28,851
Reinvested		101	N/A		11		1,491
Redeemed		(1,946)	N/A		(227)		(21,870)
Net Increase (Decrease)		130	N/A		11		8,472
Year Ended October 31, 2007
Dollars:
Sold	$ 32,786 $		3,928	$ 811		$ 5,311
Reinvested		1,290	70		162		7,650
Redeemed		(29,504 )	(20,437 )		(3,007)		(26,424)
Net Increase (Decrease)	$ 4,572 $		(16,439) $		(2,034) $		(13,463)
Shares:
Sold		2,826	338		70		458
Reinvested		109	6		14		659
Redeemed		(2,543 )	(1,760 )		(259)		(2,277)
Net Increase (Decrease)		392	(1,416)		(175)		(1,160)
Distributions:
Year Ended October 31, 2008
From net investment income $		(1,437)	N/A	$ (145) $			(17,306)
From net realized gain on
investments		–	N/A		–		–
Total Dividends and Distributions $		(1,437)	N/A	$ (145) $			(17,306)
Year Ended October 31, 2007
From net investment income $		(1,645) $	(97) $		(195) $		(7,989)
From net realized gain on
investments		–	–		–		–
Total Dividends and Distributions $		(1,645) $	(97) $		(195) $		(7,989)
(a) Class B shares discontinued operations and converted to Class A shares on January 4, 2007.

See accompanying notes.

142

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands															SmallCap Blend Fund
													Year Ended			Year Ended
													October 31, 2008			October 31, 2007
Operations
Net investment income (operating loss)													$ 341			$ (716)
Net realized gain (loss) from investment transactions and foreign currency transactions															(18,217 )			28,909
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(102,997)			12,799
				Net Increase (Decrease) in Net Assets Resulting from Operations											(120,873)			40,992
Dividends and Distributions to Shareholders
From net realized gain on investments															(28,163 )			(27,355)
							Total Dividends and Distributions								(28,163)			(27,355)
Capital Share Transactions
Net increase (decrease) in capital share transactions															(11,900 )			6,269
Redemption fees - Class A															–			15
Redemption fees - Class J															1			–
							Total increase (decrease) in net assets								(160,935)			19,921
Net Assets
Beginning of period															353,970			334,049
End of period (including undistributed net investment income as set forth below)													$ 193,035			$ 353,970
Undistributed (overdistributed) net investment income (operating loss)													$ 334			$ –
		Class A		Class B	Class C		Class J Institutional				R-1		R-2		R-3	R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 7,377		$ 600 $		54	$ 3,750		$ –		$ 99		$ 267		$ 377 $		1,235	$ 522
Reinvested		9,216		1,726	121		12,925		3,319		33		217		146	165		203
Redeemed		(18,049 )		(5,576 )	(250)		(26,420)		(693)		(158)		(687 )		(601 )	(718)		(1,100)
Net Increase (Decrease)	$ (1,456) $			(3,250) $	(75) $		(9,745) $		2,626	$ (26) $			(203) $		(78) $	682	$ (375)
Shares:
Sold		529		43	4		278		–		7		18		27	87		35
Reinvested		594		114	8		867		210		2		14		10	10		13
Redeemed		(1,305 )		(413 )	(18)		(1,992)		(48)		(11)		(52 )		(43 )	(49)		(78)
Net Increase (Decrease)		(182 )		(256 )	(6)		(847)		162		(2)		(20 )		(6 )	48		(30)
Year Ended October 31, 2007
Dollars:
Sold	$ 16,639		$ 1,900 $		1,709	$ 19,852		$ –		$ 229		$ 232		$ 406 $		1,058	$ 1,532
Reinvested		8,779		1,955	–		12,264		3,161		16		204		162	118		608
Redeemed		(21,734 )		(6,936 )	(167)		(24,949)		(2,190)		(29)		(398 )		(1,009 )	(569)		(6,574)
Net Increase (Decrease)	$ 3,684		$ (3,081) $		1,542	$ 7,167		$ 971		$ 216		$ 38		$ (441) $		607	$ (4,434)
Shares:
Sold		959		112	98		1,191		–		13		14		23	61		86
Reinvested		528		119	–		767		188		1		12		10	7		36
Redeemed		(1,250 )		(407 )	(10)		(1,494)		(121)		(2)		(23 )		(58 )	(33)		(385)
Net Increase (Decrease)		237		(176)	88		464		67		12		3		(25)	35		(263)
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ –		$ – $		–	$ –
From net realized gain on
investments		(9,271 )		(1,753 )	(124)		(12,930)		(3,319)		(33)		(217 )		(146 )	(165)		(205)
Total Dividends and Distributions $		(9,271) $		(1,753) $	(124) $		(12,930) $		(3,319) $		(33) $		(217) $		(146) $	(165) $		(205)
Year Ended October 31, 2007
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ –		$ – $		–	$ –
From net realized gain on
investments		(8,840 )		(1,981 )	–		(12,264)		(3,161)		(16)		(204 )		(162 )	(119)		(608)
Total Dividends and Distributions $		(8,840) $		(1,981) $	–	$ (12,264) $			(3,161) $		(16) $		(204) $		(162) $	(119) $		(608)

See accompanying notes.

143

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands																SmallCap Growth Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ (1,176 )				$ (1,297)
Net realized gain (loss) from investment transactions and foreign currency transactions																(23,222 )				55,176
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(146,332)				10,559
				Net Increase (Decrease) in Net Assets Resulting from Operations												(170,730)				64,438
Dividends and Distributions to Shareholders
From net realized gain on investments																(24,053 )				(2,080)
								Total Dividends and Distributions								(24,053)				(2,080)
Capital Share Transactions
Net increase (decrease) in capital share transactions																(59,700 )				370,677
Redemption fees - Class J																–				1
								Total increase (decrease) in net assets								(254,483)				433,036
Net Assets
Beginning of period																478,257				45,221
End of period (including undistributed net investment income as set forth below)														$ 223,774				$ 478,257
Undistributed (overdistributed) net investment income (operating loss)														$ –				$ –
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 7,956		$ 777		$ 1,048		$ 4,927		$ 39,143		$ 359		$ 231		$ 2,613		$ 1,762		$ 3,156
Reinvested		6,323		395		103		2,528		14,253		11		53		132		20		72
Redeemed		(58,606)		(2,665)		(670)		(7,394)		(73,636)		(87)		(358)		(984)		(195)		(967)
Net Increase (Decrease)	$ (44,327) $			(1,493) $		481	$ 61		$ (20,240) $			283	$ (74) $			1,761	$ 1,587		$ 2,261
Shares:
Sold		969		101		128		647		5,816		49		27		310		211		368
Reinvested		686		44		11		293		1,539		1		6		14		2		8
Redeemed		(7,532)		(344)		(89)		(1,013)		(7,996)		(12)		(46)		(127)		(25)		(122)
Net Increase (Decrease)		(5,877)		(199)		50		(73)		(641)		38		(13)		197		188		254
Periods Ended October 31, 2007
Dollars:
Sold	$ 10,553		$ 534		$ 1,058		$ 7,851		$ 12,489		$ 113		$ 411		$ 2,002		$ 326		$ 603
Issued in acquisitions		105,315		7,832		924		–		284,360		–		–		–		–		–
Reinvested		–		–		–		1,596		391		3		34		3		2		49
Redeemed		(15,613)		(1,757)		(373)		(7,512)		(39,224)		(4)		(273)		(413)		(60)		(543)
Net Increase (Decrease)	$ 100,255		$ 6,609		$ 1,609		$ 1,935		$ 258,016		$ 112		$ 172		$ 1,592		$ 268		$ 109
Shares:
Sold		1,111		56		109		874		1,326		12		44		219		32		65
Issued in acquisitions		11,840		881		104		–		31,975		–		–		–		–		–
Reinvested		–		–		–		190		44		–		4		–		–		5
Redeemed		(1,645)		(187)		(42)		(849)		(4,173)		–		(29)		(44)		(6)		(57)
Net Increase (Decrease)		11,306		750		171		215		29,172		12		19		175		26		13
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(6,431)		(431)		(114)		(2,532)		(14,256)		(12)		(53)		(132)		(20)		(72)
Total Dividends and Distributions $		(6,431) $		(431) $		(114) $		(2,532) $		(14,256) $		(12) $		(53) $		(132) $		(20) $		(72)
Year Ended October 31, 2007
From net investment income $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		–		–		–		(1,598)		(391)		(3)		(34)		(3)		(2)		(49)
Total Dividends and Distributions $		–	$ –		$ –		$ (1,598) $			(391) $		(3) $		(34) $		(3) $		(2) $		(49)

See accompanying notes.

144

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands														SmallCap Growth Fund II(a)
													Year Ended				Year Ended
													October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)													$ (3,998 )				$ (4,435)
Net realized gain (loss) from investment transactions and foreign currency transactions															(36,487 )				42,821
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies															(240,446)				66,518
				Net Increase (Decrease) in Net Assets Resulting from Operations											(280,931)				104,904
Dividends and Distributions to Shareholders
From net realized gain on investments															(37,471 )				(46,563)
							Total Dividends and Distributions								(37,471)				(46,563)
Capital Share Transactions
Net increase (decrease) in capital share transactions															(50,858 )				29,916
Redemption fees - Class A															–				1
Redemption fees - Class J															1				–
							Total increase (decrease) in net assets								(369,259)				88,258
Net Assets
Beginning of period															717,788				629,530
End of period (including undistributed net investment income as set forth below)													$ 348,529				$ 717,788
Undistributed (overdistributed) net investment income (operating loss)													$ –				$ –
	Class A			Class B	Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 2,490		$ 375 $		353	$ 4,354		$ 27,829		$ 633		$ 1,290		$ 3,460		$ 2,557		$ 6,714
Reinvested		1,024		416	30		1,605		29,723		108		837		982		543		2,186
Redeemed		(3,485)		(1,436)	(260)		(5,339)		(101,099)		(507)		(4,520)		(6,621)		(2,700)		(12,400)
Net Increase (Decrease)	$ 29		$ (645) $		123	$ 620		$ (43,547) $			234	$ (2,393) $			(2,179) $		400	$ (3,500)
Shares:
Sold		315		50	45		595		3,327		78		165		437		323		827
Reinvested		115		48	3		197		3,238		12		98		112		61		243
Redeemed		(461)		(190)	(35)		(768)		(12,768)		(65)		(596)		(856)		(354)		(1,629)
Net Increase (Decrease)		(31)		(92)	13		24		(6,203)		25		(333 )		(307 )		30		(559)
Year Ended October 31, 2007
Dollars:
Sold	$ 4,641		$ 817 $		496	$ 9,711		$ 46,586		$ 1,247		$ 3,510		$ 4,814		$ 6,000		$ 15,972
Reinvested		1,214		556	–		1,535		38,429		68		1,037		1,172		413		2,125
Redeemed		(4,103)		(1,471)	(17)		(4,194)		(79,978)		(254)		(3,528)		(4,739)		(2,937)		(9,206)
Net Increase (Decrease)	$ 1,752		$ (98) $		479	$ 7,052		$ 5,037		$ 1,061		$ 1,019		$ 1,247		$ 3,476		$ 8,891
Shares:
Sold		490		88	52		1,126		4,783		130		384		521		649		1,709
Reinvested		133		62	–		184		4,163		7		119		132		46		234
Redeemed		(436)		(158)	(2)		(483)		(8,379)		(27)		(390)		(517)		(311)		(986)
Net Increase (Decrease)		187		(8)	50		827		567		110		113		136		384		957
Distributions:
Year Ended October 31, 2008
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(1,034)		(421)	(30)		(1,606)		(29,723)		(108)		(837)		(982)		(543)		(2,187)
Total Dividends and Distributions $		(1,034) $		(421) $	(30) $		(1,606) $		(29,723) $		(108) $		(837) $		(982) $		(543) $		(2,187)
Year Ended October 31, 2007
From net investment income $		–	$ – $		–	$ –		$ –		$ –		$ –		$ –		$ –		$ –
From net realized gain on
investments		(1,223)		(560)	–		(1,535)		(38,429)		(68)		(1,038)		(1,172)		(413)		(2,125)
Total Dividends and Distributions $		(1,223) $		(560) $	–	$ (1,535) $			(38,429) $		(68) $		(1,038) $		(1,172) $		(413) $		(2,125)
(a) Effective June 13, 2008, Partners SmallCap Growth Fund II changed its name to SmallCap Growth Fund II.

See accompanying notes.

145

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands																SmallCap Value Fund
														Year Ended				Year Ended
														October 31, 2008				October 31, 2007
Operations
Net investment income (operating loss)														$ 3,770				$ 3,852
Net realized gain (loss) from investment transactions and foreign currency transactions																(64,073 )				35,758
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies																(110,626)				(34,571)
				Net Increase (Decrease) in Net Assets Resulting from Operations												(170,929)				5,039
Dividends and Distributions to Shareholders
From net investment income																(4,802 )				(1,000)
From net realized gain on investments																(41,414 )				(10,978)
								Total Dividends and Distributions								(46,216)				(11,978)
Capital Share Transactions
Net increase (decrease) in capital share transactions																45,298				398,629
Redemption fees - Class J																1				–
								Total increase (decrease) in net assets								(171,846)				391,690
Net Assets
Beginning of period																614,776				223,086
End of period (including undistributed net investment income as set forth below)														$ 442,930				$ 614,776
Undistributed (overdistributed) net investment income (operating loss)														$ 1,843				$ 3,362
		Class A		Class B		Class C		Class J Institutional				R-1		R-2		R-3		R-4		R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 6,366		$ 860		$ 1,858		$ 8,545		$ 96,407		$ 615		$ 1,897		$ 3,101		$ 3,179		$ 7,237
Reinvested		1,480		302		280		5,360		33,281		106		594		1,036		620		2,805
Redeemed		(7,725)		(1,310)		(1,390)		(15,987)		(88,720)		(309)		(1,891)		(3,459)		(1,423)		(8,417)
Net Increase (Decrease)	$ 121		$ (148) $			748	$ (2,082) $			40,968	$ 412		$ 600		$ 678		$ 2,376		$ 1,625
Shares:
Sold		418		58		121		578		6,561		42		123		205		205		467
Reinvested		89		18		17		332		1,991		7		36		62		37		167
Redeemed		(512)		(89)		(93)		(1,094)		(5,383)		(21)		(125 )		(226 )		(94)		(578)
Net Increase (Decrease)		(5)		(13)		45		(184)		3,169		28		34		41		148		56
Year Ended October 31, 2007
Dollars:
Sold	$ 12,265		$ 1,241		$ 2,868		$ 20,249		$ 102,333		$ 1,464		$ 4,975		$ 9,416		$ 6,077		$ 29,159
Issued in acquisitions		9,544		2,995		2,592		–		294,007		–		–		–		–		–
Reinvested		420		79		–		3,273		5,944		50		325		479		321		1,058
Redeemed		(7,664)		(1,273)		(905)		(18,741)		(60,598)		(1,096)		(3,635)		(5,028)		(2,628)		(10,937)
Net Increase (Decrease)	$ 14,565		$ 3,042		$ 4,555		$ 4,781		$ 341,686		$ 418		$ 1,665		$ 4,867		$ 3,770		$ 19,280
Shares:
Sold		646		66		152		1,096		5,400		77		263		498		317		1,557
Issued in acquisitions		502		158		136		–		15,450		–		–		–		–		–
Reinvested		22		4		–		177		310		3		17		25		17		55
Redeemed		(406)		(68)		(48)		(1,021)		(3,196)		(59)		(193 )		(264 )		(138)		(579)
Net Increase (Decrease)		764		160		240		252		17,964		21		87		259		196		1,033
Distributions:
Year Ended October 31, 2008
From net investment income $		(104) $		–	$ –		$ (322) $			(3,938) $		(3) $		(28) $		(68) $		(54) $		(285)
From net realized gain on
investments		(1,568)		(321)		(341)		(5,044)		(29,352)		(103)		(566)		(968)		(566)		(2,585)
Total Dividends and Distributions $		(1,672) $		(321) $		(341) $		(5,366) $		(33,290) $		(106) $		(594) $		(1,036) $		(620) $		(2,870)
Year Ended October 31, 2007
From net investment income $		–	$ –		$ –		$ –		$ (864) $			–	$ –		$ (15) $			(22) $		(99)
From net realized gain on
investments		(434)		(79)		–		(3,277)		(5,081)		(50)		(325)		(464)		(299)		(969)
Total Dividends and Distributions $		(434) $		(79) $		–	$ (3,277) $			(5,945) $		(50) $		(325) $		(479) $		(321) $		(1,068)

See accompanying notes.

146

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands					Tax-Exempt Bond Fund(a)
					Year Ended	Year Ended
					October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)					$ 13,609	$ 12,660
Net realized gain (loss) from investment transactions and foreign currency transactions					(4,107 )	(1,657)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies					(39,253)	(9,002)
			Net Increase (Decrease) in Net Assets Resulting from Operations		(29,751)	2,001
Dividends and Distributions to Shareholders
From net investment income					(13,524 )	(12,363)
From net realized gain on investments					–	(551)
				Total Dividends and Distributions	(13,524)	(12,914)
Capital Share Transactions
Net increase (decrease) in capital share transactions					(26,007 )	125,715
Redemption fees - Class A					4	1
Redemption fees - Class C					1	1
				Total increase (decrease) in net assets	(69,277)	114,804
Net Assets
Beginning of period					305,557	190,753
End of period (including undistributed net investment income as set forth below)					$ 236,280	$ 305,557
Undistributed (overdistributed) net investment income (operating loss)					$ 575	$ 800
		Class A	Class B	Class C
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 25,753 $		1,466 $	2,601
Reinvested		8,585	520	84
Redeemed		(55,958)	(7,682 )	(1,376)
Net Increase (Decrease)	$ (21,620) $		(5,696) $	1,309
Shares:
Sold		3,602	207	368
Reinvested		1,221	74	12
Redeemed		(7,958)	(1,094 )	(193)
Net Increase (Decrease)		(3,135)	(813 )	187
Year Ended October 31, 2007
Dollars:
Sold	$ 26,903 $		870 $	1,608
Issued in acquisitions		136,655	6,574	–
Reinvested		7,754	618	80
Redeemed		(44,067)	(10,097 )	(1,183)
Net Increase (Decrease)	$ 127,245 $		(2,035) $	505
Shares:
Sold		3,572	115	212
Issued in acquisitions		17,919	862	–
Reinvested		1,030	82	10
Redeemed		(5,863)	(1,342 )	(158)
Net Increase (Decrease)		16,658	(283 )	64
Distributions:
Year Ended October 31, 2008
From net investment income $		(12,660) $	(734) $	(130)
From net realized gain on
investments		–	–	–
Total Dividends and Distributions $		(12,660) $	(734) $	(130)
Year Ended October 31, 2007
From net investment income $		(11,357) $	(902) $	(104)
From net realized gain on
investments		(480)	(63)	(8)
Total Dividends and Distributions $		(11,837) $	(965) $	(112)
(a) Effective June 13, 2008, Tax-Exempt Bond Fund I changed its name to Tax-Exempt Bond Fund.

See accompanying notes.

147

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands										Ultra Short Bond Fund
									Year Ended		Year Ended
									October 31, 2008		October 31, 2007
Operations
Net investment income (operating loss)									$ 8,638		$ 11,635
Net realized gain (loss) from investment transactions and foreign currency transactions										(2,803 )		(770)
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies										(36,643)		(10,101)
			Net Increase (Decrease) in Net Assets Resulting from Operations							(30,808)		764
Dividends and Distributions to Shareholders
From net investment income										(8,762 )		(11,512)
From net realized gain on investments										–		(44)
					Total Dividends and Distributions					(8,762)		(11,556)
Capital Share Transactions
Net increase (decrease) in capital share transactions										669		(75,491)
Redemption fees - Class A										–		13
Redemption fees - Class C										1		–
					Total increase (decrease) in net assets					(38,900)		(86,270)
Net Assets
Beginning of period										203,767		290,037
End of period (including undistributed net investment income as set forth below)									$ 164,867		$ 203,767
Undistributed (overdistributed) net investment income (operating loss)									$ 113		$ 65
		Class A	Class C	Class J Institutional		R-1		R-2	R-3	R-4	R-5
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 1,542 $		1,036 $	2,144 $	36,054 $	–	$ 1,492 $		2,425 $	– $	717
Reinvested		358	44	1,150	6,606	–		296	116	–	52
Redeemed		(10,404)	(2,464 )	(9,130)	(25,226)	–		(2,299)	(2,010 )	–	(1,830)
Net Increase (Decrease)	$ (8,504) $		(1,384) $	(5,836) $	17,434 $	–	$ (511) $		531 $	– $	(1,061)
Shares:
Sold		178	119	248	3,973	–		168	269	–	84
Reinvested		41	5	133	764	–		34	13	–	6
Redeemed		(1,194)	(282 )	(1,056)	(2,814)	–		(264)	(225 )	–	(199)
Net Increase (Decrease)		(975)	(158)	(675)	1,923	–		(62)	57	–	(109)
Year Ended October 31, 2007
Dollars:
Sold	$ 31,482 $		3,559 $	4,134 $	41,803 $	–	$ 1,560 $		2,747 $	– $	2,396
Reinvested		1,022	46	1,740	7,604	1		434	142	1	340
Redeemed		(36,111)	(621 )	(7,984)	(96,488)	–		(2,814)	(2,801 )	–	(27,683)
Net Increase (Decrease)	$ (3,607) $		2,984 $	(2,110) $	(47,081) $	1	$ (820) $		88 $	1 $	(24,947)
Shares:
Sold		3,143	357	417	4,221	–		157	277	–	241
Reinvested		103	5	177	767	–		44	14	–	35
Redeemed		(3,633)	(63)	(811)	(9,617)	–		(285)	(284 )	–	(2,774)
Net Increase (Decrease)		(387)	299	(217)	(4,629)	–		(84)	7	–	(2,498)
Distributions:
Year Ended October 31, 2008
From net investment income $		(463) $	(68) $	(1,157) $	(6,607) $	–	$ (296) $		(118) $	(1) $	(52)
From net realized gain on
investments		–	–	–	–	–		–	–	–	–
Total Dividends and Distributions $		(463) $	(68) $	(1,157) $	(6,607) $	–	$ (296) $		(118) $	(1) $	(52)
Year Ended October 31, 2007
From net investment income $		(1,213) $	(63) $	(1,748) $	(7,577) $	(1) $		(432) $	(142) $	(1) $	(335)
From net realized gain on
investments		(4)	–	(6)	(27)	–		(2)	–	–	(5)
Total Dividends and Distributions $		(1,217) $	(63) $	(1,754) $	(7,604) $	(1) $		(434) $	(142) $	(1) $	(340)

See accompanying notes.

148

STATEMENT OF CHANGES IN NET ASSETS
PRINCIPAL FUNDS, INC.
Amounts in thousands						West Coast Equity Fund
						Year Ended	Year Ended
						October 31, 2008	October 31, 2007
Operations
Net investment income (operating loss)						$ 8,896	$ 12,544
Net realized gain (loss) from investment transactions and foreign currency transactions						43,403	123,355
Change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign
currencies						(583,144)	166,256
			Net Increase (Decrease) in Net Assets Resulting from Operations			(530,845)	302,155
Dividends and Distributions to Shareholders
From net investment income						(10,800 )	(9,570)
From net realized gain on investments						(123,750 )	(44,214)
					Total Dividends and Distributions	(134,550)	(53,784)
Capital Share Transactions
Net increase (decrease) in capital share transactions						(341,695 )	(250,221)
Redemption fees - Class A						1	3
					Total increase (decrease) in net assets	(1,007,089)	(1,847)
Net Assets
Beginning of period						1,910,880	1,912,727
End of period (including undistributed net investment income as set forth below)						$ 903,791	$ 1,910,880
Undistributed (overdistributed) net investment income (operating loss)						$ 6,033	$ 7,937
		Class A	Class B	Class C                                                           Institutional
Capital Share Transactions:
Year Ended October 31, 2008
Dollars:
Sold	$ 52,445 $		9,186 $	3,582 $	27,983
Reinvested		62,604	12,006	1,497	53,063
Redeemed		(367,824)	(46,856)	(6,044)	(143,337)
Net Increase (Decrease)	$ (252,775 ) $		(25,664) $	(965) $	(62,291)
Shares:
Sold		1,320	264	103	685
Reinvested		1,402	309	38	1,175
Redeemed		(9,389 )	(1,366 )	(178)	(3,703)
Net Increase (Decrease)		(6,667 )	(793 )	(37)	(1,843)
Year Ended October 31, 2007
Dollars:
Sold	$ 87,518 $		14,822 $	5,251 $	4,368
Reinvested		22,332	4,160	491	24,623
Redeemed		(158,746)	(41,059)	(7,312)	(206,669)
Net Increase (Decrease)	$ (48,896) $		(22,077) $	(1,570)                                                              $ (177,678)
Shares:
Sold		1,944	375	131	95
Reinvested		510	108	13	556
Redeemed		(3,521 )	(1,028 )	(184)	(4,664)
Net Increase (Decrease)		(1,067 )	(545 )	(40)	(4,013)
Distributions:
Year Ended October 31, 2008
From net investment income $		(4,780) $	– $	– $	(6,020)
From net realized gain on
investments		(61,555 )	(13,476 )	(1,676)	(47,043)
Total Dividends and Distributions $		(66,335) $	(13,476) $	(1,676) $	(53,063)
Year Ended October 31, 2007
From net investment income $		(3,642) $	– $	– $	(5,928)
From net realized gain on
investments		(20,195 )	(4,772 )	(552)	(18,695)
Total Dividends and Distributions $		(23,837) $	(4,772) $	(552) $	(24,623)

See accompanying notes.

149

STATEMENT OF CASH FLOWS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	California
Amounts in thousands	Municipal Fund
Cash Flows from Operating Activities:
Net decrease in net assets from operations	$ (56,642)
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:
Purchase of investment securities	(156,238)
Proceeds from sale of investment securities	233,709
Decrease in cash from acquisition of California Insured Intermediate Municipal Bond Fund	(93)
Increase in capital shares sold receivable	(24)
Increase in accrued interest receivable	(227)
Increase in investment securities sold	(2,961)
Increase in accrued fees, expenses, prepaid expenses, and expense reimbursement from Manager	21
Increase in capital shares reacquired	375
Increase in dividends payable	79
Decrease in interest expense and fees payable	(332)
Decrease in investment securities purchased	(8,664)
Net accretion of bond discounts and amortization of premiums	(1,102)
Unrealized depreciation on investments	62,852
Net realized loss from investments	10,097
Net cash used in operating activities	80,850
Cash Flows from Financing Activities:
Decrease in payable for floating rate notes issued	(17,083)
Proceeds from shares sold	56,697
Payment on shares redeemed	(116,936)
Dividends and distributions paid to shareholders	(6,382)
Proceeds from redemption fees	7
Increase in line of credit	2,850
Net cash provided by financing activities	(80,847)
Net increase in cash	3
Cash:
Beginning of period	$ 97
End of period	$ 100
Supplemental disclosure of cash flow information:
Reinvestment of dividends and distributions	$ 10,304
Issuance of shares in conjunction with acquisition of Principal California Insured Intermediate Municipal Bond Fund	79,746
Cash paid during the year for interest expense and fees	916

See accompanying notes.

150

STATEMENT OF CASH FLOWS
PRINCIPAL FUNDS, INC.
Year Ended October 31, 2008
	Tax-Exempt Bond
Amounts in thousands	Fund
Cash Flows from Operating Activities:
Net decrease in net assets from operations	$ (29,751)
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:
Purchase of investment securities	(181,027)
Proceeds from sale of investment securities	220,180
Increase in capital shares sold receivable		(14)
Decrease in accrued interest receivable		576
Increase in investment securities sold	(4,614)
Increase in accrued fees, expenses, prepaid expenses, and expense reimbursement from Manager		22
Decrease in capital shares reacquired		(222)
Decrease in dividends payable		(88)
Decrease in interest expense and fees payable		(198)
Increase in investment securities purchased	1,308
Net accretion of bond discounts and amortization of premiums		(337)
Unrealized depreciation on investments and swap agreements	39,253
Net realized loss from investments	4,107
Net cash used in operating activities	49,195
Cash Flows from Financing Activities:
Decrease in payable for floating rate notes issued	(9,632)
Proceeds from shares sold	29,820
Payment on shares redeemed	(65,016)
Dividends and distributions paid to shareholders	(4,335)
Proceeds from redemption fees		5
Net cash provided by financing activities	(49,158)
Net increase in cash		37
Cash:
Beginning of period	$ 60
End of period	$ 97
Supplemental disclosure of cash flow information:
Reinvestment of dividends and distributions	$ 9,189
Cash paid during the year for interest expense and fees		668

See accompanying notes.

151

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

1. Organization

Principal Funds, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company and operates as a series fund in the mutual fund industry. At October 31, 2008, the Fund consists of 74 separate funds. The financial statements for Bond & Mortgage Securities Fund, California Municipal Fund, Disciplined LargeCap Blend Fund, Diversified International Fund, Equity Income Fund, Global Real Estate Securities Fund, Government & High Quality Bond Fund, High Yield Fund, Income Fund, Inflation Protection Fund, International Emerging Markets Fund, International Growth Fund, LargeCap Blend Fund I, LargeCap Blend Fund II, LargeCap Growth Fund, LargeCap Growth Fund I, LargeCap Growth Fund II, LargeCap S&P 500 Index Fund, LargeCap Value Fund, LargeCap Value Fund III, MidCap Blend Fund, MidCap Growth Fund I, MidCap Growth Fund III, MidCap Stock Fund, MidCap Value Fund II, Money Market Fund, Mortgage Securities Fund, Preferred Securities Fund, Real Estate Securities Fund, Short-Term Bond Fund, Short-Term Income Fund, SmallCap Blend Fund, SmallCap Growth Fund, SmallCap Growth Fund II, SmallCap Value Fund, Tax-Exempt Bond Fund, Ultra Short Bond Fund, and West Coast Equity Fund (known as the "Funds") are presented herein. The Funds may offer up to eleven classes of shares: Class A, Class B, Class C, Class J, Class S, Institutional, R-1, R-2, R-3, R-4 and R-5. Information presented in these financial statements pertains to the Class A, Class B, and Class C shares. Certain detailed financial information for the Class J, Class S, Institutional, R-1, R-2, R-3, R-4, and R-5 classes of shares is provided separately.

On December 31, 2006, Principal Financial Services, Inc. and its subsidiary, Principal Management Corporation acquired all of the outstanding stock of WM Advisors, Inc., WM Shareholder Services, Inc., and WM Funds Distributor, Inc. (the “Transaction”). Immediately following the Transaction, WM Advisors, Inc., WM Shareholder Services, Inc., and WM Funds Distributor, Inc. were renamed, Edge Asset Management, Inc., Principal Shareholder Services, Inc., and Principal Funds Distributor, Inc., respectively.

Effective January 10, 2007, the initial purchases of $10,000 of Class A and Class B shares of SmallCap Growth Fund were made by Principal Life Insurance Company.

Effective January 10, 2007, the initial purchases of $10,000 of Class C shares of Bond & Mortgage Securities Fund, Disciplined LargeCap Blend Fund, Diversified International Fund, Government & High Quality Bond Fund, Inflation Protection Fund, International Emerging Markets Fund, LargeCap Blend Fund I, LargeCap Blend Fund II, LargeCap Growth Fund, LargeCap Growth Fund I, LargeCap Growth Fund II, LargeCap S&P 500 Index Fund, LargeCap Value Fund, LargeCap Value Fund III, MidCap Blend Fund, MidCap Growth Fund I, MidCap Growth Fund III, MidCap Value Fund II, Money Market Fund, Preferred Securities Fund, Real Estate Securities Fund, Short-Term Bond Fund, SmallCap Blend Fund, SmallCap Growth Fund, SmallCap Growth Fund II, SmallCap Value Fund, and Ultra Short Bond Fund were made by Principal Life Insurance Company.

Effective January 12, 2007, California Municipal Fund, Disciplined LargeCap Blend Fund, LargeCap Growth Fund, High Yield Fund, Income Fund, Diversified International Fund, MidCap Stock Fund, Money Market Fund, Real Estate Securities Fund, Short-Term Income Fund, SmallCap Growth Fund, SmallCap Value Fund, Mortgage Securities Fund, and West Coast Equity Fund (the “Acquiring Funds”) acquired all the assets and assumed all the liabilities in a tax-free reorganization of a corresponding series of WM Trust I and WM Trust II (the “Acquired Funds”) pursuant to an Agreement and Plan of Reorganization (the “Reorganization”) approved by shareholders of the Acquired Funds on December 15, 2006. Approximate conversion ratios, net assets of the Acquired Fund immediately prior to the acquisition (including accumulated net investment income/loss, accumulated realized gains/losses and unrealized appreciation/depreciation) and net assets of the Acquiring Fund immediately prior to and immediately following the acquisition were as follows:

				Accumulated
				Net	Accumulated		Net Assets	Net Assets	Net Assets of
				Investment	Realized	Unrealized	of	of	Acquiring Fund
				Income/	Gains/	Appreciation	Acquired	Acquiring	following
		Conversion Ratio
Acquired	Acquiring			(Loss)	(Losses)	(Depreciation)	Fund	Fund	acquisition
			Class
Fund	Fund	A	B       C      I	(000s)	(000s)	(000s)	(000s)	(000s)	(000s)
WM California	California Municipal
Municipal Fund*	Fund	1.00	1.00 1.00 N/A	$ 138	$ 742	$ 18,036	$ 398,852	—	$ 398,852

152

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008
1. Organization (continued)
						Accumulated
						Net	Accumulated		Net Assets	Net Assets	Net Assets of
						Investment               Realized		Unrealized	of	of	Acquiring Fund
						Income/	Gains/	Appreciation             Acquired             Acquiring			following
		Conversion Ratio
Acquired	Acquiring					(Loss)	(Losses)	(Depreciation)	Fund	Fund	acquisition
			Class
Fund	Fund	A	B            C             I			(000s)	(000s)	(000s)	(000s)	(000s)	(000s)
WM Growth & Income	Disciplined LargeCap
Fund	Blend Fund	1.59	1.54	1.51	1.59	—	(7,765)	519,637	2,351,132	1,074,834	3,425,966
WM Growth Fund	LargeCap Growth Fund	2.17	1.95	1.94	2.27	—	(182,164)	287,667	2,468,659	1,012,961	3,481,620
WM High Yield Fund*	High Yield Fund	1.00         1.00      1.00     1.00				928	(1,890)	71,874	1,279,416	—	1,279,416
WM Income Fund*	Income Fund	1.00	1.00	1.00	1.00	1,569	(18,709)	(2,667)	949,537	—	949,537
	Diversified
WM International	International
Growth Fund	Fund	0.81	0.77	0.75	0.82	(5,500)	(461)	171,434	1,252,475	866,788	2,119,263
WM Mid Cap Stock
Fund*	MidCap Stock Fund	1.00	1.00	1.00	1.00	(101)	4,548	330,139	1,035,815	—	187,654
WM Money Market
Fund	Money Market Fund	1.00	1.00	1.00	1.00	—	(4)	—	1,324,270	742,321	2,066,591
	Real Estate
WM REIT Fund	Securities Fund	0.67	0.66	0.66	0.67	—	—	153,242	501,306	1,435,213	1,936,519
WM Short Term	Short-Term
Income Fund*	Income Fund	0.20	N/A	0.20	0.20	207	(4,298)	(2,812)	235,427	—	235,427
WM Small Cap	SmallCap
Growth Fund	Growth Fund	1.74	1.50	1.52	1.81	—	(30,623)	43,997	398,431	48,409	446,840
WM Small Cap	SmallCap
Value Fund	Value Fund	0.57	0.57	0.57	0.57	—	4,429	19,964	309,138	262,371	571,509
WM U.S. Government	Mortgage
Securities Fund*	Securities Fund	1.00	1.00	1.00	1.00	385	(31,715)	(30,845)	1,690,434	—	1,690,434
WM West Coast	West Coast
Equity Fund*	Equity Fund	1.00	1.00	1.00	1.00	(42)	33,232	647,760	1,974,211	—	1,974,211

*Designates the survivor for accounting and performance reporting purposes (the “Reorganized Funds”).

Effective January 12, 2007, Equity Income Fund I (now known as Equity Income Fund) acquired all the assets and assumed all the liabilities of WM Equity Income Fund and Equity Income Fund (the “Acquired Funds”) pursuant to an Agreement and Plan of Reorganization (the “Reorganization”) approved by shareholders of the Acquired Funds on December 15, 2006. The acquisition was accomplished by a tax-free exchange of shares from the Acquired Funds for shares of Equity Income Fund at an approximate exchange rate of 1.00 for WM Equity Income Fund Class A, Class B, Class C, and Institutional Class shares, and .60 for Equity Income Fund Class A and Class B shares. The aggregate net assets of WM Equity Income Fund, Equity Income Fund, and Equity Income Fund immediately prior to the acquisition were approximately $3,979,523,000 (including approximately $2,539,000 of accumulated net investment income, $49,241,000 of accumulated realized gains, and $755,745,000 of unrealized appreciation), $124,300,000 (including approximately $54,000 of accumulated net investment income, $37,000 of accumulated realized losses, and $7,424,000 unrealized appreciation), and $0, respectively. The aggregate net assets of Equity Income Fund immediately following the acquisition were $4,103,823,000. WM Equity Income Fund is the survivor for accounting and performance reporting purposes (a “Reorganized Fund”).

153

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

1. Organization (continued)

Effective January 12, 2007, Tax-Exempt Bond Fund I (now known as Tax-Exempt Bond Fund) acquired all the assets and assumed all the liabilities of WM Tax Exempt Bond Fund and Tax-Exempt Bond Fund (the “Acquired Funds”) pursuant to an Agreement and Plan of Reorganization (the “Reorganization”) approved by shareholders of the Acquired Funds on December 15, 2006. The acquisition was accomplished by a tax-free exchange of shares from the Acquired Funds for shares of Tax-Exempt Bond Fund at an approximate exchange rate of 1.00 for WM Tax Exempt Bond Fund Class A, Class B, and Class C shares, and 1.56 and 1.58 for Tax-Exempt Bond Fund Class A and Class B shares. The aggregate net assets of WM Tax Exempt Bond Fund, Tax-Exempt Bond Fund, and Tax-Exempt Bond Fund immediately prior to the acquisition were approximately $187,654,000 (including approximately $243,000 of accumulated net investment income, $246,000 of accumulated realized losses, and $12,928,000 of unrealized appreciation), $143,229,000 (including approximately $485,000 of accumulated net investment income, $2,643,000 unrealized appreciation), and $0, respectively. The aggregate net assets of Tax-Exempt Bond Fund immediately following the acquisition were $330,883,000. WM Tax Exempt Bond Fund is the survivor for accounting and performance reporting purposes (a “Reorganized Fund”).

Effective January 12, 2007, LargeCap Growth Fund II acquired all the assets and assumed all the liabilities of Partners LargeCap Growth Fund pursuant to a plan of acquisition approved by the shareholders of Partners LargeCap Growth Fund on December 15, 2006. The acquisition was accomplished by a tax-free exchange of shares from Partners LargeCap Growth Fund for shares of LargeCap Growth Fund II at an approximate exchange rate of 1.45 for Class J, 1.40 for Institutional, 1.40 for R-1, 1.42 for R-2, 1.42 for R-3, 1.41 for R-4, and 1.41 for R-5 shares. The aggregate net assets of Partners LargeCap Growth Fund and Partners LargeCap Growth Fund II immediately prior to the acquisition were approximately $132,168,000 (including approximately $42,000 of accumulated net investment operating loss and $10,810,000 of unrealized appreciation) and $748,188,000, respectively. The aggregate net assets of Partners LargeCap Growth Fund II immediately following the acquisition were $880,356,000.

Effective January 4, 2007, Class B shares of WM Short Term Income Fund discontinued operations and converted to Class A shares of WM Short Term Income Fund.

Effective October 1, 2007, the initial purchases of $10,000 of Class A and Class C shares of International Growth Fund, $1,500,000 of Class A and Class C shares and $2,000,000 of Institutional Class shares of Global Real Estate Securities Fund were made by Principal Life Insurance Company.

Effective February 22, 2008, California Municipal Fund acquired all the assets and assumed all the liabilities of California Insured Intermediate Municipal Fund pursuant to a plan of acquisition. The acquisition was accomplished by a tax-free exchange of shares from California Insured Intermediate Municipal Fund for shares of California Municipal Fund at an approximate exchange rate of 1.04 for Class A, Class B, and Class C shares. The aggregate net assets of California Insured Intermediate Municipal Fund and California Municipal Fund immediately prior to the acquisition were approximately $79,746,000 (including approximately $137,000 of accumulated net investment income, $52,000 of accumulated realized losses, and $1,191,000 of unrealized appreciation) and $343,850,000, respectively. The aggregate net assets of California Municipal Fund immediately following the acquisition were $423,596,000.

Effective May 1, 2008, the initial purchase of $10,000 of Class S shares of Money Market Fund was made by Principal Life Insurance Company.

On June 9, 2008, the Board of Directors of Principal Funds, Inc., MidCap Growth Fund I approved an Agreement and Plan of 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 is expected to take place on November 21, 2008.

154

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

1. Organization (continued)

On June 13, 2008 Principal Investors Fund, Inc. changed its name to Principal Funds, Inc. In addition, the following Funds had name changes:

Former Fund Name	New Fund Name
Equity Income Fund I	Equity Income Fund
High Yield Fund II	High Yield Fund
Partners LargeCap Blend Fund	LargeCap Blend Fund II
Partners LargeCap Blend Fund I	LargeCap Blend Fund I
Partners LargeCap Growth Fund I	LargeCap Growth Fund I
Partners LargeCap Growth Fund II	LargeCap Growth Fund II
Partners LargeCap Value Fund	LargeCap Value Fund III
Partners MidCap Growth Fund	MidCap Growth Fund III
Partners MidCap Growth Fund I	MidCap Growth Fund I
Partners MidCap Value Fund	MidCap Value Fund II
Partners SmallCap Growth Fund II	SmallCap Growth Fund II
Tax-Exempt Bond Fund I	Tax-Exempt Bond Fund

Temporary Guarantee Program for Money Market Funds. Following approval by the Board of Directors of Principal Funds, Inc., Money Market Fund submitted to the United States Department of Treasury an agreement to participate in the Temporary Guarantee Program for Money Market Funds (the “Program”).

The Program will guarantee Money Market Fund shareholders that they will receive $1.00 per share they owned as of the close of business on September 19, 2008, or the number of shares held on the date the Fund’s market based net asset value falls below $0.995 per share and the Money Market Fund liquidates, whichever is less. The program is subject to an overall limit of $50 billion for all money market funds participating in the Program. The Program does not cover investors who were not shareholders of the Money Market Fund on September 19, 2008.

The Program remains in effect until December 18, 2008, unless extended by the United States Treasury Department. If the Program is extended, the Board of Directors would need to approve the Money Market Fund’s continued participation in the Program and the Money Market Fund would need to reapply and pay an additional premium. The cost for participating in the initial three-month Program is 0.01% of the net assets of the Fund as of September 19, 2008 and was borne by the Money Market Fund. The cost for participating in the initial three-month Program incurred during the period ended October 31, 2008 is included as a component of miscellaneous expense on the statement of operations.

On November 24, 2008, the United States Treasury Department announced an extension of the Program to April 30, 2009. Money Market Fund has applied to participate in the extension.

All classes of shares for each of the Funds represent interests in the same portfolio of investments, and will vote together as a single class except where otherwise required by law or as determined by the Fund’s Board of Directors. In addition, the Board of Directors declares separate dividends on each class of shares.

2. 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. The following summarizes the significant accounting policies of the Funds:

Security Valuation. The Funds (with the exception of Money Market Fund) 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.

155

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

2. Significant Accounting Policies (Continued)

The value of foreign securities used in computing the net asset value per share is generally determined as of the close of the foreign exchange where the security is principally traded. Events that occur after the close of the applicable foreign market or exchange but prior to the calculation of the Funds’ net asset values are ordinarily not reflected in the Funds’ net asset values. If events that occur after the close of the applicable foreign market or exchange but prior to the calculation of the Funds’ net asset values are determined to materially affect the value of a foreign security, then the security is valued at its fair value as determined in good faith by the Manager under procedures established and periodically reviewed by the Fund’s Board of Directors. Many factors are reviewed in the course of making a good faith determination of a security’s fair value, including, but not limited to, price movements in ADRs, futures contracts, industry indices, general indices, and foreign currencies.

To the extent the Funds invest in foreign securities listed on foreign exchanges which trade on days on which the Funds do not determine net asset values, for example weekends and other customary national U.S. holidays, the Funds’ net asset values could be significantly affected on days when shareholders cannot purchase or redeem shares.

Certain securities issued by companies in emerging market countries may have more than one quoted valuation at any given point in time, sometimes referred to as a “local” price and a “premium” price. The premium price is often a negotiated price, which may not consistently represent a price at which a specific transaction can be effected. It is the policy of the Funds to value such securities at prices at which it is expected those shares may be sold, and the Manager or any sub-advisor is authorized to make such determinations subject to such oversight by the Fund’s Board of Directors as may occasionally be necessary.

Short-term securities purchased with less than 60 day until maturity are valued at amortized cost, which approximates market. Money Market Fund values its securities at amortized cost as permitted under Rule 2a-7 of the Investment Company Act of 1940. 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.

Currency Translation. Foreign holdings are translated to U.S. dollars using the exchange rate at the daily close of the New York Stock Exchange. The identified cost of the Funds’ holdings is translated at approximate rates prevailing when acquired. Income and expense amounts are translated at approximate rates prevailing when received or paid, with daily accruals of such amounts reported at approximate rates prevailing at the date of valuation. Since the carrying amount of the foreign securities is determined based on the exchange rate and market values at the close of the period, it is not practicable to isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities during the period.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between trade and settlement dates on security transactions, and the difference between the amount of dividends and foreign withholding taxes recorded on the books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign currencies arise from changes in the exchange rate relating to assets and liabilities, other than investments in securities, purchased and held in non-U.S. denominated currencies.

The following funds held securities denominated in currencies that exceeded 5% of net assets of the fund:

Diversified		Global Real Estate		International Emerging		International
International Fund		Securities Fund		Markets Fund		Growth Fund
Euro	22.3%	United States Dollar	45.3%	United States Dollar	30.6%	Euro	23.8%
British Pound	20.1	Japanese Yen	9.9	Hong Kong Dollar	16.3	British Pound	21.8
Japanese Yen	19.9	Hong Kong Dollar	9.7	Korean Won	12.0	Japanese Yen	21.5
United States Dollar	9.6	Australian Dollar	9.0	Taiwan Dollar	9.9	Swiss Franc	11.5
Swiss Franc	7.3	Euro	8.2	Brazilian Real	8.3	Canadian Dollar	6.0
Canadian Dollar	6.0	British Pound	6.4	South African Rand	5.4

156

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

2. Significant Accounting Policies (Continued)

Income and Investment Transactions. The Funds record investment transactions on a trade date basis. Trade date for senior floating rate interests purchased in the secondary market is the date on which the transaction is entered into. The identified cost basis has been used in determining the net realized gain or loss from investment transactions and unrealized appreciation or depreciation of investments. The Funds record dividend income on the ex-dividend date, except dividend income from foreign securities whereby the ex-dividend date has passed; such dividends are recorded as soon as the Funds are informed of the ex-dividend date. Interest income is recognized on an accrual basis. Discounts and premiums on securities are accreted/amortized over the lives of the respective securities. The Funds allocate daily all income and realized and unrealized gains or losses to each class of shares based upon the relative proportion of the value of shares outstanding (number of settled shares outstanding for Money Market Fund) of each class.

Expenses. Expenses directly attributed to a particular fund are charged to that fund. Other expenses not directly attributed a particular fund are apportioned among the registered investment companies managed by Principal Management Corporation.

Management fees are allocated daily to each class of shares based upon the relative proportion of the value of shares outstanding (number of settled shares outstanding for Money Market Fund) of each class. Expenses specifically attributable to a particular class are charged directly to such class and are included separately in the statements of operations.

Distributions to Shareholders. With respect to Money Market Fund, all net investment income and any realized gains from investment transactions are declared as dividends daily to settled shares of record as of that day. With respect to Bond & Mortgage Securities Fund, California Municipal Fund, Government & High Quality Bond Fund, High Yield Fund, Income Fund, Inflation Protection Fund, Mortgage Securities Fund, Short-Term Bond Fund, Short-Term Income Fund, Tax-Exempt Bond Fund and Ultra Short Bond Fund, net investment income is declared as dividends daily to settled shares of record as of that day, and all distributions of realized gains from investment transactions are recorded on the ex-dividend date. Dividends and distributions to shareholders of the other Funds are recorded on the ex-dividend date. Dividends and distributions to shareholders from net investment income and net realized gain from investments and foreign currency transactions are determined in accordance with federal tax regulations, which may differ from U.S. generally accepted accounting principles. These differences are primarily due to differing treatments for net operating losses, foreign currency transactions, futures contracts, certain defaulted securities, sales of Passive Foreign Investment Companies, losses deferred due to wash sales, tax straddles, mortgage-backed securities, certain preferred securities, swap agreements, and limitations imposed by Sections 381-384 of the Internal Revenue Code. Permanent book and tax basis differences are reclassified within the capital accounts based on federal tax-basis treatment; temporary differences do not require reclassification. To the extent dividends and distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as return of capital distributions.

Global Real Estate Securities Fund and Real Estate Securities Fund receive substantial distributions from holdings in Real Estate Investment Trusts (“REITs”). Distributions from REITs may be characterized as ordinary income, net capital gain, or a return of capital to the Funds. The proper characterization of REIT distributions is generally not known until after the end of each calendar year. As such, estimates must be used in reporting the character of income and distributions for financial statement purposes.

Federal Income Taxes. No provision for federal income taxes is considered necessary because each of the Funds 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.

On July 13^th, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 became effective for the Funds on November 1, 2007. Management has evaluated the implications of FIN 48 and has determined there was no material impact on the Funds’ financial statements.

Foreign Taxes. Certain of the Funds are subject to foreign income taxes imposed by certain countries in which they invest. Foreign income taxes are accrued by the Funds as a reduction of income. These amounts are shown as withholding tax on foreign dividends on the statements of operations.

157

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

2. Significant Accounting Policies (Continued)

Gains realized upon the disposition of Indian securities held by the Funds are subject to capital gains tax in India, payable prior to repatriation of sale proceeds. The tax is computed on certain net realized gains. Realized losses in excess of gains may be carried forward eight years to offset future gains. In addition, the Funds accrue an estimated deferred tax liability for future gains on Indian securities. At October 31, 2008, Diversified International Fund had a foreign tax refund receivable of $74,000, no deferred tax liability, and no capital loss carryforward, and International Emerging Markets Fund had a foreign tax refund receivable of $285,000, no deferred tax liability, and no capital loss carryforward, relating to Indian securities.

Redemption and Exchange Fees. Each of the Funds, except Money Market Fund, will impose a redemption or exchange fee on redemptions or exchanges of $30,000 or more of Class A, Class B, or Class C shares redeemed or exchanged within 30 days after they are purchased. 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 movements in and out of the Funds.

Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31, 2008, the Funds do not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

In March 2008, the FASB issued the Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 requires enhanced disclosures about the Funds’ derivative and hedging activities, including how such activities are accounted for and their effect on the Funds’ financial position, performance and cash flows. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Management is currently evaluating the impact the adoption of FAS 161 will have on the Funds’ financial statements and related disclosures.

In September 2008, the FASB issued FASB Staff Position No. 133-1 and FASB Interpretation No. 45-4 (the “FSP”), “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161”. The FSP amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also clarifies the effective date of FAS 161, whereby disclosures required by FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The FSP is effective for fiscal years and interim periods ending after November 15, 2008. Management is currently evaluating the impact the adoption of the FSP will have on the Funds’ financial statements and related disclosures.

3. Operating Policies

Custody Credits. The Funds have entered into an arrangement with their custodian whereby interest earned on uninvested cash balances is used to offset a portion of each Funds’ expenses. These amounts are shown separately in the statements of operations.

Floating Rate Notes Issued in Conjunction with Securities Held. California Municipal Fund and Tax-Exempt Bond Fund have entered into transactions in which a fund transfers fixed rate bonds to trusts in exchange for cash and residual interests in the trusts’ assets and cash flows, which are in the form of inverse floating rate securities. The trusts finance the purchases of the fixed rate bonds by issuing floating rate notes to third parties. The fund enters into shortfall and forbearance agreements with the trusts, which commit the fund to pay the trusts, in certain circumstances, the difference between the liquidation value of the fixed rate bonds held by the trusts and the liquidation value of the floating rate notes held by third parties, as well as any shortfalls in interest cash flows. The residual interests held by the fund (inverse floating rate securities) include the right of the fund (1) to cause the holders of the floating rate notes to tender their notes at par at the next interest rate reset date, and (2) to transfer the fixed rate bond from the trusts to the fund, thereby collapsing the trusts. The fund accounts for the transfer of bonds to the trusts as secured borrowings, with the securities transferred remaining in the fund’s investment assets, and the related floating rate notes reflected as fund liabilities under the caption “floating rate notes issued” in the “statement of assets and liabilities”. The notes issued by the trusts have interest rates that reset weekly, and the floating rate note holders have the option to tender their notes to the trusts for redemption at par at each reset date. Details of the floating rates notes are included in each Funds’ schedule of investments.

158

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

3. Operating Policies (Continued)

Foreign Currency Contracts. At October 31, 2008, certain of the Funds owned forward contracts to buy or sell foreign currencies at a specified future date at a fixed exchange rate. Forward foreign currency contracts are valued at the forward rate, and are marked-to-market daily. The change in market value is recorded by the Funds as an unrealized gain or loss. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

The use of forward foreign currency contracts does not eliminate the fluctuations in underlying prices of the Funds’ portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The foreign currency contracts outstanding as of October 31, 2008 are included in the schedules of investments.

Futures Contracts. The Funds may enter into futures contracts for both hedging and non-hedging purposes. Initial margin deposits are made by cash deposits or segregation of specific securities as may be required by the exchange on which the transaction was conducted. Pursuant to the contracts, the Funds agree to receive from or pay to the broker, an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as “variation margin” and are recorded by the Funds as a variation margin receivable or payable on futures contracts. During the period the futures contracts are open, daily changes in the value of the contracts are recognized as unrealized gains or losses. These unrealized gains or losses are included as a component of net unrealized appreciation (depreciation) of investments on the statements of assets and liabilities. When the contracts are closed, the Funds recognize a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Funds’ cost basis in the contract.

Illiquid Securities. Illiquid securities generally cannot be sold or disposed of in the ordinary course of business (within seven calendar days) at approximately the value at which each of the Funds has valued the investments. This may have an adverse effect on each of the Funds’ ability to dispose of particular illiquid securities at fair market value and may limit each of the Funds’ ability to obtain accurate market quotations for purposes of valuing the securities. Information regarding illiquid securities is included with footnote designations in the schedules of investments.

Indemnification. Under the Fund’s by-laws, present and past officers, directors and employees are indemnified against certain liabilities arising out of the performance of their duties. In addition, in the normal course of business, the Fund may enter into a variety of contracts that may contain representations and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund.

Joint Trading Account. Certain of the Funds may, pursuant to an exemptive order issued by the Securities and Exchange Commission, transfer uninvested funds into a joint trading account. The order permits the participating Funds’ cash balances to be deposited into a single joint account along with the cash of other registered investment companies managed by Principal Management Corporation. These balances may be invested in one or more short-term instruments or repurchase agreements that are collateralized by U.S. government securities.

Line of Credit. The Funds participate with other registered investment companies managed by Principal Management Corporation in an unsecured joint line of credit with two banks which allow the participants to borrow up to $150 million, collectively. Borrowings are made solely to facilitate the handling of unusual and/or unanticipated short-term cash requirements. Interest is charged to each participant, based on its borrowings, at a rate equal to the Fed Funds Rate plus .4%. During the year ended October 31, 2008 Bond & Mortgage Securities Fund, California Municipal Fund, Disciplined LargeCap Blend Fund, Diversified International Fund, Equity Income Fund, Global Real Estate Securities Fund, Government & High Quality Bond Fund, High Yield Fund, Income Fund, Inflation Protection Fund, International Emerging Markets Fund, International Growth Fund, LargeCap Blend Fund II, LargeCap Growth Fund I, LargeCap Growth Fund II, LargeCap Value Fund, LargeCap Value Fund III, MidCap Blend Fund, MidCap Growth Fund I, MidCap Stock Fund, MidCap Value Fund II, Money Market Fund, Mortgage Securities Fund, Short-Term Bond Fund, Short-Term Income Fund, SmallCap Growth Fund, SmallCap Growth Fund II, and Tax-Exempt Bond Fund each borrowed against the line of credit. The interest expense associated with these borrowings is included in other expenses on the statements of operations.

159

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

3. Operating Policies (Continued)

Options Contracts. Certain of the Funds may write call and put options on futures, swaps, securities or currencies it owns for both hedging and non-hedging purposes. Writing put options tends to increase a fund’s exposure to the underlying instrument. Writing call options tends to decrease a fund’s exposure to the underlying instrument. When a fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. These liabilities are reflected as options contracts written on the statements of assets and liabilities. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against amounts paid on the underlying future, swap, security or currency transaction to determine the realized gain or loss. A fund as a writer of an option has no control over whether the underlying future, swap, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, swap, security or currency underlying the written option. There is the risk a fund may not be able to enter into a closing transaction because of an illiquid market. A fund may also purchase put and call options. Purchasing call options tends to increase a fund’s exposure to the underlying instrument. Purchasing put options tends to decrease a fund’s exposure to the underlying instrument. A fund pays a premium which is included on the fund’s statements of assets and liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, swap, security or currency transaction to determine the realized gain or loss. Details of options contracts open at year end are included in the Funds' schedules of investments. Transactions in options written during the year ended October 31, 2008, were as follows:

Government & High Quality Bond Fund	Number of Contracts	Notional Amount	Premium (thousands)
Beginning of period	—	$57,000,000	$108
Options written	—	20,000,000	313
Options expired	—	—	—
Options closed	—	(77,000,000)	(421)
Options exercised	—	—	—
Balance at end of period	—	—	—
Inflation Protection Fund	Number of Contracts	Notional Amount	Premium (thousands)
Beginning of period	—	$64,000,000	$122
Options written	—	—	—
Options expired	—	—	—
Options closed	—	(64,000,000)	(122)
Options exercised	—	—	—
Balance at end of period	—	—	—
Short Term Bond Fund	Number of Contracts	Notional Amount	Premium (thousands)
Beginning of period	—	$37,000,000	$70
Options written	—	—	—
Options expired	—	—	—
Options closed	—	(37,000,000)	(70)
Options exercised	—	—	—
Balance at end of period	—	—	—
Ultra Short Bond Fund	Number of Contracts	Notional Amount	Premium (thousands)
Beginning of period	—	$15,000,000	$28
Options written	120	—	183
Options expired	—	—	—
Options closed	(120)	(15,000,000)	(211)
Options exercised	—	—	—
Balance at end of period	—	—	—

Rebates. Subject to best execution, the Funds may direct certain portfolio transactions to brokerage firms that, in turn, have agreed to rebate a portion of the related brokerage commission to the Funds in cash. Commission rebates are included as a component of realized gain from investment transactions in the statements of operations.

160

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

3. Operating Policies (Continued)

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.

Restricted Securities. Certain of the Funds may invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted securities is included with footnote designations in the schedules of investments.

Securities Lending. To earn additional income, certain of the Funds may lend portfolio securities to approved brokerage firms. The Funds receive collateral, generally in the form of cash, against the loaned securities. During the period of the loan, the borrower must maintain collateral in an amount not less than 100% of the market value of the loaned securities. The market value of loaned securities is determined at the close of business of the Funds and any additional required collateral is delivered to the Funds on the next business day. The cash collateral is usually invested in short-term securities and the Funds could realize a loss on such investments. Further, the Funds could experience a delay in recovering its securities and possible loss of income or value if the borrower fails to return them. As of October 31, 2008, the Funds had securities on loan as follows (in thousands):

	Market	Cash		Market	Cash
	Value	Collateral		Value	Collateral
Bond & Mortgage Securities Fund	$297,712	$304,575	LargeCap Value Fund III	$1,064	$1,085
Government & High Quality Bond Fund	24,392	24,823	Short-Term Bond Fund	15,329	15,642
Income Fund	1,306	1,497	Ultra Short Bond Fund	476	485
Inflation Protection Fund	76,621	78,811

Senior Floating Rate Interests. The Funds may invest in senior floating rate interests (bank loans). Senior floating rate interests hold the most senior position in the capital structure of a business entity (the “Borrower”), are typically secured by specific collateral and have a claim on the assets and/or stock of the Borrower that is senior to that held by subordinated debtholders and stockholders of the Borrower. Senior floating rate interests are typically structured and administered by a financial institution that acts as the agent of the lenders participating in the senior floating rate interest. Senior floating rate interests are rated below-investment-grade, which means they are more likely to default than investment-grade loans. A default could lead to non-payment of income which would result in a reduction of income to the fund and there can be no assurance that the liquidation of any collateral would satisfy the Borrower’s obligation in the event of non-payment of scheduled interest or principal payments, or that such collateral could be readily liquidated.

Senior floating rate interests pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR) or the prime rate offered by one or more major United States banks.

Senior floating rate interests generally are subject to mandatory and/or optional prepayment. Because of these mandatory prepayment conditions and because there may be significant economic incentives for the Borrower to repay, prepayments of senior floating rate interests may occur. As a result, the actual remaining maturity of senior floating rate interests may be substantially less than stated maturities shown in the schedules of investments.

161

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

3. Operating Policies (Continued)

Swap Agreements. Certain of the Funds may invest in swaps for the purpose of managing their exposure to interest rate, credit or market risk. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon, or calculated by reference to, changes in specified prices or rates for a specified amount of an underlying asset. Swaps agreements are valued through a pricing service or using procedures established and periodically reviewed by the Fund’s Board of Directors; changes in value are recorded as unrealized gain or loss. These unrealized gains or losses are included as a component of net unrealized appreciation (depreciation) of investments on the statements of assets and liabilities. Upon termination of swap agreements, the Funds recognize a realized gain or loss. Net periodic payments to be received or paid are accrued daily and are recorded in the statements of operations as realized gains or losses. Notional principal amounts are used to express the extent of involvement in these contracts. Risks may exceed amounts shown on the statements of assets and liabilities. These risks include changes in the returns of the underlying instruments, unfavorable interest rate fluctuation, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and the possible lack of liquidity with respect to the swap agreements.

Credit default swaps involve commitments to pay a fixed rate at a predetermined frequency in exchange for a lump sum payment if a “credit event”, as defined in the agreement, affecting a third party occurs. Credit events may include a failure to pay interest, bankruptcy, restructuring, or other event as defined in the agreement. A “buyer” of credit protection agrees to pay a counterparty to assume the credit risk of an issuer upon the occurrence of a credit event. The “seller” of the protection receives periodic payments and agrees to assume the credit risk of an issuer upon the occurrence of a credit event. A “seller’s” exposure is limited to the total notional amount of the credit default swap contract.

Interest rate swaps involve the commitment to pay or receive a floating rate of interest in exchange for a fixed rate of interest based on the same notional amount.

Total return swaps involve commitments to pay interest in exchange for a market-linked return. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Funds will receive a payment from or make a payment to the counterparty.

Details of swap agreements open at year end are included in the Funds' schedules of investments.

162

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates

Management Services. The Funds have agreed to pay investment advisory and management fees to Principal Management Corporation (wholly owned by Principal Financial Services, Inc.) computed at an annual percentage rate of each of the Funds’ average daily net assets. The annual rates used in this calculation for the Funds are as follows:

		Net Assets of Funds (in millions)								Net Assets of Funds (in millions)
		First Next Next Over $1.5								First	Next Next Over $1.5
		$500	$500	$500	billion					$500	$500	$500	billion
Disciplined LargeCap Blend Fund		.60%	.58%	.56% .55%		MidCap Growth Fund I				1.00%	.98%	.96%	.95%
Global Real Estate Securities Fund		.90	.88	.86	.85	MidCap Growth Fund III				1.00	.96	.94	.92
Government & High Quality Bond Fund		.40	.38	.36	.35	MidCap Value Fund II				1.00	.98	.96	.95
Inflation Protection Fund		.40	.38	.36	.35	Preferred Securities Fund				.75	.73	.71	.70
International Emerging Markets Fund		1.20	1.18	1.16	1.15	Real Estate Securities Fund				.85	.83	.81	.80
International Growth Fund		1.00	.98	.96	.95	Short-Term Bond Fund				.40	.38	.36	.35
LargeCap Blend Fund I		.45	.43	.41	.40	SmallCap Blend Fund				.75	.73	.71	.70
LargeCap Blend Fund II		.75	.73	.71	.70	SmallCap Growth Fund				.75	.73	.71	.70
LargeCap Growth Fund I		.75	.73	.71	.70	SmallCap Growth Fund II				1.00	.98	.96	.95
LargeCap Growth Fund II		.95	.93	.91	.90	SmallCap Value Fund				.75	.73	.71	.70
LargeCap S&P 500 Index Fund		.15	.15	.15	.15	Tax-Exempt Bond Fund I				.50	.48	.46	.45
LargeCap Value Fund		.45	.43	.41	.40	Ultra Short Bond Fund				.40	.39	.38	.37
MidCap Blend Fund		.65	.63	.61	.60
		Net Assets of Funds								Net Assets of Funds
		First $1			Over $1				First $2		Over $2
		billion			billion				billion		billion
California Municipal Fund		.50%			.45%	Income Fund				.50%	.45%
						Mortgage Securities Fund				.50	.45
		Net Assets of Funds (in millions)							Net Assets of Funds (in millions)
		First	Next		Over				First	Next		Over $1
		$200	$300		$500				$500	$500		billion
Short-Term Income Fund		.50%	.45%		.40%	West Coast Equity Fund			.625%	.50%		.375%
		Net Assets of Funds							Net Assets of Funds (in millions)
	First $1	Next $1	Next $1		Over $3				First		Over
	billion	billion	billion		billion				$250		$250
MidCap Stock Fund	.75%	.70%		.65%	.60%	High Yield Fund			.625%		.50%
				Net Assets of Funds (in millions)
		First	Next		Next	Next Next $1 Over $3
		$500	$500		$500	$500	billion billion
Bond & Mortgage Securities Fund		.55%		.53%	.51%	.50%	.48%	.45%
Diversified International Fund		.90		.88	.86	.85	.83	.80
Money Market Fund		.40		.39	.38	.37	.36	.35
LargeCap Value Fund III		.80		.78	.76	.75	.73	.70
			Net Assets of Funds (in millions)
		First	Next		Next $1          Next $1               Over $3
		$500	$500		billion             billion		billion
LargeCap Growth Fund		.68%		.65%	.62%	.58%	.55%
		Net Assets of Funds (in millions)
		First	Next		Over
		$250	$250		$500
Equity Income Fund		.60%	.55%		.50%

163

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates (Continued)

In addition to the management fee, R-1, R-2, R-3, R-4, and R-5 classes of shares of the Funds pay the Manager a service fee and an administrative service fee computed at an annual percentage rate of each class’s average daily net assets. The annual rates for the service fee are .25%, .25%, .17%, .15%, and .15% and the annual rates for the administrative service fee are .28%, .20%, .15%, .13%, and .11% for R-1, R-2, R-3, R-4, and R-5, respectively. Class A, Class B, Class C, Class J, and Class S shares of the Funds reimburse Principal Shareholder Services, Inc. (the “Transfer Agent”) (wholly owned by Principal Management Corporation) for transfer agent services. In addition, Class S shares pays Principal Shareholder Services, Inc. a service fee computed at an annual percentage rate of Class S shares average daily net assets. The annual rates used in this calculation for Class S shares are as follows:

Net Assets of Funds (in millions)
First	Next	Next $4 Next $5		Next $10	Over $20
$500	$500	billion billion		billion	billion
.06%	.05%	.04%	.03%	.02%	.01%

The Manager has contractually agreed to limit the expenses (excluding interest the Funds incur in connection with investments they make) for certain classes of shares of certain of the Funds. The reductions and reimbursements are in amounts that maintain total operating expenses at or below certain limits. The limits are expressed as a percentage of average daily net assets attributable to each class of shares on an annualized basis during the reporting period. The operating expense limits are as follows:

		From November 1, 2007 through October 31, 2008
	Class A	Class B	Class C	Class J	Institutional	Expiration
Bond & Mortgage Securities Fund	.94%	1.60%	1.75%**	N/A	N/A	June 30, 2009
Disciplined LargeCap Blend Fund	.88*	1.91*	1.82	N/A	N/A	February 28, 2009
Diversified International Fund	1.29*	2.30*	2.08	1.59%*	.90*	February 28, 2009
Global Real Estate Securities Fund	1.45	N/A	2.20	N/A	.95	February 28, 2009
Government & High Quality Bond Fund	N/A	N/A	1.65	N/A	N/A	February 28, 2009
Income Fund	.90	1.64	1.65	N/A	N/A	February 28, 2009
Inflation Protection Fund	.90	N/A	1.65	1.15	N/A	February 28, 2009
International Emerging Markets Fund	N/A	N/A	2.80	N/A	N/A	February 28, 2009
International Growth Fund	1.60	N/A	2.35	N/A	N/A	February 28, 2009
LargeCap Blend Fund I	N/A	N/A	1.90	N/A	N/A	February 28, 2009
LargeCap Blend Fund II	N/A	N/A	2.20	N/A	N/A	February 28, 2009
LargeCap Growth Fund	1.28	2.26	2.03	N/A	N/A	February 28, 2009
LargeCap Growth Fund I	N/A	N/A	2.20	N/A	N/A	February 28, 2009
LargeCap Growth Fund II	1.70	N/A	2.45	1.75	N/A	February 28, 2009
LargeCap S&P 500 Index Fund	N/A	N/A	1.30	N/A	N/A	February 28, 2009
LargeCap Value Fund	N/A	N/A	1.70	N/A	N/A	February 28, 2009
LargeCap Value Fund III	N/A	N/A	2.25	N/A	N/A	February 28, 2009
MidCap Blend Fund	1.02	1.32	1.95**	N/A	N/A	June 30, 2008
MidCap Growth Fund I	1.75	N/A	2.50	N/A	N/A	February 28, 2009
MidCap Growth Fund III	1.75	2.50	2.50	N/A	N/A	February 28, 2009
MidCap Value Fund II	1.75	2.50	2.50	N/A	N/A	February 28, 2009
Money Market Fund	.64*	1.74*	1.79	N/A	N/A	February 28, 2009
Mortgage Securities Fund	.91	1.65	1.63	N/A	N/A	February 28, 2009
Preferred Securities Fund	1.00	N/A	1.75	1.60*	N/A	February 28, 2009
Real Estate Securities Fund	1.28	2.08	1.98	N/A	N/A	February 28, 2009
Short-Term Bond Fund	N/A	N/A	1.70	N/A	N/A	February 28, 2009
Short-Term Income Fund	.95	N/A	1.67	N/A	N/A	February 28, 2009
SmallCap Blend Fund	N/A	N/A	2.20	N/A	N/A	February 28, 2009
SmallCap Growth Fund	1.42*	2.57	2.21	1.50*	.75*	February 28, 2009
SmallCap Growth Fund II	1.95	2.70	2.70	2.05*	N/A	February 28, 2009
SmallCap Value Fund	1.35	2.29	2.08	1.47*	.75*	February 28, 2009
Tax-Exempt Bond Fund I	.76	1.15	1.65	N/A	N/A	February 28, 2009
Ultra Short Bond Fund	.75*	N/A	1.50	1.20*	N/A	February 28, 2009

*	The operating expense limit expired on February 28, 2008.
**	Expires February 28, 2009.

164

		NOTES TO FINANCIAL STATEMENTS
		PRINCIPAL FUNDS, INC.
		October 31, 2008
4. Management Agreement and Transactions with Affiliates (Continued)
	Period from November 1, 2007 through February 28, 2008
	Class A	Class B	Class C	Expiration
California Municipal Fund	.83	1.59	1.59	February 28, 2008
Equity Income Fund	.87	1.73	1.65	February 28, 2008
High Yield Fund	.90	1.66	1.65	February 28, 2008
MidCap Stock Fund	1.10	2.06	1.95	February 28, 2008
West Coast Equity	.86	1.78	1.70	February 28, 2008

		Period from November 1, 2007 through February 28, 2008
	Advisors	Advisors	Advisors
	Preferred	Select	Signature	Preferred	Select	Expiration
Diversified International Fund	1.47%	1.65%	1.78%	1.16%	1.28%	February 28, 2008
SmallCap Growth Fund	1.32	1.50	1.63	1.01	1.13	February 28, 2008
SmallCap Value Fund	1.32	1.50	1.63	1.01	1.13	February 28, 2008

Distribution and Shareholder Servicing Fees. The Class A, Class B, Class C, Class J, Class S, R-1, R-2, R-3 and R-4 shares of the Funds bear distribution fees. The fee is computed at an annual rate of the average daily net assets attributable to each class of each of the Funds. Distribution fees are paid to Principal Funds Distributor, Inc. or Princor Financial Services Corporation, the principal underwriters, a portion may be paid to other selling dealers for providing certain services. The annual rates are .25%, 1.00%, 1.00%, .45%, .35%, .35%, .30%, .25% and .10% for, Class A, Class B, Class C, Class J, Class S, R-1, R-2, R-3 and R-4 classes of shares, respectively, except the following classes of shares:

LargeCap S&P 500 Index Fund	Class A	.15%
Money Market Fund	Class A	N/A
Money Market Fund	Class J	.25
SmallCap Blend Fund	Class J	.15
Short-Term Bond Fund	Class A	.15
Ultra Short Bond Fund	Class A	.15

From November 1, 2007 through December 31, 2007, the annual rate for Class J shares was .50%. Money Market Fund and SmallCap Blend Fund remained unchanged for the year ended October 31, 2008.

Princor Financial Services Corporation has contractually agreed to limit the distribution fees attributable to Class J shares through December 31, 2008. The limit will maintain the level of distribution fees (expressed as a percent of average net assets on an annualized basis) not to exceed .40% for Class J shares. From November 1, 2007 through December 31, 2007 the limit was .45%.

165

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates (Continued)

Sales Charges. Principal Funds Distributor, Inc. or Princor Financial Services Corporation, as principal underwriters, receive proceeds of any CDSC on certain Class A, Class B, Class C, and Class J share redemptions. The charge for Class A shares is 1.00% (.50% for the Short-Term Bond Fund and Short-Term Income Fund; .25% for the LargeCap S&P 500 Index Fund and Ultra Short Bond Fund) of the lesser of current market value or the cost of shares redeemed. The charge for Class B shares is based on declining rates which begin at 5.00% of the lesser of current market value or the cost of shares being redeemed. The charge for Class C shares is 1.00% of the lesser of current market value or the cost of shares redeemed within 12 months of purchase. The charge for Class J shares is 1.00% of the lesser of current market value or the cost of shares redeemed within 18 months of purchase. Principal Funds Distributor, Inc. or Princor Financial Services Corporation also retain sales charges on sales of Class A shares based on declining rates which begin at 1.00% for Ultra Short Bond Fund, 1.50% for LargeCap S&P Index Fund, 2.50% for Short-Term Bond Fund and Short Term Income Fund, 4.50% for Bond & Mortgage Securities Fund, California Municipal Fund, Government & High Quality Bond Fund, High Yield Fund, Income Fund, Inflation Protection Fund, Mortgage Securities Fund, Preferred Securities Fund, and Tax-Exempt Bond Fund, and 5.50% for all other Funds (except Money Market Fund which does not carry a sales charge). The aggregate amounts of these charges retained by Principal Funds Distributor, Inc. and Princor Financial Services Corporation for the year ended October 31, 2008, were as follows (in thousands):

	Class A	Class B	Class C	Class J
Bond & Mortgage Securities Fund	$151	$ 44	$ 2	$58
California Municipal Fund	119	34	9	N/A
Disciplined LargeCap Blend Fund	125	74	1	N/A
Diversified International Fund	603	100	12	80
Equity Income Fund	548	1,106	41	N/A
Global Real Estate Securities Fund	16	N/A	—	N/A
Government & High Quality Bond Fund	184	70	3	18
High Yield Fund	298	187	64	N/A
Income Fund	77	130	5	N/A
Inflation Protection Fund	25	N/A	1	5
International Emerging Markets Fund	464	54	13	65
International Growth Fund	20	N/A	1	10
LargeCap Blend Fund I	141	19	2	11
LargeCap Blend Fund II	142	29	—	50
LargeCap Growth Fund	421	85	7	15
LargeCap Growth Fund I	109	17	1	16
LargeCap Growth Fund II	10	N/A	—	6
LargeCap S&P 500 Index Fund	62	N/A	3	68
LargeCap Value Fund	252	24	1	18
LargeCap Value Fund III	125	26	1	37
MidCap Blend Fund	571	78	3	53
MidCap Growth Fund I	12	N/A	—	N/A
MidCap Growth Fund III	114	14	1	8
MidCap Stock Fund	38	48	4	N/A
MidCap Value Fund II	38	3	1	12
Money Market Fund	45	298	17	279
Mortgage Securities Fund	22	29	—	N/A
Preferred Securities Fund	245	N/A	81	7
Real Estate Securities Fund	223	56	3	24
Short-Term Bond Fund	42	N/A	1	22
Short-Term Income Fund	20	N/A	2	N/A
SmallCap Blend Fund	136	20	—	14
SmallCap Growth Fund	42	12	1	8
SmallCap Growth Fund II	51	10	—	9
SmallCap Value Fund	72	10	3	16
Tax-Exempt Bond Fund	109	18	—	N/A
Ultra Short Bond Fund	9	N/A	3	3
West Coast Equity Fund	206	340	4	N/A

Class B shares automatically convert into Class A shares, based on relative net asset value (without a sales charge), eight years after purchase.

166

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

4. Management Agreement and Transactions with Affiliates (Continued)

At October 31, 2008, Principal Life Insurance Company (an affiliate of the Manager), Princor Financial Services Corporation, and benefit plans sponsored on behalf of Principal Life Insurance Company owned shares of the Funds as follows (amounts in thousands):

	Class A	Class C	Institutional	R - 1	R - 4
Bond & Mortgage Securities Fund	405	—	15,254	—	—
Diversified International Fund	—	—	3,720	—	—
Global Real Estate Securities Fund	150	150	200	N/A	N/A
Government & High Quality Bond Fund	136	—	—	—	—
LargeCap Growth Fund	—	—	9,137	—	—
LargeCap Value Fund	—	—	6,860	—	—
Money Market Fund	20,084	—	33,409	—	—
Short-Term Bond Fund	748	—	—	—	—
SmallCap Blend Fund	—	—	2,492	—	—
Ultra Short Bond Fund	—	—	—	1	1

Affiliated Brokerage Commissions. With respect to Bond & Mortgage Securities Fund and Preferred Securities Fund, $43,000 and $1,037,000 of brokerage commissions were paid, respectively, to Spectrum Asset Management, Inc., a member of the Principal Financial Group. The other Funds did not pay brokerage commissions to any member of the Principal Financial Group during the year ended October 31, 2008. Brokerage commissions were paid to affiliates of sub-advisors as follows (in thousands):

	Year Ended October 31, 2008
LargeCap Growth Fund II	$84
MidCap Value Fund II	16
SmallCap Growth Fund II	14
5. Capital Share Transactions

For the year ended October 31, 2008, the following table reflects the conversion of Class B shares into Class A shares. The amounts are also shown in the statement of changes in net assets as shares sold and dollars sold for Class A and shares redeemed and dollars redeemed for Class B (amounts in thousands).

	Year Ended October 31, 2008
	Shares	Dollars
Bond & Mortgage Securities Fund	189	$ 1,860
California Municipal Fund	1,150	11,684
Disciplined LargeCap Blend Fund	678	9,253
Diversified International Fund	577	7,022
Equity Income Fund I	660	12,410
Government & High Quality Bond Fund	343	3,384
High Yield Fund	429	3,385
Income Fund	333	2,948
International Emerging Markets Fund	58	1,480
LargeCap Blend Fund I	288	2,464
LargeCap Blend Fund II	115	1,069
LargeCap Growth Fund	3,879	32,334
LargeCap Growth Fund I	198	1,465
LargeCap Value Fund	244	2,565
LargeCap Value Fund III	96	1,091
MidCap Blend Fund	556	7,229
MidCap Growth Fund III	128	1,186
MidCap Stock Fund	157	2,233
MidCap Value Fund II	3	34
Money Market Fund	4,311	4,311
Mortgage Securities Fund	233	2,458
Real Estate Securities Fund	66	1,064
SmallCap Blend Fund	180	2,456
SmallCap Growth Fund	196	1,529
SmallCap Growth Fund II	42	316
SmallCap Value Fund	8	126
Tax-Exempt Bond Fund	382	2,688
West Coast Equity Fund	422	14,710

167

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

6. Investment Transactions

For the year ended October 31, 2008, the cost of investment securities purchased and proceeds from investment securities sold (not including short-term investments and U.S. government securities) by the Funds were as follows (amounts shown in thousands):

	Purchases	Sales		Purchases	Sales
Bond & Mortgage Securities Fund	$10,748,257	$10,545,771	LargeCap Value Fund III	$1,489,686	$1,224,945
California Municipal Fund	156,235	233,709	MidCap Blend Fund	215,078	288,134
Disciplined LargeCap Blend Fund	3,762,095	4,421,024	MidCap Growth Fund I	281,813	304,879
Diversified International Fund	2,133,959	2,237,215	MidCap Growth Fund III	1,393,675	1,182,167
Equity Income Fund	2,562,158	3,522,689	MidCap Stock Fund	166,987	367,054
Global Real Estate Securities	9,660	6,237	MidCap Value Fund II	902,199	1,041,421
Government & High Quality Bond Fund	1,226,551	1,240,741	Mortgage Securities Fund	78,095	481,539
High Yield Fund	692,032	437,602	Preferred Securities Fund	1,083,767	225,068
Income Fund	144,492	148,662	Real Estate Securities Fund	889,960	679,076
Inflation Protection Fund	13,018	78,592	Short-Term Bond Fund	54,042	110,450
International Emerging Markets Fund	1,760,467	1,611,572	Short-Term Income Fund	287,395	165,794
International Growth Fund	2,924,544	2,707,383	SmallCap Blend Fund	153,945	198,379
LargeCap Blend Fund I	1,036,820	852,611	SmallCap Growth Fund	202,528	298,524
LargeCap Blend Fund II	556,551	612,437	SmallCap Growth II	418,438	501,394
LargeCap Growth Fund	2,799,742	3,686,232	SmallCap Value Fund	517,454	501,659
LargeCap Growth Fund I	1,235,360	1,068,541	Tax-Exempt Bond Fund	181,027	220,180
LargeCap Growth Fund II	2,986,558	1,876,774	Ultra Short Bond Fund	21,192	52,671
LargeCap S&P 500 Index Fund	148,583	84,222	West Coast Equity Fund	136,931	612,866
LargeCap Value Fund	1,120,198	1,024,200

For the year ended October 31, 2008, the cost of U.S. government securities purchased and proceeds from U.S. government securities sold (not including short-term investments) by the Funds were as follows (amounts shown in thousands):

	Purchases	Sales	Purchases	Sales
Bond & Mortgage Securities Fund	$614,882	$683,084      Mortgage Securities Fund	$ —	$ 42,444
Government & High Quality Bond Fund	86,130	127,859         Short-Term Bond Fund	5,602	34,868
High Yield Fund	—	10,623        Short-Term Income Fund	88,843	108,372
Income Fund	32,186	132,463         Ultra Short Bond Fund	1,993	9,031
Inflation Protection Fund	185,713	111,392

The Funds may trade portfolio securities on a “to-be-announced” (“TBA”) or when-issued basis. In a TBA or when-issued transaction, the Funds commit to purchase or sell securities for which all specific information is not known at the time of the trade. Securities purchased on a TBA or when-issued basis are not settled until they are delivered to the Funds, normally 15 to 30 days later. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other portfolio securities. The securities purchased on a TBA or when-issued basis are identified as such in the Funds’ schedules of investments.

Certain of the Funds have entered into mortgage-dollar-roll transactions, in which the Funds sell mortgage-backed securities and simultaneously agree to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are invested in additional securities. The Funds forgo principal and interest paid on the securities, and are compensated by interest earned on the proceeds of the initial sale and by a lower price on the securities to be repurchased. The Funds treat mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the Funds’ portfolio turnover ratio. Amounts to be received or paid in connection with open mortgage-dollar-rolls are included in Investment securities sold and Investment securities purchased on the statements of assets and liabilities.

Certain of the Funds experienced an in-kind-redemption during the year ended October 31, 2008. The in-kind redemption resulted in realized gains (losses) of $20,595,000, $14,435,000, ($10,984,000), $7,173,000, $661,000, ($3,542,000), ($2,764,000), and $29,454,000, for Disciplined LargeCap Blend Fund, Diversified International Fund, Equity Income Fund, LargeCap Growth Fund, LargeCap Growth Fund II, MidCap Stock Fund, SmallCap Growth Fund, and West Coast Equity Fund, respectively. These realized gains (losses) are included in net realized gain (loss) from investment transactions on the statement of operations.

168

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

7. Federal Tax Information

Distributions to Shareholders. The federal income tax character of distributions paid for the years ended October 31, 2008 and October 31, 2007 were as follows (amounts in thousands):

			Tax-Exempt		Long-Term
	Ordinary Income		Income**		Capital Gain^		Return of Capital		Section 1250 Gains
	2008	2007	2008	2007	2008	2007	2008	2007	2008	2007
						$
Bond & Mortgage Securities Fund	140,512	$120,154	$—	$ —	—	—	$—	$—	$ —	$ —
California Municipal Fund*	—	1	16,686	16,057	—	2,471	—	—	—	—
Disciplined LargeCap Blend Fund	38,008	11,432	—	—	415,077	23,879	—	—	—	—
Diversified International Fund	96,425	26,722	—	—	229,056	52,561	—	—	—	—
Equity Income Fund	197,593	70,881	—	—	259,573	196,339	—	—	—	—
Global Real Estate Securities Fund	138	—	—	—	—	—	—	—	—	—
Government & High Quality Bond Fund	15,489	16,284	—	—	—	—	—	—	—	—
High Yield Fund	126,534	115,516	—	—	38,075	24,846	—	—	—	—
Income Fund	66,976	69,599	—	—	—	—	—	—	—	—
Inflation Protection Fund	40,806	17,260	—	—	—	—	7,447	—	—	—
International Emerging Markets Fund	177,393	21,464	—	—	55,661	8,482	—	—	—	—
International Growth Fund	90,391	61,780	—	—	127,096	77,467	—	—	—	—
LargeCap Blend Fund I	10,840	1,893	—	—	22,772	—	—	—	—	—
LargeCap Blend Fund II	32,048	25,065	—	—	68,604	30,246	—	—	—	—
LargeCap Growth Fund	20,684	4,154	—	—	43,699	12,172	8,589	—	—	—
LargeCap Growth Fund I	18,638	13,545	—	—	62,120	45,889	—	—	—	—
LargeCap Growth Fund II	51,402	31,808	—	—	48,590	26,325	—	—	—	—
LargeCap S&P 500 Index Fund	17,641	11,671	—	—	10,195	3,039	—	—	—	—
LargeCap Value Fund	23,404	11,030	—	—	57,148	34,028	—	—	—	—
LargeCap Value Fund III	73,936	38,659	—	—	137,764	114,676	—	—	—	—
MidCap Blend Fund	12,486	15,260	—	—	73,740	63,223	—	—	—	—
MidCap Growth Fund I	18,290	10,426	—	—	17,164	21,153	—	—	—	—
MidCap Growth Fund III	987	1,273	—	—	46,620	13,170	294	—	—	—
MidCap Stock Fund	15,917	9,781	—	—	94,504	41,972	—	—	—	—
MidCap Value Fund II	45,044	24,120	—	—	29,722	34,958	—	—	—	—
Money Market Fund	80,699	98,162	—	—	—	—	—	—	—	—
Mortgage Securities Fund	75,056	82,101	—	—	—	—	355	—	—	—
Preferred Securities Fund	84,591	41,009	—	—	—	—	—	—	—	—
Real Estate Securities Fund	50,905	11,143	—	—	352,110	100,584	—	—	2,800	2,768
Short-Term Bond Fund	13,283	12,646	—	—	—	—	—	—	—	—
Short-Term Income Fund	18,888	9,954	—	—	—	—	—	—	—	—
SmallCap Blend Fund	7,829	1,561	—	—	20,334	25,794	—	—	—	—
SmallCap Growth Fund	—	110	—	—	24,053	1,970	—	—	—	—
SmallCap Growth Fund II	6,788	—	—	—	30,683	46,563	—	—	—	—
SmallCap Value Fund	18,232	7,198	—	—	27,984	4,780	—	—	—	—
Tax-Exempt Bond Fund	13	1	13,511	12,603	—	550	—	—	—	—
Ultra Short Bond Fund	8,762	11,512	—	—	—	44	—	—	—	—
West Coast Equity Fund	10,800	11,204	—	—	123,750	42,580	—	—	—	—

*In addition to the distributions shown above, California Municipal Fund had return of capital distributions of $80,000. **The funds designate these distributions as exempt interest per IRC Sec. 852(b)(5).

^ The funds designate these distributions as long-term capital gain dividends per IRC code Sec. 852(b)(3)(C).

The acquisitions of WM California Insured Intermediate Municipal Fund, WM California Municipal Fund, WM Equity Income Fund, WM High Yield Fund, WM Income Fund, WM Mid Cap Stock Fund, WM U.S. Government Securities Fund, WM Short Term Income Fund, WM Tax Exempt Bond Fund, and WM West Coast Equity Fund, by corresponding series of Principal Funds, Inc. constitute reorganizations under Internal Revenue Code Section 368(a)(1)(F). Distributions shown for 2007 include the respective Acquired Fund distributions prior to the reorganizations.

For U.S. federal income tax purposes, short-term capital gain distributions are considered ordinary income distributions.

169

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

7. Federal Tax Information (Continued)

Distributable Earnings. As of October 31, 2008, the components of distributable earnings on a federal tax basis were as follows (amounts in thousands):

	Undistributed	Undistributed	Undistributed
	Ordinary Income	Tax-Exempt Income	Long-Term Capital Gains
Bond & Mortgage Securities Fund*	$ 3,237	$ —	$ —
California Municipal Fund	—	109	—
Disciplined LargeCap Blend Fund	31,049	—	—
Diversified International Fund*	30,134	—	—
Equity Income Fund	6,260	—	—
Global Real Estate Securities Fund	42	—	—
Government & High Quality Bond Fund	843	—	—
High Yield Fund	4,117	—	—
Income Fund	5	—	—
International Emerging Markets Fund	8,090	—	—
International Growth Fund	30,139	—	—
LargeCap Blend Fund I	10,046	—	—
LargeCap Blend Fund II	7,188	—	—
LargeCap Growth Fund II	6,261	—	—
LargeCap S&P 500 Index Fund	13,357	—	—
LargeCap Value Fund	12,939	—	—
LargeCap Value Fund III	37,209	—	—
MidCap Blend Fund	—	—	32,304
MidCap Stock Fund	2,516	—	305
MidCap Value Fund II	3,904	—	—
Preferred Securities Fund	2,187	—	—
Real Estate Securities Fund	2,213	—	—
Short-Term Bond Fund	17	—	—
Short-Term Income Fund	19	—	—
SmallCap Blend Fund	333	—	—
SmallCap Value Fund	1,843	—	—
Tax-Exempt Bond Fund	—	67	—
Ultra Short Bond Fund	113	—	—
West Coast Equity Fund	6,033	—	44,442

* Distributable earnings reflect certain limitations imposed by Sections 381-384 of the Internal Revenue Code.

170

NOTES TO FINANCIAL STATEMENTS
PRINCIPAL FUNDS, INC.
October 31, 2008

7. Federal Tax Information (Continued)

Capital Loss Carryforwards. Capital loss carryforwards are losses that can be used to offset future capital gains of the Funds. At October 31, 2008, the Funds had approximate net capital loss carryforwards as follows (amounts in thousands):

			Net Capital Loss Carryforward Expiring In:
									Annual
	2009	2010	2011	2012	2013	2014	2015	2016	Limitations*
Bond & Mortgage Securities Fund	$1,281	$ —	$ —	$ —	$2,386	$6,971	$5,293	$49,435	$ —
California Municipal Bond Fund	—	—	—	—	—	—	1,415	10,847	—
Disciplined LargeCap Blend Fund	—	—	—	—	—	—	—	282,137	—
Diversified International Fund	398	1,183	586	—	—	—	—	218,904	516
Equity Income Fund	—	—	—	—	—	—	—	281,914	—
Global Real Estate Securities Fund	—	—	—	—	—	—	8	1,427	—
Government & High Quality Bond Fund	—	—	1,681	525	1,535	4,014	1,729	—	—
High Yield Fund	—	—	—	—	—	—	—	5,508	—
Income Fund	—	1,212	892	—	1,047	—	2,036	—	—
Inflation Protection Fund	—	—	—	—	—	1,338	4,175	8,044	—
International Emerging Markets Fund	—	—	—	—	—	—	—	172,450	—
International Growth Fund	—	—	—	—	—	—	—	339,871	—
LargeCap Blend Fund I	—	—	—	—	—	—	—	99,148	—
LargeCap Blend Fund II	—	—	—	—	—	—	—	29,297	—
LargeCap Growth Fund	21,343	2,581	14,931	—	—	—	—	48,001	138
LargeCap Growth Fund I	5,526	—	115	296	—	—	—	84,598	2,763
LargeCap Growth Fund II	—	—	—	—	—	—	—	91,597	62,861
LargeCap S&P 500 Index Fund	—	—	—	—	—	—	—	20,129	—
LargeCap Value Fund	—	—	—	—	—	—	—	111,812	—
LargeCap Value Fund III	—	—	—	—	—	—	—	109,903	—
MidCap Growth Fund I	—	—	—	—	—	—	—	14,106	—
MidCap Growth Fund III	937	806	—	—	—	—	—	95,184	269
MidCap Value Fund II	—	—	—	—	—	—	—	72,150	—
Money Market Fund	—	—	—	—	—	—	—	3,741	—
Mortgage Securities Fund	—	852	6,859	7,815	5,054	7,754	3,147	2,031	—
Preferred Securities Fund	—	—	—	3,453	716	675	3,787	130,624	—
Real Estate Securities Fund	—	—	—	—	—	—	—	177,793	—
Short-Term Bond Fund	895	—	1,572	2,029	1,226	2,068	1,597	3,535	—
Short-Term Income Fund	381	1,139	684	241	—	431	240	2,743	—
SmallCap Blend Fund	—	—	—	—	—	—	—	18,090	—
SmallCap Growth Fund	—	1,627	—	—	—	—	—	22,315	542
SmallCap Growth Fund II	112	—	—	—	—	—	—	33,226	—
SmallCap Value Fund	—	—	—	—	—	—	—	62,911	—
Tax-Exempt Bond Fund	—	—	—	—	—	—	1,229	3,675	—
Ultra Short Bond Fund	—	—	—	—	—	—	661	3,170	—
*In accordance with Sections 381-384 of the Internal Revenue Code, a portion of certain Fund’s losses have been subjected to an annual limitation.

171

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (0.00%)			PREFERRED STOCKS (continued)
Independent Power Producer (0.00%)			Electric - Integrated (continued)
Dynegy Inc (a)	99 $	-	Xcel Energy Inc 7.60%	31,300 $	746
TOTAL COMMON STOCKS	$ -				5,312
PREFERRED STOCKS (1.77%)			Fiduciary Banks (0.04%)
Cable TV (0.06%)			BNY Capital V	45,300	969
Comcast Corp 6.63%	40,700	737
Comcast Corp 7.00%; Series B	35,900	720	Finance - Consumer Loans (0.04%)
		1,457	HSBC Finance Corp 6.88%	51,900	1,093
Commercial Banks (0.12%)			Finance - Investment Banker & Broker (0.11%)
ASBC Capital I	11,600	206	Credit Suisse Guernsey Ltd	22,600	433
Barclays Bank PLC 7.10%	49,100	774	JP Morgan Chase Capital XI	16,700	347
Barclays Bank PLC 7.75%	15,396	256	JP Morgan Chase Capital XII	800	16
BB&T Capital Trust V (a)	35,100	850	JP Morgan Chase Capital XIV	22,400	445
National Bank of Greece SA (a)	11,422	211	JP Morgan Chase Capital XXVI	13,100	306
VNB Capital Trust I	15,466	333	Morgan Stanley Capital Trust III	13,400	200
Zions Capital Trust B	15,600	339	Morgan Stanley Capital Trust IV	62,400	910
		2,969	Morgan Stanley Capital Trust V	4,100	54
Diversified Banking Institutions (0.06%)					2,711
Citigroup Inc 8.13%	20,000	337	Finance - Other Services (0.03%)
JP Morgan Chase & Co	7,100	177	ABN AMRO Capital Funding Trust VII	50,500	615
Royal Bank of Scotland Group PLC 5.75%;			National Rural Utilities Cooperative Finance
Series L	29,097	306	Corp 6.10%	4,800	83
Royal Bank of Scotland Group PLC 6.13%;			National Rural Utilities Cooperative Finance
Series R	18,700	198	Corp 6.75%	3,800	76
Royal Bank of Scotland Group PLC 6.25%;					774
Series P	3,000	32
Royal Bank of Scotland Group PLC 6.60%;			Financial Guarantee Insurance (0.00%)
Series S	26,900	295	Financial Security Assurance Holdings Ltd
Royal Bank of Scotland Group PLC 6.75%;			6.25%	4,000	22
Series Q	1,377	15	Financial Security Assurance Holdings Ltd
		1,360	6.88%	1,200	10
					32
Diversified Financial Services (0.04%)
Citigroup Capital IX	5,000	80	Investment Management & Advisory Services (0.03%)
Citigroup Capital VII	12,000	207	Deutsche Bank Contingent Capital Trust II	52,300	781
Citigroup Capital X	14,100	209
			Life & Health Insurance (0.07%)
Citigroup Capital XI	13,200	195
			Delphi Financial Group Inc 7.38%	9,100	91
Citigroup Capital XIX	9,300	157
			Delphi Financial Group Inc 8.00%	21,800	288
Citigroup Capital XV	1,500	23
			Lincoln National Capital VI	2,000	31
Citigroup Capital XVI	9,900	147
			Lincoln National Corp 6.75%	4,000	58
General Electric Capital Corp 6.45%	1,200	27
			PLC Capital Trust III	30,900	386
		1,045
			PLC Capital Trust IV	7,400	85
Electric - Integrated (0.22%)			PLC Capital Trust V	23,800	269
Alabama Power Co - Series 2007B	59,400	1,363	Protective Life Corp	16,300	209
FPL Group Capital Inc 7.45%	72,800	1,776	Prudential Financial Inc	14,900	289
Georgia Power Co 5.90%	6,100	134			1,706
Georgia Power Co 6.375%	1,300	32
			Money Center Banks (0.06%)
Gulf Power Co	2,300	51
			Santander Finance Preferred SA Unipersonal
PPL Capital Funding Inc	20,400	485	6.50%	4,600	74
PPL Energy Supply LLC	29,700	725

See accompanying notes

172

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
PREFERRED STOCKS (continued)			PREFERRED STOCKS (continued)
Money Center Banks (continued)			Reinsurance (continued)
Santander Finance Preferred SA Unipersonal			RenaissanceRe Holdings Ltd - Series C	5,900 $	83
6.80%	76,686 $	1,311	RenaissanceRe Holdings Ltd - Series D	24,200	395
UBS Preferred Funding Trust IV	4,900	69			1,406
		1,454
			REITS - Apartments (0.02%)
Multi-Line Insurance (0.08%)			BRE Properties Inc - Series C	19,800	316
Aegon NV 6.375%	48,050	480	BRE Properties Inc - Series D	2,600	42
Aegon NV 6.50%	6,500	64	Equity Residential	3,000	51
Aegon NV 7.25%	17,242	197	UDR Inc	7,100	121
Allianz SE	13,300	259			530
ING Groep NV 6.13%	11,200	139
			REITS - Diversified (0.06%)
ING Groep NV 6.38%	28,700	362
			Duke Realty Corp 6.60%	57,100	628
ING Groep NV 7.05%	12,000	164
			Duke Realty Corp 6.95%	3,500	46
ING Groep NV 7.20%	4,000	55
			Duke Realty Corp 8.38%	10,000	143
ING Groep NV 7.38%	11,100	161
			PS Business Parks Inc Series H	20,000	310
ING Groep NV 8.50%	3,200	55
			PS Business Parks Inc Series I	1,400	21
		1,936
			PS Business Parks Inc Series M	8,500	128
Multimedia (0.02%)			PS Business Parks Inc Series P	15,400	230
Viacom Inc	27,400	473	Vornado Realty Trust - Series F	4,000	64
					1,570
Property & Casualty Insurance (0.06%)
Berkley W R Capital Trust	64,900	943	REITS - Office Property (0.01%)
Markel Corp	20,000	410	HRPT Properties Trust - Series B	25,000	312
		1,353
			REITS - Shopping Centers (0.10%)
Regional Banks (0.26%)			Developers Diversified Realty Corp 7.50%	24,600	246
BAC Capital Trust IV	4,300	75	Kimco Realty Corp 7.75%	38,599	665
BAC Capital Trust V	18,800	329	Regency Centers Corp 7.45%	20,100	344
BAC Capital Trust VIII	78,500	1,452	Weingarten Realty Investors 6.50%	84,500	1,289
Fleet Capital Trust VIII	600	12			2,544
KeyCorp Capital IX	41,600	593
			REITS - Single Tenant (0.01%)
KeyCorp Capital V	17,300	244
			Realty Income Corp - Series D	20,700	346
PNC Capital Trust C	17,600	405
PNC Capital Trust D	36,500	719
			REITS - Storage (0.01%)
SunTrust Capital IX	19,400	415	Public Storage Inc 6.63%; Series M	8,500	147
USB Capital VI	10,200	191	Public Storage Inc 6.95%; Series H	3,500	63
USB Capital VII	15,900	309			210
USB Capital XI	5,600	120
Wachovia Capital Trust IV	1,500	24	REITS - Warehouse & Industrial (0.05%)
			AMB Property Corp - Series P	80,400	1,153
Wachovia Capital Trust IX	6,000	97
			First Industrial Realty Trust Inc - Series J	2,500	26
Wachovia Corp 7.25%	1,400	23
			First Industrial Realty Trust Inc - Series K	1,400	17
Wells Fargo Capital IX	1,900	38
					1,196
Wells Fargo Capital VII	31,000	617
Wells Fargo Capital XI	14,300	300	Special Purpose Entity (0.11%)
Wells Fargo Capital XII	17,300	428	Corporate-Backed Trust Certificates 6.00%	9,900	158
		6,391	Corporate-Backed Trust Certificates 6.30%	3,100	48
			CORTS Trust for Bellsouth Capital Funding	12,600	303
Reinsurance (0.06%)
			CORTS Trust for First Union Institutional
Everest Re Capital Trust II	43,400	638
			Capital I	17,800	387
PartnerRe Ltd 6.50%	10,000	169
			CORTS Trust for SunAmerica	8,462	69
PartnerRe Ltd 6.75%	6,900	121
			CORTS Trust for Walt Disney Co/The	2,600	64

See accompanying notes

173

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
				Principal
	Shares	Value		Amount	Value
	Held	(000's)		(000's)	(000's)
PREFERRED STOCKS (continued)			BONDS (continued)
Special Purpose Entity (continued)			Apparel Manufacturers (0.03%)
Deutsche Bank Capital Funding Trust VIII	12,510 $	201	Rafaella Apparel Group Inc
Merrill Lynch Capital Trust I	36,000	590	11.25%, 6/15/2011	$ 1,807 $	705
PreferredPlus TR-CCR1 6.00%; Series GSC3	22,700	312
			Appliances (0.06%)
PreferredPlus TR-CCR1 6.00%; Series GSG1	1,500	25
			Whirlpool Corp
SATURNS 2003-06 6.00%; Series GS	2,000	32
			3.32%, 6/15/2009 (b)(f)	1,600	1,596
SATURNS 2003-11 5.63%; Series GS	2,500	36
SATURNS 2003-13 6.25%; Series CSFB	2,500	41	Asset Backed Securities (4.01%)
SATURNS 2004-04 6.00%; Series GS	2,200	33	Ameriquest Mortgage Securities Inc
SATURNS 2004-06 6.00%; Series GS	22,900	338	3.56%, 3/25/2035 (b)(f)	242	207
		2,637	3.49%, 7/25/2035 (b)(f)	215	211
			Carrington Mortgage Loan Trust
Telephone - Integrated (0.02%)
			3.54%, 12/25/2035 (f)	6,172	5,620
AT&T Inc	23,300	557
			Chase Funding Mortgage Loan Asset-Backed
			Certificates
Television (0.02%)			3.56%, 7/25/2033 (b)(f)	3,290	2,844
CBS Corp 6.75%	26,100	384	3.76%, 9/25/2033 (f)	664	267
TOTAL PREFERRED STOCKS	$ 43,508		3.49%, 12/25/2033 (f)	61	54
	Principal		CNH Equipment Trust
	Amount	Value	4.12%, 5/15/2012	8,890	8,496
	(000's)	(000's)	Countrywide Asset-Backed Certificates
BONDS (66.91%)			4.33%, 1/25/2034 (f)	39	26
Advertising Agencies (0.02%)			3.78%, 6/25/2035 (f)	2,800	2,402
Interpublic Group of Cos Inc			3.92%, 12/25/2035 (f)	2,600	1,429
6.25%, 11/15/2014	$ 725	482	3.55%, 2/25/2036 (b)(f)	6,432	6,174
			3.42%, 2/25/2037 (f)	7,775	5,294
Aerospace & Defense Equipment (0.05%)			3.43%, 6/25/2037 (f)	4,032	2,348
GenCorp Inc			3.39%, 11/25/2037 (b)(f)	5,320	4,359
9.50%, 8/15/2013	1,410	1,227
			Countrywide Home Equity Loan Trust
			4.79%, 12/15/2035 (f)	1,185	483
Agricultural Operations (0.56%)
			4.76%, 5/15/2036 (f)	4,127	2,064
Bunge Ltd Finance Corp
4.38%, 12/15/2008 (b)	7,564	7,540	First Franklin Mortgage Loan Asset Backed
			Certificates
Cargill Inc			3.64%, 10/25/2034 (b)(f)	68	66
5.20%, 1/22/2013 (c)	6,900	6,272
			First-Citizens Home Equity Loan LLC
		13,812	4.77%, 9/15/2022 (c)(f)	1,087	849
Airlines (0.33%)			Ford Credit Floorplan Master Owner Trust
American Airlines Inc			5.01%, 6/15/2011 (b)(f)	2,515	2,392
7.25%, 2/ 5/2009	3,150	3,091	GMAC Mortgage Corp Loan Trust
Continental Airlines Inc			3.44%, 8/25/2035 (f)	1,951	1,064
5.98%, 4/19/2022	1,870	1,300	3.47%, 11/25/2036 (f)	13,251	5,301
Delta Air Lines Inc			Great America Leasing Receivables
7.11%, 9/18/2011 (d)	1,000	935	5.39%, 9/15/2011 (c)	1,295	1,267
7.57%, 12/30/2049	450	433	Indymac Residential Asset Backed Trust
Northwest Airlines Inc			3.45%, 4/25/2037 (b)(f)	2,000	1,708
7.03%, 11/ 1/2019	1,250	959	JP Morgan Mortgage Acquisition Corp
Southwest Airlines Co 2007-1 Pass Through			3.43%, 4/25/2036 (f)	4,850	4,146
Trust			5.45%, 11/25/2036 (b)	6,230	5,483
6.15%, 8/ 1/2022 (e)	1,479	1,332	3.34%, 12/25/2036 (b)(f)	1,873	1,713
		8,050	3.34%, 3/25/2037 (b)(f)	2,536	2,362
			3.41%, 3/25/2037 (f)	3,820	2,822
			3.42%, 5/ 1/2037 (f)	7,850	4,966

See accompanying notes

174

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Asset Backed Securities (continued)				Automobile Sequential (continued)
Lehman XS Trust				Capital Auto Receivables Asset Trust
3.67%, 11/25/2035 (f)	$ 3,221 $		1,946	3.92%, 11/16/2009 (b)	$ 2,000 $		1,985
Long Beach Mortgage Loan Trust				5.34%, 1/15/2010 (b)(c)(f)		2,986	2,956
3.79%, 6/25/2034 (f)		450	308	4.79%, 3/15/2010 (b)(f)		2,642	2,617
3.76%, 2/25/2035 (f)		3,000	2,429	4.93%, 6/15/2010 (b)(f)		1,070	1,052
3.41%, 7/25/2036 (f)		6,660	3,563	5.52%, 3/15/2011 (f)		3,445	3,218
3.37%, 10/25/2036 (f)		2,625	1,820	4.68%, 10/15/2012 (f)		6,740	6,333
3.43%, 12/25/2036 (f)		2,175	936	Capital One Auto Finance Trust
Marriott Vacation Club Owner Trust				4.60%, 10/15/2012 (b)(f)		3,224	2,963
5.52%, 5/20/2029 (c)(f)		1,583	1,441	Daimler Chrysler Auto Trust
Merrill Lynch Mortgage Investors Inc				4.71%, 9/10/2012		3,130	2,870
3.49%, 7/25/2036 (f)		355	283	Ford Credit Auto Owner Trust
MSDWCC Heloc Trust				5.30%, 6/15/2012		3,095	2,671
3.45%, 7/25/2017 (f)		606	414	5.60%, 10/15/2012		1,315	1,084
Ownit Mortgage Loan Asset Backed Certificates				5.69%, 11/15/2012 (f)		905	749
3.56%, 8/25/2036 (b)(f)		677	656	Honda Auto Receivables Owner Trust
Popular ABS Mortgage Pass-Through Trust				4.74%, 2/15/2011 (b)(f)		2,975	2,889
3.53%, 5/25/2035 (f)		1,503	1,224	Hyundai Auto Receivables Trust
3.52%, 11/25/2035 (b)(f)		1,281	1,264	4.96%, 1/17/2012 (b)(f)		1,840	1,772
Residential Asset Mortgage Products Inc				Merrill Auto Trust Securitization
3.53%, 7/25/2035 (b)(f)		1,074	1,029	5.71%, 12/15/2010 (b)(f)		3,400	3,350
SACO I Inc				Volkswagen Auto Loan Enhanced Trust
3.40%, 9/25/2036 (f)		1,316	265	4.50%, 7/20/2012		3,260	3,158
Saxon Asset Securities Trust				WFS Financial Owner Trust
3.78%, 3/25/2035 (f)		2,500	1,915	4.50%, 5/17/2013		1,960	1,883
Swift Master Auto Receivables Trust				World Omni Auto Receivables Trust
4.66%, 6/15/2012 (b)(f)		3,300	2,880	4.13%, 3/15/2011 (b)(f)		3,400	3,294
			98,790				46,573
Auto - Car & Light Trucks (0.11%)				Beverages - Non-Alcoholic (0.17%)
Daimler Finance North America LLC				Coca-Cola HBC Finance BV
5.75%, 9/ 8/2011		2,000	1,602	5.13%, 9/17/2013		345	325
General Motors Corp				Panamerican Beverages Inc
7.13%, 7/15/2013		845	287	7.25%, 7/ 1/2009		4,000	3,940
8.38%, 7/15/2033		2,260	734				4,265
			2,623
				Beverages - Wine & Spirits (0.12%)
Auto/Truck Parts & Equipment - Original (0.11%)				Constellation Brands Inc
Stanadyne Corp				8.38%, 12/15/2014		1,200	1,068
10.00%, 8/15/2014		700	539	7.25%, 5/15/2017		2,235	1,855
Tenneco Inc							2,923
10.25%, 7/15/2013		1,485	1,262
8.13%, 11/15/2015		500	260	Brewery (0.26%)
Titan International Inc				SABMiller PLC
				4.18%, 7/ 1/2009 (b)(c)(f)		2,165	2,159
8.00%, 1/15/2012		750	668
				6.50%, 7/15/2018 (c)		5,000	4,324
			2,729
							6,483
Auto/Truck Parts & Equipment - Replacement (0.03%)
Allison Transmission				Broadcasting Services & Programming (0.05%)
11.00%, 11/ 1/2015 (c)		1,250	781	Clear Channel Communications Inc
				4.25%, 5/15/2009		1,375	1,203
Automobile Sequential (1.89%)
AmeriCredit Automobile Receivables Trust				Building - Residential & Commercial (0.12%)
4.07%, 4/ 6/2012 (b)(f)		1,815	1,729	DR Horton Inc
				8.00%, 2/ 1/2009		1,595	1,539

See accompanying notes

175

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
Building - Residential & Commercial				Cable TV (continued)
(continued)				Kabel Deutschland GmbH
DR Horton Inc (continued)				10.63%, 7/ 1/2014	$ 450 $	378
6.00%, 4/15/2011	$ 250 $		193
				Rogers Cable Inc
M/I Homes Inc				7.88%, 5/ 1/2012	2,450	2,421
6.88%, 4/ 1/2012		2,000	1,200
				6.75%, 3/15/2015	3,000	2,680
			2,932
				Time Warner Cable Inc
Building & Construction - Miscellaneous (0.02%)				6.20%, 7/ 1/2013	5,690	5,191
Dycom Industries Inc				Unitymedia GmbH
8.13%, 10/15/2015		830	560	10.38%, 2/15/2015 (c)(g)	1,200	786
						42,305
Building & Construction Products -
Miscellaneous (0.02%)				Casino Hotels (0.30%)
Ply Gem Industries Inc				Caesars Entertainment Inc
11.75%, 6/15/2013 (c)		575	380	7.88%, 3/15/2010	235	133
				Harrah's Operating Co Inc
Building Products - Cement & Aggregate (0.20%)				5.50%, 7/ 1/2010	1,060	552
CRH America Inc				10.75%, 2/ 1/2016 (c)	2,080	676
6.40%, 10/15/2033		545	336	MGM Mirage
Martin Marietta Materials Inc				8.38%, 2/ 1/2011	400	232
3.62%, 4/30/2010 (b)(f)		4,520	4,365	6.75%, 4/ 1/2013	1,200	750
US Concrete Inc				13.00%, 11/15/2013 (c)(e)	3,265	2,906
8.38%, 4/ 1/2014		500	312	6.63%, 7/15/2015	990	579
			5,013	Turning Stone Resort Casino Enterprise
Building Products - Wood (0.05%)				9.13%, 12/15/2010 (c)	400	348
Masco Corp				Wynn Las Vegas Capital Corp
3.12%, 3/12/2010 (b)(f)		1,335	1,257	6.63%, 12/ 1/2014	1,607	1,185
						7,361
Cable TV (1.72%)
				Casino Services (0.02%)
CCH II LLC / CCH II Capital Corp
				Choctaw Resort Development Enterprise
10.25%, 10/ 1/2013 (c)		4,027	2,436
				7.25%, 11/15/2019 (c)	896	511
Charter Communications Operating LLC /
Charter Communications Operating Capital
				Cellular Telecommunications (0.92%)
8.38%, 4/30/2014 (c)		2,095	1,519
				Cricket Communications Inc
10.88%, 9/15/2014 (c)		955	776	9.38%, 11/ 1/2014	2,360	1,917
Comcast Corp				iPCS Inc
5.12%, 7/14/2009 (b)(f)		3,650	3,497	4.93%, 5/ 1/2013 (f)	560	431
6.95%, 8/15/2037		2,000	1,631	MetroPCS Wireless Inc
6.40%, 5/15/2038		5,385	4,119	9.25%, 11/ 1/2014	600	500
COX Communications Inc				Nextel Communications Inc
6.75%, 3/15/2011		305	297	7.38%, 8/ 1/2015	3,075	1,691
7.13%, 10/ 1/2012		3,325	3,176	Rogers Wireless Inc
4.63%, 6/ 1/2013		1,000	847	7.25%, 12/15/2012	890	861
5.50%, 10/ 1/2015		165	136	8.00%, 12/15/2012	3,050	2,844
6.45%, 12/ 1/2036 (c)		500	353	6.38%, 3/ 1/2014	3,185	2,844
CSC Holdings Inc				VIP Finance Ireland Ltd for OJSC Vimpel
7.88%, 2/15/2018		1,800	1,309	Communications
DirecTV Holdings LLC/DirecTV Financing Co				9.13%, 4/30/2018 (c)	2,590	1,338
8.38%, 3/15/2013		6,315	5,920	Vodafone Group PLC
7.63%, 5/15/2016 (c)		2,000	1,680	3.16%, 6/15/2011 (f)	1,930	1,608
Echostar DBS Corp				3.09%, 2/27/2012 (f)	4,000	3,203
7.00%, 10/ 1/2013		1,100	913	5.75%, 3/15/2016	4,945	4,168
6.63%, 10/ 1/2014		1,375	1,103
7.75%, 5/31/2015		1,400	1,137

See accompanying notes

176

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Cellular Telecommunications (continued)			Commercial Banks (continued)
Vodafone Group PLC (continued)			Wachovia Bank NA (continued)
6.15%, 2/27/2037	$ 1,640 $	1,228	6.00%, 11/15/2017	$ 1,780 $		1,434
		22,633	6.60%, 1/15/2038		5,350	4,230
			Woori Bank
Chemicals - Diversified (0.16%)
			6.13%, 5/ 3/2016 (c)(f)		1,300	1,040
Huntsman LLC
11.63%, 10/15/2010	1,000	990	6.21%, 5/ 2/2037 (f)		2,265	949
11.50%, 7/15/2012	1,515	1,507				31,328
Phibro Animal Health Corp			Commercial Services (0.12%)
10.00%, 8/ 1/2013 (c)	500	425	ARAMARK Corp
Reichhold Industries Inc			8.50%, 2/ 1/2015		80	68
9.00%, 8/15/2014 (c)	1,100	957	Iron Mountain Inc
		3,879	8.63%, 4/ 1/2013		2,000	1,825
			6.63%, 1/ 1/2016		500	400
Chemicals - Specialty (0.12%)
Hercules Inc			8.00%, 6/15/2020		940	738
6.75%, 10/15/2029	1,200	1,104				3,031
Nalco Co			Computer Services (0.06%)
7.75%, 11/15/2011	1,500	1,365	Sungard Data Systems Inc
NewMarket Corp			9.13%, 8/15/2013		1,740	1,444
7.13%, 12/15/2016	750	615
		3,084	Computers - Integrated Systems (0.02%)
Coatings & Paint (0.04%)			NCR Corp
			7.13%, 6/15/2009 (b)		600	600
Valspar Corp
5.63%, 5/ 1/2012	990	1,016
			Computers - Memory Devices (0.04%)
Commercial Banks (1.27%)			Seagate Technology HDD Holdings
			6.80%, 10/ 1/2016		1,370	959
BBVA Bancomer SA/Grand Cayman
6.01%, 5/17/2022 (c)(f)	3,575	2,379
			Consumer Products - Miscellaneous (0.08%)
BOI Capital Funding No 2 LP
5.57%, 8/29/2049 (c)(f)	1,595	526	Blyth Inc
			5.50%, 11/ 1/2013		1,150	886
Commonwealth Bank of Australia
6.02%, 3/15/2036 (c)	1,920	1,163	Kimberly-Clark Corp
			7.50%, 11/ 1/2018 (e)		1,165	1,183
Credit Agricole SA/London
6.64%, 5/31/2049 (c)(f)	2,140	1,025				2,069
KeyBank NA			Containers - Metal & Glass (0.02%)
2.94%, 11/ 3/2009 (b)(f)	2,000	1,956	Impress Holdings BV
4.95%, 9/15/2015	190	136	7.88%, 9/15/2013 (c)(f)		750	488
Lloyds TSB Group PLC
6.27%, 11/29/2049 (c)(f)	2,800	1,270	Containers - Paper & Plastic (0.10%)
M&I Marshall & Ilsley Bank			Graphic Packaging International Inc
3.08%, 12/ 4/2012 (f)	5,500	4,294	8.50%, 8/15/2011		1,010	843
National Australia Bank Ltd			Intertape Polymer US Inc
5.35%, 6/12/2013 (c)	4,500	4,167	8.50%, 8/ 1/2014		350	280
RSHB Capital SA for OJSC Russian			Jefferson Smurfit Corp US
Agricultural Bank			8.25%, 10/ 1/2012		1,785	911
7.75%, 5/29/2018 (c)	1,825	1,150	Plastipak Holdings Inc
Societe Generale			8.50%, 12/15/2015 (c)		750	536
5.92%, 4/29/2049 (c)(f)	1,225	717				2,570
US Bank NA/Cincinnati OH
6.38%, 8/ 1/2011	275	272	Credit Card Asset Backed Securities (1.87%)
			American Express Credit Account Master Trust
4.95%, 10/30/2014	4,485	4,243
			4.79%, 8/15/2011 (b)(c)(f)		1,860	1,838
Wachovia Bank NA
			4.81%, 9/15/2011 (b)(f)		5,965	5,889
7.80%, 8/18/2010	385	377

See accompanying notes

177

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Credit Card Asset Backed Securities			Diversified Banking Institutions (continued)
(continued)			Morgan Stanley
BA Credit Card Trust			5.03%, 1/15/2010 (f)	$ 3,925 $		3,622
5.16%, 3/15/2012 (b)(f)	$ 6,000 $	5,630
			6.75%, 4/15/2011		640	597
5.26%, 12/15/2014 (f)	3,000	2,542
			Royal Bank of Scotland Group PLC
Bank One Issuance Trust			5.00%, 10/ 1/2014		220	169
4.88%, 3/15/2012 (b)(f)	3,550	3,394
						58,381
4.75%, 6/15/2012 (b)(f)	4,575	4,395
Cabela's Master Credit Card Trust			Diversified Financial Services (0.59%)
4.31%, 12/16/2013 (c)	3,600	3,313	Citigroup Capital XXI
Chase Credit Card Master Trust			8.30%, 12/21/2057		5,600	3,844
4.91%, 2/15/2011 (b)(f)	7,500	7,491	General Electric Capital Corp
Citibank Credit Card Issuance Trust			4.63%, 9/15/2009		285	284
4.50%, 5/20/2011 (b)(f)	2,300	2,224	5.63%, 5/ 1/2018		10,750	8,850
Citibank Credit Card Master Trust I			6.38%, 11/15/2067 (f)		1,355	876
3.11%, 3/10/2011 (b)(f)	1,875	1,842	TNK-BP Finance SA
Discover Card Master Trust			7.50%, 3/13/2013 (c)		200	100
5.65%, 3/16/2020	2,525	1,794	6.63%, 3/20/2017 (c)		1,540	647
GE Capital Credit Card Master Note Trust						14,601
4.74%, 3/15/2015 (f)	3,160	2,321
			Diversified Manufacturing Operations (0.28%)
Providian Master Note Trust
5.10%, 11/15/2012 (b)(c)	3,350	3,303	General Electric Co
			5.25%, 12/ 6/2017		1,400	1,172
		45,976
			SPX Corp
Data Processing & Management (0.13%)			7.63%, 12/15/2014 (c)		2,045	1,717
Fiserv Inc			Tyco Electronics Group SA
6.13%, 11/20/2012	3,740	3,293	6.55%, 10/ 1/2017		4,925	4,100
						6,989
Diversified Banking Institutions (2.37%)
Bank of America Corp			Diversified Operations (0.12%)
2.89%, 8/ 2/2010 (b)(f)	3,290	3,198	Capmark Financial Group Inc
			3.45%, 5/10/2010 (f)		3,450	1,384
5.65%, 5/ 1/2018	2,540	2,183
			Susser Holdings LLC
8.13%, 12/29/2049 (f)	2,905	2,251
			10.63%, 12/15/2013		1,900	1,615
Citigroup Inc
						2,999
8.40%, 4/29/2049	7,270	5,053
Goldman Sachs Group Inc/The			Electric - Generation (0.46%)
6.65%, 5/15/2009 (b)	75	74	AES Corp/The
3.01%, 8/ 5/2011 (f)	3,500	3,084	8.75%, 5/15/2013 (c)		715	651
2.98%, 2/ 6/2012 (f)	2,000	1,608	CE Casecnan Water & Energy
5.25%, 10/15/2013	7,510	6,414	11.95%, 11/15/2010		683	601
5.15%, 1/15/2014	1,700	1,428	CE Generation LLC
			7.42%, 12/15/2018		966	900
5.75%, 10/ 1/2016	470	387
			Edison Mission Energy
6.45%, 5/ 1/2036	1,160	746
			7.00%, 5/15/2017		340	269
6.75%, 10/ 1/2037	2,310	1,505
			7.20%, 5/15/2019		2,250	1,687
HSBC Holdings PLC
			Elwood Energy LLC
5.25%, 12/12/2012	300	278
			8.16%, 7/ 5/2026		2,247	1,962
JP Morgan Chase & Co
			Indiantown Cogeneration LP
2.99%, 3/ 9/2009 (b)(f)	2,000	1,999
			9.26%, 12/15/2010		2,097	2,149
6.75%, 2/ 1/2011	2,675	2,656
			Korea East-West Power Co Ltd
5.13%, 9/15/2014	6,000	5,340	4.88%, 4/21/2011 (c)		280	270
5.25%, 5/ 1/2015	3,840	3,424	System Energy Resources Inc
6.40%, 5/15/2038	5,500	4,722	6.20%, 10/ 1/2012		175	161
7.90%, 4/29/2049 (f)	9,430	7,643	Tenaska Gateway Partners Ltd
			6.05%, 12/30/2023 (c)		2,571	2,065

See accompanying notes

178

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Electric - Generation (continued)			Electric - Integrated (continued)
Tenaska Oklahoma			Union Electric Co
6.53%, 12/30/2014 (c)	$ 358 $	361	4.65%, 10/ 1/2013	$ 2,300 $		2,012
Tenaska Virginia Partners LP						36,717
6.12%, 3/30/2024 (c)	469	362
			Electronic Components - Miscellaneous (0.21%)
		11,438
			Communications & Power Industries Inc
Electric - Integrated (1.49%)			8.00%, 2/ 1/2012		500	420
Alabama Power Co			Flextronics International Ltd
3.00%, 8/25/2009 (b)(f)	1,000	973	6.50%, 5/15/2013		1,415	1,104
Arizona Public Service Co			Jabil Circuit Inc
5.80%, 6/30/2014	1,770	1,469	5.88%, 7/15/2010		2,570	2,316
6.25%, 8/ 1/2016	1,700	1,371	NXP BV/NXP Funding LLC
Baltimore Gas & Electric Co			7.50%, 10/15/2013 (f)		1,715	755
5.90%, 10/ 1/2016	1,230	1,018	9.50%, 10/15/2015		1,760	594
Commonwealth Edison Co						5,189
4.70%, 4/15/2015	2,740	2,251
			Electronic Components - Semiconductors (0.13%)
5.90%, 3/15/2036	250	174
			Freescale Semiconductor Inc
6.45%, 1/15/2038	500	375	6.69%, 12/15/2014 (f)		750	285
Entergy Louisiana LLC			8.88%, 12/15/2014		2,955	1,315
5.83%, 11/ 1/2010	350	345
			National Semiconductor Corp
Florida Power Corp			3.07%, 6/15/2010 (f)		1,725	1,663
5.65%, 6/15/2018	1,250	1,107
						3,263
Integrys Energy Group Inc
7.00%, 11/ 1/2009	1,540	1,549	Electronic Measurement Instruments (0.13%)
Mirant Americas Generation LLC			Agilent Technologies Inc
8.30%, 5/ 1/2011	850	780	6.50%, 11/ 1/2017		4,285	3,205
Ohio Power Co
4.39%, 4/ 5/2010 (b)(f)	2,870	2,824	Electronics - Military (0.08%)
Oncor Electric Delivery Co			L-3 Communications Corp
6.38%, 5/ 1/2012	770	732	7.63%, 6/15/2012		2,000	1,855
Pacificorp			5.88%, 1/15/2015		100	82
5.65%, 7/15/2018	2,000	1,750				1,937
6.35%, 7/15/2038	2,000	1,649
			Export & Import Bank (0.03%)
PPL Energy Supply LLC
			Export-Import Bank Of Korea
6.40%, 11/ 1/2011	50	48
			4.50%, 8/12/2009		740	716
PSEG Power LLC
3.75%, 4/ 1/2009 (b)	2,750	2,704	Fiduciary Banks (0.17%)
Public Service Co of Oklahoma			Bank of New York Mellon Corp/The
6.63%, 11/15/2037	1,845	1,395	4.50%, 4/ 1/2013		4,190	3,931
Sierra Pacific Power Co			4.95%, 3/15/2015		210	190
6.25%, 4/15/2012	3,100	3,028
						4,121
South Carolina Electric & Gas Co
6.50%, 11/ 1/2018	3,120	3,095	Finance - Auto Loans (0.32%)
Southern California Edison Co			Ford Motor Credit Co LLC
2.89%, 2/ 2/2009 (b)(f)	1,325	1,318	7.38%, 10/28/2009		700	581
TECO Energy Inc			6.32%, 1/15/2010 (f)		4,500	3,511
4.80%, 5/ 1/2010 (f)	1,500	1,436	9.75%, 9/15/2010 (f)		1,250	850
Texas Competitive Electric Holdings Co LLC			GMAC LLC
10.25%, 11/ 1/2015 (c)	3,510	2,676	6.88%, 9/15/2011		1,400	820
Transelec SA			6.00%, 12/15/2011		1,815	1,024
7.88%, 4/15/2011	650	638	6.63%, 5/15/2012		2,190	1,214
						8,000

See accompanying notes

179

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
Finance - Commercial (0.37%)				Finance - Investment Banker & Broker
CIT Group Inc				(continued)
3.76%, 4/27/2011 (f)	$ 6,200 $		3,435	Merrill Lynch & Co Inc (continued)
				7.75%, 5/14/2038	$ 4,165 $	3,424
3.05%, 2/13/2012 (f)		1,850	982
						45,008
Textron Financial Corp
2.94%, 2/25/2011 (b)(f)		5,325	4,128	Finance - Leasing Company (0.08%)
6.00%, 2/15/2067 (c)(f)		1,750	519	International Lease Finance Corp
			9,064	5.15%, 1/15/2010 (f)	2,000	1,511
				5.65%, 6/ 1/2014	870	556
Finance - Consumer Loans (0.44%)
						2,067
HSBC Finance Capital Trust IX
5.91%, 11/30/2035		650	355	Finance - Mortgage Loan/Banker (0.74%)
HSBC Finance Corp				Countrywide Financial Corp
4.13%, 12/15/2008 (b)		900	894	3.33%, 12/19/2008 (b)(f)	4,165	4,149
3.09%, 11/16/2009 (b)(f)		3,275	2,968	4.50%, 6/15/2010	3,995	3,721
4.13%, 11/16/2009 (h)		1,750	1,680	5.80%, 6/ 7/2012	3,785	3,520
6.38%, 10/15/2011		110	101	Countrywide Home Loans Inc
7.00%, 5/15/2012		2,095	1,960	5.63%, 7/15/2009 (b)	1,775	1,718
4.75%, 7/15/2013		205	181	Fannie Mae
SLM Corp				5.25%, 1/15/2009	350	352
3.70%, 7/26/2010 (f)		3,500	2,628	7.25%, 1/15/2010	250	262
			10,767	6.00%, 5/15/2011	75	80
				SLM Student Loan Trust
Finance - Credit Card (0.34%)
				4.03%, 10/25/2014 (b)(f)(g)	1,791	1,773
American Express Credit Corp
				4.08%, 10/25/2014 (f)	3,000	2,735
5.88%, 5/ 2/2013		4,650	3,887
						18,310
Capital One Bank USA NA
5.00%, 6/15/2009		2,165	2,010	Finance - Other Services (0.18%)
6.50%, 6/13/2013		2,800	2,375	Icahn Enterprises LP / Icahn Enterprises
			8,272	Finance Corp
				8.13%, 6/ 1/2012	1,000	680
Finance - Investment Banker & Broker (1.83%)				7.13%, 2/15/2013	575	362
Bear Stearns Cos LLC/The
				NYSE Euronext
4.91%, 7/16/2009 (b)(f)		4,720	4,725
				4.80%, 6/28/2013	3,710	3,479
5.30%, 10/30/2015		3,290	2,802
						4,521
Credit Suisse USA Inc
4.99%, 1/15/2010 (b)(f)		1,500	1,461	Financial Guarantee Insurance (0.03%)
Jefferies Group Inc				MGIC Investment Corp
6.45%, 6/ 8/2027		4,520	3,217	5.63%, 9/15/2011	980	677
6.25%, 1/15/2036		3,880	2,562
JP Morgan Chase Capital XXII				Food - Miscellaneous/Diversified (0.43%)
6.45%, 2/ 2/2037		750	524	Corn Products International Inc
				8.45%, 8/15/2009	470	471
Lazard Group
7.13%, 5/15/2015		8,100	6,371	General Mills Inc
				4.19%, 1/22/2010 (b)(f)	3,575	3,536
6.85%, 6/15/2017		3,630	2,607
				8.02%, 2/ 5/2013	5,000	5,076
Merrill Lynch & Co Inc
3.05%, 2/ 6/2009 (b)(f)		2,275	2,217	Kraft Foods Inc
				3.30%, 8/11/2010 (f)	1,640	1,502
3.01%, 2/ 5/2010 (b)(f)		1,500	1,360
						10,585
3.00%, 11/ 1/2011 (f)		4,650	3,868
3.04%, 6/ 5/2012 (f)		2,300	1,873	Food - Retail (0.12%)
5.45%, 2/ 5/2013		640	577	Ingles Markets Inc
6.15%, 4/25/2013		6,775	6,251	8.88%, 12/ 1/2011	1,110	977
6.22%, 9/15/2026		250	176
6.11%, 1/29/2037		1,500	993

See accompanying notes

180

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Food - Retail (continued)			Home Equity - Other (continued)
Safeway Inc			Option One Mortgage Loan Trust (continued)
4.12%, 3/27/2009 (b)(f)	$ 1,950 $	1,878	3.71%, 3/25/2037 (f)	$ 4,325 $		625
		2,855	Residential Asset Securities Corp
			3.46%, 5/25/2035 (f)		29	29
Forestry (0.05%)
			3.53%, 7/25/2035 (f)		885	873
Weyerhaeuser Co
6.75%, 3/15/2012	1,440	1,239	3.41%, 9/25/2036 (f)		7,900	5,958
			Saxon Asset Securities Trust
Gas - Distribution (0.04%)			4.95%, 3/25/2035 (f)		996	713
National Fuel Gas Co			Soundview Home Equity Loan Trust
5.25%, 3/ 1/2013	350	327	3.35%, 7/25/2036 (b)(f)		2,041	2,004
Sempra Energy			Specialty Underwriting & Residential Finance
4.75%, 5/15/2009 (b)	675	666	3.77%, 2/25/2035 (f)		677	405
		993	3.49%, 3/25/2036 (b)(f)		290	281
			WAMU Asset-Backed Certificates
Home Equity - Other (2.40%)			3.43%, 5/25/2037 (f)		4,000	2,924
ACE Securities Corp			3.43%, 7/25/2047 (f)		6,850	3,445
3.47%, 9/25/2035 (b)(f)	443	440
			Wells Fargo Home Equity Trust
Asset Backed Funding Certificates			3.76%, 4/25/2034 (f)		528	401
3.50%, 7/25/2035 (b)(f)	422	417
						59,178
Asset Backed Securities Corp Home Equity
3.36%, 7/25/2036 (b)(f)	2,847	2,809	Home Equity - Sequential (0.32%)
Bear Stearns Asset Backed Securities Trust			BNC Mortgage Loan Trust
3.86%, 3/25/2034 (b)(f)	1,098	886	3.43%, 7/25/2037 (f)		4,405	2,724
3.53%, 9/25/2035 (b)(f)	1,809	1,783	Countrywide Asset-Backed Certificates
3.42%, 8/25/2036 (f)	7,145	4,711	5.39%, 4/25/2036		3,794	2,583
3.45%, 5/25/2037 (b)(f)	3,200	2,467	5.51%, 8/25/2036		3,209	2,271
CDC Mortgage Capital Trust			Residential Asset Securities Corp
4.11%, 6/25/2034 (f)	631	520	4.70%, 10/25/2031 (b)		230	228
Countrywide Asset-Backed Certificates						7,806
6.09%, 6/25/2021 (f)	4,000	1,451	Independent Power Producer (0.12%)
First NLC Trust			NRG Energy Inc
3.59%, 5/25/2035 (f)	559	455	7.25%, 2/ 1/2014		3,290	2,879
3.56%, 9/25/2035 (f)	3,595	3,442
GMAC Mortgage Corp Loan Trust			Insurance Brokers (0.10%)
5.75%, 10/25/2036	4,850	3,899	Willis North America Inc
5.81%, 10/25/2036	1,825	1,023	6.20%, 3/28/2017		3,555	2,591
6.05%, 12/25/2037 (f)	3,820	1,943
GSAA Trust			Investment Companies (0.09%)
3.40%, 4/25/2047 (f)	8,765	5,497	Xstrata Finance Dubai Ltd
HSI Asset Securitization Corp Trust			3.15%, 11/13/2009 (b)(c)(f)		2,150	2,111
3.40%, 1/25/2037 (f)	6,548	4,428
Indymac Residential Asset Backed Trust			Investment Management & Advisory Services (0.10%)
3.50%, 8/25/2035 (f)	454	447	Ameriprise Financial Inc
			5.35%, 11/15/2010		55	51
JP Morgan Mortgage Acquisition Corp
3.52%, 7/25/2035 (f)	1,411	1,391	7.52%, 6/ 1/2066 (f)		4,720	2,356
3.41%, 8/25/2036 (f)	1,850	1,345				2,407
Morgan Stanley ABS Capital I			Life & Health Insurance (0.75%)
4.13%, 12/25/2034 (f)	1,500	1,070	Hartford Life Global Funding Trusts
New Century Home Equity Loan Trust			2.99%, 9/15/2009 (b)(f)		3,475	3,192
3.55%, 3/25/2035 (f)	85	65	Lincoln National Corp
Option One Mortgage Loan Trust			4.32%, 4/ 6/2009 (b)(f)		4,200	4,175
4.31%, 5/25/2034 (f)	1,224	984	5.65%, 8/27/2012		865	818
4.26%, 2/25/2035 (f)	222	47	6.05%, 4/20/2067 (f)		1,345	619

See accompanying notes

181

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Life & Health Insurance (continued)			Medical - HMO (continued)
New York Life Global Funding			WellPoint Inc
4.65%, 5/ 9/2013 (c)	$ 3,125 $	2,929	5.85%, 1/15/2036	$ 2,605 $		1,622
Pacific Life Global Funding						25,085
3.43%, 6/22/2011 (c)(f)	2,500	2,495
			Medical - Hospitals (0.16%)
StanCorp Financial Group Inc
			Community Health Systems Inc
6.88%, 10/ 1/2012	1,065	1,056
			8.88%, 7/15/2015		2,210	1,851
Stingray Pass-Through Trust
			HCA Inc
5.90%, 1/12/2015 (c)(g)	3,000	360
			6.75%, 7/15/2013		1,200	768
Sun Life Financial Global Funding LP
			9.25%, 11/15/2016		1,480	1,258
4.46%, 7/ 6/2010 (b)(c)(f)	1,750	1,729
Unum Group						3,877
5.86%, 5/15/2009	1,050	1,033	Medical - Outpatient & Home Medical Care (0.09%)
		18,406	Select Medical Corp
			7.63%, 2/ 1/2015		3,665	2,291
Machinery - General Industry (0.01%)
Manitowoc Co Inc/The
			Medical - Wholesale Drug Distribution (0.23%)
7.13%, 11/ 1/2013	5	4
			AmerisourceBergen Corp
Stewart & Stevenson LLC
			5.63%, 9/15/2012		2,175	1,967
10.00%, 7/15/2014	475	356
			Cardinal Health Inc
		360
			4.32%, 10/ 2/2009 (b)(f)		3,800	3,747
Machinery - Material Handling (0.04%)						5,714
Columbus McKinnon Corp/NY
			Medical Instruments (0.12%)
8.88%, 11/ 1/2013	1,100	919
			Boston Scientific Corp
			6.00%, 6/15/2011		1,515	1,356
Medical - Drugs (0.24%)
Elan Finance PLC/Elan Finance Corp			6.40%, 6/15/2016		1,841	1,519
6.94%, 12/ 1/2013 (f)	2,570	1,581				2,875
Schering-Plough Corp			Medical Laboratory & Testing Service (0.02%)
5.55%, 12/ 1/2013 (f)	4,625	4,386	Quest Diagnostics Inc
		5,967	6.40%, 7/ 1/2017		595	484
Medical - HMO (1.02%)
			Medical Products (0.12%)
Aetna Inc
6.50%, 9/15/2018	1,530	1,311	Angiotech Pharmaceuticals Inc
			6.56%, 12/ 1/2013 (f)		1,800	1,098
6.75%, 12/15/2037	3,740	2,657
			Hospira Inc
Centene Corp
			4.24%, 3/30/2010 (b)(f)		2,000	1,947
7.25%, 4/ 1/2014	750	604
						3,045
Cigna Corp
7.00%, 1/15/2011	175	171	Metal - Diversified (0.12%)
6.35%, 3/15/2018	1,000	817	Falconbridge Ltd
Coventry Health Care Inc			7.35%, 6/ 5/2012		500	480
5.88%, 1/15/2012	3,042	2,463	5.38%, 6/ 1/2015		640	495
6.30%, 8/15/2014	2,500	1,759	Freeport-McMoRan Copper & Gold Inc
5.95%, 3/15/2017	1,725	1,113	8.25%, 4/ 1/2015		1,280	1,024
Health Net Inc			8.38%, 4/ 1/2017		445	349
6.38%, 6/ 1/2017	2,390	1,506	Xstrata Canada Corp
Humana Inc			7.25%, 7/15/2012		630	601
6.45%, 6/ 1/2016	325	247				2,949
7.20%, 6/15/2018	6,035	4,822
			Miscellaneous Manufacturers (0.02%)
UnitedHealth Group Inc
			Trimas Corp
5.50%, 11/15/2012	3,300	2,915
			9.88%, 6/15/2012		700	385
4.88%, 2/15/2013	2,355	2,197
6.88%, 2/15/2038	1,235	881

See accompanying notes

182

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Money Center Banks (0.22%)			Mortgage Backed Securities (continued)
Comerica Capital Trust II			Bella Vista Mortgage Trust (continued)
6.58%, 2/20/2037	$ 2,705 $	888	4.53%, 5/20/2045 (f)	$ 794 $		525
Rabobank Capital Funding Trust			Chase Mortgage Finance Corp
5.25%, 12/29/2049 (c)(f)	2,580	1,674	5.44%, 3/25/2037 (f)		9,682	7,181
Unicredit Luxembourg Finance SA			Citigroup Commercial Mortgage Trust
6.00%, 10/31/2017 (c)	3,600	2,775	0.52%, 10/15/2049 (f)		68,833	1,333
		5,337	Citigroup/Deutsche Bank Commercial
			Mortgage Trust
Mortgage Backed Securities (20.17%)			0.43%, 10/15/2048 (f)		110,111	1,879
ACT Depositors Corp			0.06%, 12/11/2049 (c)(f)		120,761	764
4.86%, 9/22/2041 (f)(g)	5,886	1,766
			0.34%, 12/11/2049 (f)		94,952	1,242
Adjustable Rate Mortgage Trust
			0.38%, 12/11/2049 (c)(f)		227,600	3,919
3.83%, 2/25/2035 (f)	382	264
			Commercial Mortgage Loan Trust
3.54%, 6/25/2035 (f)	1,662	1,093
			6.22%, 9/10/2017 (f)		5,260	4,038
5.07%, 11/25/2035 (f)	1,600	1,201
			Commercial Mortgage Pass Through Certificates
3.53%, 8/25/2036 (f)	6,040	1,778	5.22%, 5/10/2043 (f)		2,000	1,198
Banc of America Commercial Mortgage Inc			0.07%, 12/10/2046 (c)(f)		61,182	534
0.25%, 7/10/2042	258,939	1,985
			5.25%, 12/10/2046		3,500	3,102
0.12%, 7/10/2043 (c)(f)	158,313	1,396
			Countrywide Alternative Loan Trust
4.97%, 7/10/2043	1,890	1,101	3.48%, 5/25/2035 (f)		26	15
5.93%, 5/10/2045 (f)	4,225	3,359	4.16%, 7/20/2035 (f)		1,030	505
5.33%, 9/10/2045	4,775	4,399	3.68%, 12/25/2035 (f)		4,142	2,218
5.31%, 10/10/2045 (f)	3,920	3,499	3.54%, 6/25/2036 (f)		6,462	1,627
5.68%, 7/10/2046 (f)	3,750	2,390	Countrywide Asset-Backed Certificates
5.45%, 1/15/2049	5,750	4,253	3.54%, 11/25/2035 (f)		639	609
5.67%, 1/15/2049 (c)(f)	1,335	433	3.53%, 1/25/2036 (b)(f)		4,516	4,091
5.87%, 4/10/2049 (f)	9,250	7,007	Countrywide Home Loan Mortgage Pass
5.84%, 6/10/2049 (f)	14,850	11,114	Through Trust
5.84%, 6/10/2049 (f)	800	484	4.59%, 12/19/2033 (f)		1,000	897
5.49%, 2/10/2051	13,000	9,486	3.46%, 4/25/2046 (f)		6,637	3,421
5.94%, 2/10/2051 (f)	8,000	6,008	3.56%, 4/25/2046 (f)		9,529	3,825
Banc of America Funding Corp			Credit Suisse Mortgage Capital Certificates
4.36%, 7/20/2036 (b)(f)	950	863	6.02%, 6/15/2038 (f)		2,990	2,385
4.56%, 7/20/2036 (f)	7,116	1,902	5.91%, 6/15/2039 (f)		3,600	2,713
3.44%, 4/25/2037 (f)	3,200	1,433	0.57%, 9/15/2039		72,122	1,598
Banc of America Mortgage Securities Inc			5.47%, 9/15/2039		2,700	2,036
4.11%, 6/25/2034 (b)(f)	3,513	3,378	5.54%, 9/15/2039 (f)		6,000	3,557
Bear Stearns Adjustable Rate Mortgage Trust			6.00%, 9/15/2039 (f)		8,450	4,605
4.06%, 6/25/2034 (f)	855	847	0.09%, 12/15/2039		20,136	245
4.74%, 8/25/2035 (f)	1,580	1,176	0.67%, 12/15/2039 (f)		90,799	2,235
Bear Stearns Alt-A Trust			5.38%, 2/15/2040 (f)		7,650	5,661
3.54%, 7/25/2035 (f)	409	166	5.42%, 2/15/2040		4,000	2,543
3.42%, 11/25/2036 (f)	1,051	505	5.69%, 9/15/2040 (f)		5,300	3,942
3.43%, 4/25/2037 (f)	834	396	5.87%, 9/15/2040		12,150	7,386
Bear Stearns Asset Backed Securities Trust			6.43%, 2/15/2041 (c)(f)		2,800	1,734
3.49%, 4/25/2036 (f)	2,993	2,044
			CS First Boston Mortgage Securities Corp
Bear Stearns Commercial Mortgage Securities			1.09%, 3/15/2036 (c)(f)		8,453	120
0.47%, 5/11/2039 (c)(f)	5,702	66
			0.23%, 5/15/2036 (c)(f)		10,583	72
Bear Stearns Mortgage Funding Trust
			0.49%, 7/15/2036 (c)(f)		9,619	143
3.47%, 7/25/2036 (f)	8,600	5,373
			5.11%, 7/15/2036 (f)		2,450	2,043
Bella Vista Mortgage Trust
4.05%, 1/22/2045 (f)	1,433	878	0.19%, 11/15/2037 (c)(f)		22,291	342

See accompanying notes

183

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
BONDS (continued)			BONDS (continued)
Mortgage Backed Securities (continued)			Mortgage Backed Securities (continued)
CS First Boston Mortgage Securities Corp			GS Mortgage Securities Corp II (continued)
(continued)			5.99%, 8/10/2045 (f)	$ 3,765 $	2,313
7.73%, 9/15/2041 (f)	$ 470 $	472	GSR Mortgage Loan Trust
CW Capital Cobalt Ltd			3.44%, 12/25/2035 (f)	589	571
6.02%, 7/15/2017 (f)	2,570	1,572	3.52%, 8/25/2046 (f)	4,254	1,022
5.17%, 8/15/2048	5,220	4,728	Harborview Mortgage Loan Trust
Fannie Mae			4.52%, 5/19/2047 (f)	6,883	2,636
1.29%, 10/25/2011 (f)(g)	100,793	2,643	Impac CMB Trust
3.56%, 2/25/2018 (f)	738	740	4.26%, 10/25/2033 (f)	269	190
3.51%, 11/25/2022 (f)	996	975	4.02%, 1/25/2035 (f)	509	348
3.46%, 1/25/2023 (f)	1,261	1,231	3.57%, 4/25/2035 (f)	511	218
3.56%, 2/25/2032 (f)	1,746	1,725	3.69%, 4/25/2035 (f)	398	137
3.51%, 3/25/2035 (f)	849	828	3.56%, 8/25/2035 (f)	660	289
6.50%, 2/25/2047	1,910	1,965	3.77%, 8/25/2035 (f)	1,956	688
Fannie Mae Whole Loan			3.51%, 4/25/2037 (f)	4,539	2,748
3.46%, 5/25/2035 (f)	1,815	1,702	Impac Secured Assets CMN Owner Trust
First Union National Bank Commercial			3.42%, 3/25/2037 (f)	4,000	1,395
Mortgage Securities Inc			Indymac Index Mortgage Loan Trust
8.09%, 5/17/2032	700	702	3.86%, 4/25/2034 (f)	246	191
6.14%, 2/12/2034	150	143	3.49%, 4/25/2035 (f)	676	385
Freddie Mac			3.59%, 4/25/2035 (f)	438	184
4.89%, 6/15/2018 (f)	955	939
			3.52%, 6/25/2035 (f)	5,614	3,617
5.04%, 6/15/2023 (f)	1,375	1,337
			5.23%, 7/25/2035 (f)	5,964	1,910
4.99%, 7/15/2023 (f)	9,535	9,119
			3.56%, 8/25/2035 (f)	1,121	644
4.94%, 2/15/2030 (f)	829	833
			3.44%, 1/25/2037 (f)	3,744	1,097
4.94%, 5/15/2030 (f)	710	691
			3.50%, 6/25/2037 (f)	6,737	4,103
5.50%, 9/15/2031 (f)	5,025	4,950
			JP Morgan Alternative Loan Trust
GE Capital Commercial Mortgage Corp			3.41%, 3/25/2037 (f)	7,458	2,927
0.23%, 5/10/2014	161,245	1,385
			JP Morgan Chase Commercial Mortgage
5.61%, 4/10/2017 (f)	7,360	4,459	Securities Corp
0.56%, 3/10/2040 (c)(f)	16,105	203	0.45%, 10/12/2035 (c)(f)	23,406	653
Ginnie Mae			5.02%, 1/12/2037	755	515
4.51%, 10/16/2028 (f)	2,949	2,947	5.29%, 9/12/2037 (f)	1,300	760
3.96%, 6/16/2031	3,654	3,611	0.54%, 10/12/2037 (c)(f)	37,508	1,238
1.08%, 2/16/2047 (f)	29,535	1,348	1.10%, 1/12/2039 (c)(f)	8,811	174
0.82%, 3/16/2047 (f)	25,792	1,247	5.63%, 6/12/2041 (f)	4,005	2,892
GMAC Commercial Mortgage Securities Inc			0.25%, 1/15/2042 (c)(f)	24,795	304
0.79%, 3/10/2038 (c)(f)	7,909	140
			5.59%, 5/12/2045 (f)	2,765	1,745
Greenpoint Mortgage Funding Trust
			5.44%, 5/15/2045 (f)	4,825	3,004
3.53%, 6/25/2045 (f)	677	272
			5.62%, 5/15/2045 (f)	1,350	646
3.56%, 6/25/2045 (f)	594	286
			5.30%, 5/15/2047 (f)	5,255	4,644
Greenwich Capital Commercial Funding Corp
5.48%, 2/10/2017	2,443	1,471	6.01%, 6/15/2049 (f)	7,765	4,755
0.27%, 6/10/2036 (c)(f)	90,594	571	6.20%, 2/12/2051 (c)	3,005	1,431
6.11%, 7/10/2038 (f)	3,320	2,181	6.30%, 2/12/2051 (f)	4,000	2,220
0.32%, 3/10/2039 (c)(f)	67,690	1,019	0.63%, 2/15/2051 (f)	119,815	2,396
5.51%, 3/10/2039	3,775	2,037	5.88%, 2/15/2051	4,655	3,486
5.74%, 12/10/2049	3,300	2,458	JP Morgan Mortgage Trust
			5.30%, 7/25/2035	2,080	1,788
GS Mortgage Securities Corp II
0.67%, 11/10/2039 (c)	37,822	1,055	4.95%, 11/25/2035 (f)	6,840	5,275
5.56%, 11/10/2039 (f)	7,190	5,543	5.30%, 4/25/2036 (b)(f)	1,025	1,009
5.99%, 8/10/2045 (f)	17,700	13,313	5.82%, 6/25/2036 (f)	1,825	1,149

See accompanying notes

184

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Mortgage Backed Securities (continued)			Mortgage Backed Securities (continued)
JP Morgan Mortgage Trust (continued)			Morgan Stanley Capital I (continued)
5.96%, 6/25/2036 (f)	$ 1,193 $	1,031	0.94%, 1/13/2041 (c)(f)	$ 5,142 $		128
5.95%, 8/25/2036 (f)	8,600	6,093	3.49%, 5/24/2043 (c)(f)		4,600	4,111
6.00%, 8/25/2036 (b)(f)	2,607	2,343	0.06%, 12/15/2043 (c)(f)		43,485	419
5.56%, 10/25/2036 (f)	9,732	6,377	5.36%, 3/15/2044 (f)		11,700	8,580
5.70%, 4/25/2037 (f)	2,900	2,001	3.64%, 8/25/2046 (f)(g)		5,500	1,375
5.70%, 4/25/2037 (f)	2,895	2,042	5.81%, 4/12/2049 (f)		4,365	3,267
LB-UBS Commercial Mortgage Trust			5.81%, 4/12/2049		3,800	1,742
4.90%, 6/15/2026	19	19	Morgan Stanley Dean Witter Capital I
6.37%, 12/15/2028	400	387	6.54%, 2/15/2031		10	9
5.74%, 6/15/2032	2,974	2,854	0.73%, 4/15/2034 (c)(f)		2,909	7
0.59%, 3/15/2034 (c)(f)	48,517	130	Nomura Asset Acceptance Corp
0.45%, 3/15/2036 (c)(f)	5,951	137	3.61%, 2/25/2035 (f)		218	137
1.05%, 3/15/2036 (c)(f)	3,772	83	Residential Accredit Loans Inc
0.65%, 8/15/2036 (c)(f)	9,308	95	3.41%, 2/25/2037 (f)		3,111	1,534
5.41%, 9/15/2039 (f)	1,200	744	3.45%, 7/25/2037 (f)		9,136	5,552
0.49%, 2/15/2040 (f)	14,853	326	Sequoia Mortgage Trust
			3.38%, 2/20/2034 (f)		2,616	2,170
5.46%, 2/15/2040 (f)	200	120
			4.51%, 2/20/2035 (f)		647	493
5.48%, 2/15/2040	3,400	1,841
			Structured Adjustable Rate Mortgage Loan Trust
5.49%, 2/15/2040 (f)	1,505	901	4.66%, 7/25/2034 (f)		2,001	1,862
5.56%, 2/15/2040 (f)	4,300	2,314	3.96%, 8/25/2034 (f)		3,051	1,317
0.21%, 7/15/2040 (c)	71,756	1,116	3.51%, 3/25/2035 (f)		35	29
5.86%, 7/15/2040 (f)	10,399	7,840	5.25%, 12/25/2035		1,847	1,276
6.45%, 7/17/2040 (f)	3,540	1,712	5.25%, 2/25/2036 (f)		2,415	1,970
6.32%, 4/15/2041 (f)	3,820	2,088	3.45%, 7/25/2037 (f)		7,434	4,030
5.87%, 9/15/2045 (f)	4,250	3,193	Structured Asset Mortgage Investments Inc
6.46%, 9/15/2045 (f)	2,780	1,352	3.56%, 5/25/2045 (f)		670	351
Lehman XS Trust			3.57%, 9/25/2045 (f)		837	500
3.48%, 6/25/2047 (f)	9,938	5,631	Structured Asset Securities Corp
Luminent Mortgage Trust			5.50%, 6/25/2036 (f)		5,000	2,665
3.45%, 5/25/2046 (f)	2,735	1,543	Wachovia Bank Commercial Mortgage Trust
Merrill Lynch Alternative Note Asset Trust			0.34%, 11/15/2035 (c)		53,860	444
3.47%, 4/25/2037 (f)	8,225	3,112	0.42%, 10/15/2041 (c)(f)		51,155	507
Merrill Lynch Mortgage Investors Inc			0.25%, 3/15/2042 (c)(f)		86,473	636
3.61%, 8/25/2036 (f)	349	158
			5.25%, 12/15/2043		3,550	3,082
Merrill Lynch Mortgage Trust
5.78%, 8/12/2016	4,170	2,686	5.34%, 12/15/2043 (f)		10,000	7,269
5.80%, 5/12/2039 (f)	4,065	3,808	5.48%, 12/15/2043		1,115	510
0.46%, 2/12/2042 (f)	17,707	166	5.60%, 12/15/2043		2,960	946
Merrill Lynch/Countrywide Commercial			4.52%, 5/15/2044		3,665	3,447
Mortgage Trust			5.88%, 3/15/2045 (f)		1,569	806
5.46%, 7/12/2046 (f)	3,995	2,483	5.80%, 7/15/2045		5,000	3,212
0.54%, 8/12/2048 (f)	40,789	1,082	5.82%, 5/15/2046 (f)		4,000	2,406
6.16%, 8/12/2049 (f)	10,500	8,014	WAMU Commercial Mortgage Securities Trust
0.12%, 12/12/2049 (c)(f)	36,774	389	3.83%, 1/25/2035 (c)		1,087	1,025
0.63%, 12/12/2049 (f)	128,824	3,104	WaMu Mortgage Pass Through Certificates
5.11%, 12/12/2049 (f)	4,085	3,684	3.90%, 12/25/2027 (f)		5,070	4,424
5.39%, 12/12/2049 (c)(f)	2,400	1,123	3.80%, 6/25/2034 (f)		1,345	1,302
Morgan Stanley Capital I			4.68%, 5/25/2035 (f)		945	804
7.11%, 4/15/2033	86	86	5.69%, 6/25/2037 (f)		2,205	1,537
0.41%, 4/14/2040 (c)(f)	15,288	173	4.23%, 7/25/2044 (f)		535	500

See accompanying notes

185

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Multimedia (continued)
WaMu Mortgage Pass Through Certificates				Vivendi (continued)
(continued)				6.63%, 4/ 4/2018 (c)	$ 4,795 $		4,086
3.57%, 1/25/2045 (f)	$ 485 $		307				20,917
3.63%, 1/25/2045 (f)		914	400
				Music (0.05%)
3.66%, 1/25/2045 (f)		7,810	4,251
				WMG Acquisition Corp
3.79%, 1/25/2045 (f)		1,927	503
				7.38%, 4/15/2014		1,200	744
3.49%, 4/25/2045 (f)		367	219
				WMG Holdings Corp
3.53%, 4/25/2045 (f)		367	191	9.50%, 12/15/2014 (a)(f)		1,390	598
3.55%, 7/25/2045 (f)		817	502				1,342
3.51%, 11/25/2045 (b)(f)		951	877
				Mutual Insurance (0.07%)
3.64%, 11/25/2045 (b)(f)		4,259	3,969
				Liberty Mutual Group Inc
3.48%, 8/25/2046 (f)		2,483	1,912
				7.00%, 3/15/2037 (c)(f)		2,000	1,078
Washington Mutual Alternative Mortgage
				10.75%, 6/15/2058 (c)(f)		1,405	738
Pass-Through Certificates
3.44%, 1/25/2047 (f)		5,330	1,938				1,816
Wells Fargo Mortgage Backed Securities Trust				Non-Hazardous Waste Disposal (0.17%)
3.56%, 1/25/2034 (b)(f)		965	942	Allied Waste North America Inc
4.99%, 10/25/2035 (f)		1,546	1,348	5.75%, 2/15/2011		315	290
			496,985	7.88%, 4/15/2013		1,750	1,628
Multi-Line Insurance (0.51%)				Oakmont Asset Trust
				4.51%, 12/22/2008 (b)(c)		1,600	1,602
Allstate Corp/The
6.13%, 5/15/2037 (f)		1,400	782	Waste Management Inc
				5.00%, 3/15/2014		10	9
AXA SA
6.46%, 12/31/2049 (c)(f)		910	499	WCA Waste Corp
				9.25%, 6/15/2014		825	676
CNA Financial Corp
6.00%, 8/15/2011		1,875	1,738				4,205
Genworth Financial Inc				Office Automation & Equipment (0.08%)
6.15%, 11/15/2066 (f)		2,650	620	Xerox Corp
ING Groep NV				5.50%, 5/15/2012		1,895	1,473
5.78%, 12/ 8/2035		3,125	1,719	6.40%, 3/15/2016		775	550
Metropolitan Life Global Funding I							2,023
2.97%, 3/17/2009 (b)(c)(f)		1,625	1,577
2.85%, 5/17/2010 (b)(c)(f)		5,750	5,094	Office Furnishings - Original (0.05%)
XL Capital Ltd				Steelcase Inc
6.50%, 12/31/2049 (f)		1,885	528	6.50%, 8/15/2011		1,290	1,349
			12,557
				Oil - Field Services (0.09%)
Multimedia (0.85%)				Halliburton Co
News America Inc				5.50%, 10/15/2010		1,655	1,662
6.65%, 11/15/2037		2,310	1,830	Key Energy Services Inc
Quebecor Media Inc				8.38%, 12/ 1/2014		700	518
7.75%, 3/15/2016		750	519				2,180
Thomson Reuters Corp
5.95%, 7/15/2013		1,780	1,615	Oil Company - Exploration & Production (0.97%)
Time Warner Inc				Canadian Natural Resources Ltd
3.03%, 11/13/2009 (b)(f)		3,200	3,008	5.15%, 2/ 1/2013		2,015	1,823
Viacom Inc				Canadian Oil Sands Ltd
3.17%, 6/16/2009 (b)(f)		3,650	3,451	4.80%, 8/10/2009 (c)		1,700	1,685
5.75%, 4/30/2011		665	595	Chesapeake Energy Corp
				7.63%, 7/15/2013		2,780	2,363
6.25%, 4/30/2016		5,500	4,435
				7.25%, 12/15/2018		1,380	1,042
Vivendi
5.75%, 4/ 4/2013 (c)		1,500	1,378	Citic Resources Finance Ltd
				6.75%, 5/15/2014 (c)		1,250	650

See accompanying notes

186

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Oil Company - Exploration & Production			Paper & Related Products (0.06%)
(continued)			Rock-Tenn Co
Compton Petroleum Finance Corp			9.25%, 3/15/2016 (c)	$ 1,565 $		1,377
7.63%, 12/ 1/2013	$ 650 $	377
EnCana Corp			Pharmacy Services (0.26%)
6.30%, 11/ 1/2011	175	171	Medco Health Solutions Inc
Husky Oil Co			7.25%, 8/15/2013		1,450	1,387
7.55%, 11/15/2016	325	289	7.13%, 3/15/2018		4,185	3,504
KCS Energy Inc			Omnicare Inc
7.13%, 4/ 1/2012	600	429	6.75%, 12/15/2013		250	207
Marathon Oil Canada Corp			6.88%, 12/15/2015		1,600	1,232
8.38%, 5/ 1/2012	1,530	1,535
						6,330
Nexen Inc
5.05%, 11/20/2013	1,960	1,741	Physician Practice Management (0.07%)
7.88%, 3/15/2032	500	406	US Oncology Inc
6.40%, 5/15/2037	1,675	1,143	8.33%, 3/15/2012 (f)		322	225
PetroHawk Energy Corp			9.00%, 8/15/2012		1,900	1,577
9.13%, 7/15/2013	2,650	2,041				1,802
7.88%, 6/ 1/2015 (c)	805	545	Pipelines (0.97%)
Petroleum Development Corp			Atlas Pipeline Partners LP
12.00%, 2/15/2018	1,665	1,282	8.75%, 6/15/2018 (c)		1,450	979
Pioneer Natural Resources Co			Copano Energy LLC / Copano Energy Finance
6.65%, 3/15/2017	4,745	3,574	Corp
Plains Exploration & Production Co			8.13%, 3/ 1/2016		760	559
7.75%, 6/15/2015	1,300	949	7.75%, 6/ 1/2018 (c)		405	279
Southwestern Energy Co			Enbridge Energy Partners LP
7.50%, 2/ 1/2018 (c)	890	730	4.00%, 1/15/2009 (b)		388	387
Swift Energy Co			Holly Energy Partners LP
7.63%, 7/15/2011	565	477	6.25%, 3/ 1/2015		1,000	680
7.13%, 6/ 1/2017	1,090	759	MarkWest Energy Partners LP / MarkWest
		24,011	Energy Finance Corp
			8.50%, 7/15/2016		1,000	735
Oil Company - Integrated (0.17%)
			8.75%, 4/15/2018		2,440	1,757
ConocoPhillips Holding Co
			NGPL PipeCo LLC
6.95%, 4/15/2029	100	87
			6.51%, 12/15/2012 (c)		3,500	3,255
Petrobras International Finance Co
			7.12%, 12/15/2017 (c)		2,800	2,284
8.38%, 12/10/2018	600	568
			Pacific Energy Partners LP / Pacific Energy
Petronas Capital Ltd
			Finance Corp
7.88%, 5/22/2022 (c)	545	466
			6.25%, 9/15/2015		4,500	3,445
Suncor Energy Inc
			Rockies Express Pipeline LLC
6.10%, 6/ 1/2018	3,915	3,104
			5.10%, 8/20/2009 (b)(c)(f)		2,260	2,261
		4,225
			Southern Natural Gas Co
Oil Field Machinery & Equipment (0.02%)			8.00%, 3/ 1/2032		962	743
Cameron International Corp			Targa Resources Partners LP
6.38%, 7/15/2018	725	600	8.25%, 7/ 1/2016 (c)		1,105	685
			TEPPCO Partners LP
Oil Refining & Marketing (0.33%)			7.63%, 2/15/2012		1,080	1,048
Premcor Refining Group Inc/The			Transcontinental Gas Pipe Line Corp
6.75%, 2/ 1/2011	1,675	1,684	7.00%, 8/15/2011		4,385	4,228
Tesoro Corp			Transportadora de Gas del Sur SA
6.25%, 11/ 1/2012	1,020	780	7.88%, 5/14/2017 (c)		1,384	567
Valero Energy Corp						23,892
6.63%, 6/15/2037	7,940	5,641
		8,105

See accompanying notes

187

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
BONDS (continued)			BONDS (continued)
Printing - Commercial (0.04%)			Regional Banks (1.55%)
Cadmus Communications Corp			BAC Capital Trust XIII
8.38%, 6/15/2014	$ 750 $	482	3.22%, 3/15/2043 (f)	$ 3,640 $	1,313
Sheridan Group Inc/The			BAC Capital Trust XIV
10.25%, 8/15/2011	650	539	5.63%, 3/15/2043 (f)	2,385	1,121
		1,021	Capital One Financial Corp
			3.10%, 9/10/2009 (b)(f)	3,500	3,246
Private Corrections (0.10%)
			5.70%, 9/15/2011	1,570	1,382
Corrections Corp of America
7.50%, 5/ 1/2011	2,690	2,542	First Union Institutional Capital I
			8.04%, 12/ 1/2026	1,000	748
Property & Casualty Insurance (0.13%)			Keycorp
			3.36%, 5/26/2009 (b)(f)	3,000	2,945
Crum & Forster Holdings Corp
7.75%, 5/ 1/2017	1,000	695	6.50%, 5/14/2013	1,665	1,466
Markel Corp			PNC Financial Services Group Inc
7.35%, 8/15/2034	135	98	8.25%, 5/29/2049 (f)	6,190	5,104
Travelers Cos Inc/The			PNC Funding Corp
6.25%, 3/15/2067 (f)	1,730	1,031	3.56%, 1/31/2012 (f)	4,625	3,748
WR Berkley Corp			PNC Preferred Funding Trust I
6.25%, 2/15/2037	1,820	1,294	8.70%, 2/28/2049 (c)(f)	2,400	1,936
		3,118	SunTrust Preferred Capital I
			5.85%, 12/31/2049 (f)	1,580	871
Publishing - Newspapers (0.01%)			Wachovia Corp
Block Communications Inc			5.63%, 12/15/2008 (b)	865	859
8.25%, 12/15/2015 (c)	350	259	6.38%, 2/ 1/2009 (b)	365	362
			Wells Fargo & Co
Publishing - Periodicals (0.06%)			3.03%, 8/20/2010 (b)(f)	640	636
Dex Media West LLC/Dex Media West
			Wells Fargo Bank NA
Finance Co
			5.75%, 5/16/2016	2,755	2,469
9.88%, 8/15/2013	500	187
			Wells Fargo Capital XIII
Idearc Inc
			7.70%, 12/29/2049 (f)	8,935	7,305
8.00%, 11/15/2016	1,200	167
			Wells Fargo Capital XV
Nielsen Finance LLC / Nielsen Finance Co
			9.75%, 12/29/2049 (f)	2,820	2,735
10.00%, 8/ 1/2014	1,415	1,026
					38,246
		1,380
			Reinsurance (0.24%)
Quarrying (0.20%)
			Endurance Specialty Holdings Ltd
Compass Minerals International Inc
			7.00%, 7/15/2034	3,350	2,149
12.00%, 6/ 1/2013 (a)(f)	551	570
			PartnerRe Finance II
Vulcan Materials Co
			6.44%, 12/ 1/2066 (f)	1,320	694
4.07%, 12/15/2010 (f)	4,325	4,293
			Platinum Underwriters Finance Inc
		4,863
			7.50%, 6/ 1/2017	3,170	2,983
Radio (0.03%)					5,826
Entercom Radio LLC/Entercom Capital Inc
7.63%, 3/ 1/2014	1,000	680	REITS - Apartments (0.01%)
			UDR Inc
Real Estate Operator & Developer (0.11%)			6.50%, 6/15/2009	395	337
Duke Realty LP
5.63%, 8/15/2011	980	853	REITS - Healthcare (0.33%)
			HCP Inc
Regency Centers LP
			5.65%, 12/15/2013	2,900	2,448
8.45%, 9/ 1/2010	940	955
			6.00%, 1/30/2017	600	426
5.88%, 6/15/2017	1,235	941
			Nationwide Health Properties Inc
		2,749
			6.50%, 7/15/2011	585	528
			6.25%, 2/ 1/2013	5,700	4,616
					8,018

See accompanying notes

188

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
BONDS (continued)			BONDS (continued)
REITS - Hotels (0.14%)			Retail - Automobile (0.02%)
Hospitality Properties Trust			Penske Auto Group Inc
5.13%, 2/15/2015	$ 825 $	603	7.75%, 12/15/2016	$ 1,150 $	549
6.30%, 6/15/2016	2,795	2,059
6.70%, 1/15/2018	1,005	736	Retail - Consumer Electronics (0.08%)
		3,398	Best Buy Co Inc
			6.75%, 7/15/2013 (c)	2,190	2,062
REITS - Mortgage (0.19%)
iStar Financial Inc			Retail - Discount (0.08%)
3.16%, 9/15/2009 (f)	2,425	1,370	Target Corp
3.16%, 3/ 9/2010 (f)	3,425	1,918	5.38%, 6/15/2009	80	80
5.85%, 3/15/2017	3,500	1,330	Wal-Mart Stores Inc
		4,618	6.50%, 8/15/2037	2,240	2,011
					2,091
REITS - Office Property (0.21%)
Brandywine Operating Partnership LP			Retail - Drug Store (0.17%)
5.63%, 12/15/2010	2,325	2,022	CVS/Caremark Corp
5.70%, 5/ 1/2017	1,945	1,133	3.11%, 6/ 1/2010 (b)(f)	4,710	4,256
Highwoods Properties Inc
5.85%, 3/15/2017	1,245	800	Retail - Restaurants (0.08%)
HRPT Properties Trust			Darden Restaurants Inc
3.42%, 3/16/2011 (f)	1,408	1,284	6.20%, 10/15/2017	1,690	1,225
		5,239	Landry's Restaurants Inc
			9.50%, 12/15/2014	700	627
REITS - Regional Malls (0.15%)					1,852
Simon Property Group LP
4.60%, 6/15/2010	375	347	Rubber - Tires (0.07%)
5.30%, 5/30/2013	1,985	1,638	Goodyear Tire & Rubber Co/The
			6.68%, 12/ 1/2009 (f)	840	770
6.13%, 5/30/2018	2,245	1,599
			8.63%, 12/ 1/2011	1,000	845
		3,584
					1,615
REITS - Shopping Centers (0.24%)
			Satellite Telecommunications (0.16%)
Developers Diversified Realty Corp
5.25%, 4/15/2011	4,580	3,881	Intelsat Ltd
			6.50%, 11/ 1/2013	1,465	732
5.38%, 10/15/2012	2,560	1,914
			Intelsat Subsidiary Holding Co Ltd
		5,795
			8.88%, 1/15/2015 (c)	3,355	2,852
REITS - Single Tenant (0.03%)			Telesat Canada/Telesat LLC
National Retail Properties Inc			11.00%, 11/ 1/2015 (c)	580	348
6.88%, 10/15/2017	935	852			3,932
			Schools (0.03%)
REITS - Warehouse & Industrial (0.19%)
Prologis			Knowledge Learning Corp Inc
3.06%, 8/24/2009 (b)(f)	4,800	4,679	7.75%, 2/ 1/2015 (c)	970	757
			Seismic Data Collection (0.03%)
Rental - Auto & Equipment (0.35%)
Erac USA Finance Co			Cie Generale de Geophysique-Veritas
3.71%, 4/30/2009 (b)(c)(f)	6,350	5,875	7.50%, 5/15/2015	1,210	811
3.06%, 8/28/2009 (b)(c)(f)	1,900	1,896
			Sovereign (0.05%)
7.00%, 10/15/2037 (c)	1,370	801
			Mexico Government International Bond
		8,572	5.52%, 1/13/2009 (b)(f)	1,135	1,135
Retail - Apparel & Shoe (0.02%)
Phillips-Van Heusen Corp			Special Purpose Banks (0.03%)
8.13%, 5/ 1/2013	455	391	Korea Development Bank
			4.90%, 10/20/2009 (b)(f)	760	759

See accompanying notes

189

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
BONDS (continued)			BONDS (continued)
Special Purpose Entity (0.89%)			Telecommunication Equipment (0.13%)
AGFC Capital Trust I			Lucent Technologies Inc
6.00%, 1/15/2067 (c)(f)	$ 835 $	92	5.50%, 11/15/2008	$ 1,789 $	1,753
Axcan Intermediate Holdings Inc			Nortel Networks Ltd
9.25%, 3/ 1/2015 (c)	2,000	1,700	9.00%, 7/15/2011 (f)	450	244
BAE Systems Holdings Inc			10.75%, 7/15/2016 (c)	2,165	1,142
6.40%, 12/15/2011 (c)	3,305	3,407			3,139
5.20%, 8/15/2015 (c)	3,420	3,028
			Telecommunication Services (0.21%)
Capital One Capital IV
			Fairpoint Communications Inc
6.75%, 2/17/2037	1,640	773
			13.13%, 4/ 1/2018 (c)	1,440	1,015
Hawker Beechcraft Acquisition Co LLC /
Hawker Beechcraft Notes Co			MasTec Inc
8.50%, 4/ 1/2015	380	228	7.63%, 2/ 1/2017	900	720
John Hancock Global Funding II			Maxcom Telecomunicaciones SAB de CV
4.32%, 4/ 3/2009 (b)(c)(f)	2,550	2,557	11.00%, 12/15/2014	785	510
QBE Capital Funding II LP			Qwest Corp
6.80%, 6/29/2049 (c)(e)(f)	1,865	793	7.88%, 9/ 1/2011	1,000	868
Rainbow National Services LLC			Telcordia Technologies Inc
10.38%, 9/ 1/2014 (c)	2,190	1,905	8.50%, 7/15/2012 (c)(f)	2,020	1,313
Regency Energy Partners LP/Regency Energy			West Corp
Finance Corp			9.50%, 10/15/2014	1,565	853
8.38%, 12/15/2013	1,465	1,113			5,279
Santander Perpetual SA Unipersonal			Telephone - Integrated (1.88%)
6.67%, 10/24/2017 (c)(f)	1,500	1,056
			AT&T Inc
SMFG Preferred Capital USD 1 Ltd			6.15%, 9/15/2034	705	541
6.08%, 1/29/2049 (c)(f)	2,740	1,884
			6.30%, 1/15/2038	3,845	3,036
Swiss Re Capital I LP
			Cincinnati Bell Inc
6.85%, 5/29/2049 (c)(f)	1,925	1,054
			8.38%, 1/15/2014	3,000	2,168
Universal City Development Partners
			Deutsche Telekom International Finance BV
11.75%, 4/ 1/2010	1,000	800
			3.39%, 3/23/2009 (b)(f)	3,175	3,138
USB Realty Corp
			5.25%, 7/22/2013	3,520	3,118
6.09%, 12/22/2049 (c)(f)	985	463
			Koninklijke KPN NV
Williams Cos Inc Credit Linked Certificate
Trust/The			8.00%, 10/ 1/2010	1,075	1,029
6.05%, 5/ 1/2009 (b)(c)(f)	1,200	1,193	Level 3 Financing Inc
		22,046	9.25%, 11/ 1/2014	3,355	1,912
			Qwest Capital Funding Inc
Specified Purpose Acquisition (0.06%)			7.00%, 8/ 3/2009	10,245	9,733
ESI Tractebel Acquisition Corp			Qwest Communications International Inc
7.99%, 12/30/2011	1,518	1,397	7.50%, 2/15/2014	850	584
			Sprint Nextel Corp
Steel - Producers (0.19%)			4.17%, 6/28/2010 (f)	2,500	1,984
Evraz Group SA			6.00%, 12/ 1/2016	2,600	1,801
8.88%, 4/24/2013 (c)	1,400	602
			Telecom Italia Capital SA
Ispat Inland ULC			3.28%, 2/ 1/2011 (b)(f)	845	676
9.75%, 4/ 1/2014	2,225	2,181
			5.11%, 7/18/2011 (f)	2,175	1,722
Steel Dynamics Inc
			5.25%, 11/15/2013	2,405	1,826
7.38%, 11/ 1/2012	635	472
			6.38%, 11/15/2033	2,610	1,569
7.75%, 4/15/2016 (c)	2,290	1,517
			Telefonica Emisiones SAU
		4,772
			5.98%, 6/20/2011	1,415	1,351
Steel Pipe & Tube (0.03%)			3.12%, 2/ 4/2013 (a)(e)(f)	2,075	1,555
Mueller Water Products Inc			5.86%, 2/ 4/2013 (e)	1,670	1,520
7.38%, 6/ 1/2017	1,000	655	Telefonica Europe BV
			7.75%, 9/15/2010	760	736

See accompanying notes

190

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
Telephone - Integrated (continued)				Wireless Equipment (continued)
Verizon Communications Inc				Rogers Communications Inc (continued)
8.75%, 11/ 1/2018 (e)	$ 2,220 $		2,267	7.50%, 8/15/2038	$ 1,470 $	1,235
8.95%, 3/ 1/2039 (e)		2,500	2,537			7,163
Windstream Corp
				TOTAL BONDS	$ 1,648,956
8.63%, 8/ 1/2016		2,050	1,548
			46,351	SENIOR FLOATING RATE INTERESTS (1.55%)
				Aerospace & Defense (0.05%)
Television (0.08%)
				Hawker Beechcraft Inc, Letter of Credit
Univision Communications Inc
				6.54%, 3/26/2014 (f)	107	68
7.85%, 7/15/2011		1,020	643
				Hawker Beechcraft Inc, Term Loan B
Videotron Ltee
				5.76%, 3/26/2014 (f)	1,829	1,155
6.88%, 1/15/2014		725	602
						1,223
9.13%, 4/15/2018 (c)		735	652
			1,897	Auto - Car & Light Trucks (0.09%)
				Ford Motor Co, Term Loan B
Theaters (0.08%)
				0.00%, 12/15/2013 (f)	3,990	2,178
AMC Entertainment Inc
8.63%, 8/15/2012		900	756
				Auto/Truck Parts & Equipment - Replacement (0.07%)
11.00%, 2/ 1/2016		575	454	Allison Transmission Inc, Term Loan B
Cinemark Inc				5.95%, 8/ 7/2014 (f)	2,435	1,628
0.00%, 3/15/2014 (a)(f)		975	819
			2,029	Cable TV (0.05%)
Tobacco (0.17%)				CSC Holdings Inc, Term Loan B
				4.57%, 3/30/2013 (f)	1,496	1,270
Reynolds American Inc
7.25%, 6/ 1/2013		3,950	3,456
				Cellular Telecommunications (0.06%)
6.75%, 6/15/2017		975	732
				Alltel Holdings Corp, Term Loan B
			4,188	6.25%, 5/31/2015 (f)	1,485	1,411
Tools - Hand Held (0.13%)
Snap-On Inc				Commercial Services (0.00%)
4.95%, 1/12/2010 (b)(f)		3,200	3,163	Aramark Corp, Term Loan B
				0.00%, 1/26/2014 (f)(i)	60	50
Transport - Rail (0.07%)
CSX Transportation Inc				Data Processing & Management (0.08%)
6.25%, 1/15/2023		1,924	1,659	First Data Corporation, Term Loan B
Union Pacific Railroad Co 2003 Pass Through				5.98%, 9/24/2014 (f)	990	724
Trust				First Data Corporation, Term Loan B1
4.70%, 1/ 2/2024		178	145	6.05%, 12/24/2014 (f)	990	725
			1,804	First Data Corporation, Term Loan B2
				5.97%, 9/24/2014 (f)	743	541
Transport - Services (0.01%)
						1,990
FedEx Corp
3.50%, 4/ 1/2009 (b)		260	256	Dialysis Centers (0.07%)
				Davita Inc, Term Loan B
Water (0.11%)				0.00%, 10/ 5/2012 (f)(i)	1,900	1,640
Veolia Environnement
5.25%, 6/ 3/2013		3,000	2,713	Electric - Integrated (0.14%)
				Texas Competitive Electric Holdings
Wire & Cable Products (0.04%)				Company, Term Loan B2
Coleman Cable Inc				6.30%, 8/ 7/2014 (f)	2,275	1,781
9.88%, 10/ 1/2012		1,250	891	Texas Competitive Electric Holdings
				Company, Term Loan B3
Wireless Equipment (0.29%)				6.30%, 10/10/2014 (f)	1,980	1,550
Rogers Communications Inc						3,331
6.80%, 8/15/2018		6,775	5,928

See accompanying notes

191

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
SENIOR FLOATING RATE INTERESTS (continued)				SENIOR FLOATING RATE INTERESTS (continued)
Food - Confectionery (0.02%)				Telecommunication Services (0.03%)
Wrigley WM Jr Co; Term Loan B				Fairpoint Communications Inc, Term Loan B
0.00%, 9/30/2014 (f)(i)	$ 450 $		426	5.75%, 3/ 8/2015 (f)	$ 1,000 $		695
Health Care Services (0.09%)				Theaters (0.01%)
Community Health Systems Inc, Term Loan B				Cinemark USA Inc, Term Loan C
5.16%, 7/25/2014 (f)		2,809	2,268	0.00%, 3/31/2011 (f)(i)		500	358
				TOTAL SENIOR FLOATING RATE INTERESTS		$ 38,277
Machinery - General Industry (0.05%)
Manitowoc Company Inc, Term Loan B				U.S. GOVERNMENT & GOVERNMENT AGENCY
0.00%, 4/14/2014 (f)(i)		1,500	1,174	OBLIGATIONS (56.14%)
				Federal Home Loan Mortgage Corporation
				(FHLMC) (18.49%)
Medical - Hospitals (0.15%)				4.50%, 11/ 1/2023 (j)		17,475	16,590
HCA Inc, Term Loan B1				5.00%, 11/ 1/2023 (j)		7,625	7,444
6.01%, 11/18/2013 (f)		4,462	3,681
				5.00%, 11/ 1/2038 (j)		40,965	38,763
Medical Products (0.04%)				5.50%, 11/ 1/2038 (j)		93,770	91,455
Biomet Inc, Term Loan B				6.00%, 11/ 1/2038 (j)		41,555	41,477
0.00%, 3/25/2015 (f)(i)		1,200	1,032	5.50%, 1/ 1/2039 (j)		10,360	10,075
				6.00%, 1/ 1/2039 (j)		15,775	15,691
Money Center Banks (0.01%)				5.50%, 4/ 1/2009		16	16
BE Aerospace Inc, Term Loan B				5.50%, 8/ 1/2009		51	51
6.07%, 7/28/2014 (f)		399	363	4.50%, 12/ 1/2009		520	526
				4.50%, 4/ 1/2011		2,228	2,259
Physician Practice Management (0.00%)
				7.00%, 8/ 1/2016		9	10
US Oncology Inc, Term Loan
0.00%, 8/20/2011 (f)(i)		150	124	6.50%, 6/ 1/2017		456	468
				6.00%, 7/ 1/2017		170	171
Property & Casualty Insurance (0.04%)				5.50%, 3/ 1/2018		392	392
Asurion Corp, Term Loan B				5.00%, 5/ 1/2018		2,891	2,852
10.84%, 7/ 7/2015 (f)		1,750	1,067	5.00%, 10/ 1/2018		1,781	1,757
				5.50%, 12/ 1/2018		8	8
Publishing - Periodicals (0.01%)
				5.00%, 1/ 1/2019		2,841	2,797
Nielsen Finance LLC / Nielsen Finance Corp,
				6.00%, 3/ 1/2022		494	497
Term Loan B
4.80%, 8/ 9/2013 (f)		499	355	5.50%, 7/ 1/2023		7,849	7,819
				6.00%, 7/ 1/2023		1,632	1,638
Racetracks (0.17%)				5.50%, 8/ 1/2023		5,599	5,578
Penn National Gaming Inc, Term Loan B				5.50%, 6/ 1/2024		765	754
5.02%, 10/ 3/2012 (f)		4,979	4,175	5.00%, 2/ 1/2026		10,297	9,938
				6.00%, 6/ 1/2028		32	32
Retail - Building Products (0.16%)
				6.00%, 1/ 1/2029		12	12
HD Supply Inc, Term Loan B
4.37%, 8/30/2012 (f)		5,148	3,861	6.50%, 3/ 1/2029		52	53
				6.50%, 3/ 1/2029		9	9
Satellite Telecommunications (0.16%)				6.50%, 5/ 1/2029		77	78
Panamsat Corp, Term Loan B				7.00%, 12/ 1/2029		29	29
6.65%, 1/ 3/2014 (f)		2,985	2,468	7.00%, 6/ 1/2030		29	30
Telesat Canada Inc, Term Loan B				7.50%, 9/ 1/2030		14	15
6.36%, 9/ 1/2014 (f)		1,839	1,397	7.50%, 9/ 1/2030		8	9
Telesat Canada Inc, Term Loan DD				8.00%, 9/ 1/2030		128	135
6.59%, 10/31/2014 (f)		147	112
				8.00%, 11/ 1/2030		-	1
			3,977
				7.00%, 12/ 1/2030		36	37
				7.50%, 12/ 1/2030		3	3
				7.50%, 1/ 1/2031		52	55

See accompanying notes

192

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY			U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)			OBLIGATIONS (continued)
Federal Home Loan Mortgage Corporation			Federal Home Loan Mortgage Corporation
(FHLMC) (continued)			(FHLMC) (continued)
6.00%, 3/ 1/2031	$ 96 $	97	4.65%, 8/ 1/2035 (f)	$ 1,387 $		1,406
7.50%, 3/ 1/2031	19	20	4.82%, 8/ 1/2035 (f)		6,469	6,466
6.00%, 4/ 1/2031	15	15	4.97%, 9/ 1/2035 (f)		4,086	4,107
6.50%, 4/ 1/2031	40	41	5.18%, 11/ 1/2035 (f)		742	743
6.50%, 6/ 1/2031	4	4	5.34%, 12/ 1/2035 (f)		1,188	1,199
7.00%, 6/ 1/2031	1	1	5.44%, 12/ 1/2035 (f)		223	224
6.50%, 9/ 1/2031	44	45	6.53%, 7/ 1/2036 (f)		4,090	4,153
7.00%, 9/ 1/2031	11	11	6.48%, 8/ 1/2036 (f)		8,044	8,249
6.00%, 12/ 1/2031	459	460	6.54%, 10/ 1/2036 (f)		1,745	1,783
6.50%, 2/ 1/2032	35	35	6.15%, 12/ 1/2036		5,685	5,802
6.50%, 2/ 1/2032	27	27	6.51%, 1/ 1/2037 (f)		3,010	3,061
7.50%, 2/ 1/2032	27	29	5.96%, 2/ 1/2037 (f)		2,356	2,385
6.50%, 5/ 1/2032	100	102	6.28%, 4/ 1/2037 (f)		2,267	2,325
6.00%, 12/ 1/2032	454	455	5.64%, 5/ 1/2037		882	885
6.00%, 2/ 1/2033	365	365	6.11%, 5/ 1/2037 (f)		1,070	1,087
5.50%, 4/ 1/2033	808	790	5.57%, 8/ 1/2037 (f)		3,234	3,270
5.50%, 5/ 1/2033	959	938				455,780
5.50%, 10/ 1/2033	747	730
			Federal National Mortgage Association (FNMA) (22.68%)
5.50%, 12/ 1/2033	3,392	3,316	5.00%, 11/ 1/2023 (j)		19,960	19,511
6.00%, 12/ 1/2033	759	760	5.00%, 11/ 1/2038 (j)		100,175	94,885
5.50%, 9/ 1/2034	2,705	2,643	5.50%, 11/ 1/2038 (j)		114,070	111,432
5.50%, 2/ 1/2035	4,297	4,196	6.00%, 11/ 1/2038 (j)		54,485	54,451
6.50%, 4/ 1/2035	901	915	6.50%, 11/ 1/2038 (j)		5,365	5,437
5.00%, 7/ 1/2035	1,600	1,516	6.00%, 5/ 1/2009		3	3
5.00%, 8/ 1/2035	8,204	7,772	6.00%, 5/ 1/2009		3	3
5.00%, 10/ 1/2035	3,154	2,988	6.00%, 7/ 1/2009		24	24
6.50%, 10/ 1/2035	399	405	6.00%, 7/ 1/2009		9	9
6.00%, 8/ 1/2036	1,598	1,596	5.00%, 3/ 1/2010		409	409
6.00%, 10/ 1/2036 (f)	4,253	4,248	6.50%, 4/ 1/2010		10	11
5.00%, 6/ 1/2037	316	299	6.50%, 1/ 1/2011		6	6
5.50%, 7/ 1/2037	5,090	4,967	6.50%, 2/ 1/2011		54	56
6.00%, 8/ 1/2037	15,114	15,096	6.50%, 3/ 1/2011		78	79
6.00%, 8/ 1/2037	13,893	13,877	6.50%, 7/ 1/2016		14	14
6.00%, 12/ 1/2037 (f)	5,191	5,185	6.50%, 2/ 1/2017		60	61
6.00%, 1/ 1/2038 (f)	1,477	1,475	6.50%, 3/ 1/2017		24	25
6.50%, 2/ 1/2038 (f)	20,507	20,797	6.50%, 4/ 1/2017		21	22
5.50%, 4/ 1/2038	4,326	4,221	6.50%, 8/ 1/2017		380	390
5.50%, 4/ 1/2038	5,566	5,431	5.00%, 9/ 1/2017		759	749
5.50%, 5/ 1/2038	9,169	8,947	5.50%, 9/ 1/2017		149	149
5.50%, 5/ 1/2038	5,857	5,715	5.50%, 10/ 1/2017		255	256
6.00%, 7/ 1/2038	14,350	14,333	5.00%, 3/ 1/2018		1,240	1,222
5.50%, 8/ 1/2038	6,115	5,967	4.50%, 1/ 1/2020		2,080	1,991
5.50%, 8/ 1/2038	2,976	2,904	5.00%, 5/ 1/2020		1,010	990
4.62%, 12/ 1/2033 (f)	977	990	5.50%, 6/ 1/2020		3,902	3,898
6.11%, 1/ 1/2034 (f)	381	388	5.50%, 9/ 1/2020		3,988	3,983
5.06%, 7/ 1/2034 (f)	302	303	6.00%, 10/ 1/2021		3,317	3,344
4.54%, 8/ 1/2034 (f)	543	545	6.50%, 5/ 1/2022		36	37
5.51%, 6/ 1/2035 (f)	3,106	3,151	5.50%, 2/ 1/2023		592	583

See accompanying notes

193

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)				OBLIGATIONS (continued)
Federal National Mortgage Association (FNMA)				Federal National Mortgage Association (FNMA)
(continued)				(continued)
6.00%, 2/ 1/2023	$ 184 $		185	4.97%, 4/ 1/2036 (f)	$ 1,107 $		1,105
4.50%, 5/ 1/2023		19,415	18,488	6.50%, 4/ 1/2036		1,470	1,491
5.50%, 6/ 1/2023		2,529	2,492	6.00%, 5/ 1/2036		1,164	1,165
5.50%, 7/ 1/2023		39	38	6.00%, 5/ 1/2036		6,819	6,819
6.50%, 12/ 1/2031		25	25	5.78%, 6/ 1/2036 (f)		391	396
6.50%, 2/ 1/2032		22	22	6.50%, 8/ 1/2036		586	595
6.50%, 2/ 1/2032		50	51	6.50%, 8/ 1/2036		3,049	3,092
7.00%, 2/ 1/2032		66	69	6.50%, 9/ 1/2036 (f)		11,983	12,154
7.00%, 3/ 1/2032		161	166	5.43%, 10/ 1/2036 (f)		874	877
6.50%, 4/ 1/2032		27	28	6.50%, 10/ 1/2036		6,783	6,880
6.00%, 5/ 1/2032		20	20	6.50%, 11/ 1/2036		7,720	7,830
6.50%, 6/ 1/2032		13	13	5.93%, 12/ 1/2036 (f)		5,850	5,915
6.50%, 8/ 1/2032		145	148	5.50%, 2/ 1/2037		1,069	1,045
7.50%, 8/ 1/2032		83	88	5.74%, 5/ 1/2037 (f)		4,854	4,919
6.77%, 11/ 1/2032 (f)		219	222	6.00%, 6/ 1/2037		3,082	3,082
6.35%, 12/ 1/2032 (f)		383	386	6.50%, 7/ 1/2037		2,793	2,833
6.20%, 1/ 1/2033 (f)		485	499	6.50%, 7/ 1/2037		3,760	3,813
5.32%, 4/ 1/2033 (f)		515	528	6.50%, 1/ 1/2038		1,790	1,815
4.01%, 5/ 1/2033 (f)		2,783	2,833	6.00%, 2/ 1/2038 (f)		5,559	5,559
5.07%, 7/ 1/2033 (f)		3,150	3,169	6.00%, 2/ 1/2038		8,339	8,339
5.50%, 7/ 1/2033		1,437	1,408	6.00%, 2/ 1/2038 (f)		6,975	6,975
4.84%, 8/ 1/2033 (f)		2,401	2,405	6.00%, 2/ 1/2038		5,187	5,187
5.50%, 9/ 1/2033		1,987	1,945	6.50%, 2/ 1/2038		2,557	2,593
4.59%, 12/ 1/2033 (f)		2,761	2,752	5.50%, 3/ 1/2038		10,196	9,966
4.68%, 12/ 1/2033 (f)		2,177	2,173	6.00%, 3/ 1/2038		2,210	2,210
4.56%, 1/ 1/2034 (f)		1,887	1,936	6.50%, 3/ 1/2038		2,274	2,306
4.01%, 3/ 1/2034 (f)		5,163	5,128	5.50%, 4/ 1/2038		20,141	19,687
3.74%, 5/ 1/2034 (f)		1,719	1,736	6.00%, 4/ 1/2038		7,243	7,242
4.29%, 5/ 1/2034 (f)		377	379	6.00%, 5/ 1/2038		2,459	2,459
4.51%, 5/ 1/2034 (f)		2,094	2,151	6.00%, 5/ 1/2038		1,558	1,558
4.64%, 5/ 1/2034 (f)		2,268	2,264	6.00%, 5/ 1/2038		1,636	1,636
4.25%, 6/ 1/2034 (f)		757	760	6.50%, 5/ 1/2038		1,343	1,362
4.31%, 7/ 1/2034 (f)		1,062	1,067	6.00%, 8/ 1/2038		5,274	5,274
4.37%, 9/ 1/2034 (f)		7,016	7,052	6.00%, 8/ 1/2038		4,199	4,199
4.74%, 10/ 1/2034 (f)		479	485				558,806
4.44%, 11/ 1/2034 (f)		5,022	5,033
				Government National Mortgage Association
4.29%, 12/ 1/2034 (f)		1,021	1,024	(GNMA) (1.69%)
4.58%, 3/ 1/2035 (f)		1,184	1,189	5.00%, 11/ 1/2038 (j)		860	820
5.14%, 3/ 1/2035 (f)		9,609	9,896	5.50%, 11/ 1/2038 (j)		11,305	11,086
5.33%, 5/ 1/2035 (f)		8,178	8,169	6.00%, 11/ 1/2038 (j)		2,125	2,125
5.00%, 7/ 1/2035		1,558	1,477	7.00%, 4/15/2031		1	1
5.00%, 7/ 1/2035		3,746	3,552	7.00%, 6/15/2031		60	61
4.85%, 8/ 1/2035 (f)		633	634	7.00%, 7/15/2031		11	12
4.88%, 8/ 1/2035 (f)		292	293	6.00%, 8/15/2031		73	73
5.07%, 8/ 1/2035 (f)		1,573	1,581	6.00%, 1/15/2032		24	24
4.87%, 9/ 1/2035 (f)		618	620	6.00%, 2/15/2032		351	352
5.42%, 2/ 1/2036 (f)		186	186	7.00%, 6/15/2032		322	329
4.88%, 3/ 1/2036 (b)(f)		5,771	5,633	6.50%, 10/15/2032		112	114

See accompanying notes

194

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
		Principal				Principal
		Amount	Value				Amount	Value
		(000's)	(000's)				(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				REPURCHASE AGREEMENTS (1.80%)
OBLIGATIONS (continued)				Money Center Banks (1.80%)
Government National Mortgage Association				BNP Paribas Securities Corporation
(GNMA) (continued)				Repurchase Agreement; 0.20% dated
6.50%, 12/15/2032	$ 770 $		782	10/31/08 maturing 11/03/08 (collateralized
6.00%, 2/15/2033		160	161	by U.S. Government Agency Issues;
5.00%, 11/15/2033		13,177	12,671	$17,249,000; 0.00% - 6.25%; dated
6.00%, 12/15/2033		215	216	12/23/08 - 07/13/37) (b)		$ 17,111$		17,112
5.00%, 6/15/2034		317	303	Investment in Joint Trading Account; Bank
				of America Repurchase Agreement;
6.50%, 3/20/2028		39	40	0.15%; dated 10/31/2008 maturing
6.00%, 7/20/2028		217	219	11/03/2008 (collateralized by Sovereign
6.00%, 11/20/2028		200	201	Agency Issues; $28,120,000; 2.75% -
6.00%, 1/20/2029		210	212	5.38%; dated 11/28/08 - 02/13/17)			27,301	27,301
								44,413
6.50%, 5/20/2029		31	32
6.00%, 7/20/2029		53	53	TOTAL REPURCHASE AGREEMENTS			$ 44,413
8.00%, 1/20/2031		20	21	Total Investments			$ 3,273,985
6.50%, 2/20/2032		18	18	Liabilities in Excess of Other Assets, Net - (32.85)%				(809,562)
6.00%, 11/20/2033		2,669	2,673
				TOTAL NET ASSETS - 100.00%			$ 2,464,423
5.50%, 5/20/2035		794	780
6.00%, 12/20/2036		8,278	8,267
			41,646	(a)	Non-Income Producing Security
U.S. Treasury (13.28%)				(b)	Security was purchased with the cash proceeds from securities loans.
4.50%, 2/15/2009		15,000	15,157	(c)	Security exempt from registration under Rule 144A of the Securities Act
					of 1933. These securities may be resold in transactions exempt from
4.88%, 8/15/2009 (k)		60,000	61,612		registration, normally to qualified institutional buyers. Unless otherwise
3.13%, 11/30/2009 (k)		65,000	66,127		indicated, these securities are not considered illiquid. At the end of the
4.50%, 4/30/2012 (k)		65,000	70,383		period, the value of these securities totaled $182,304 or 7.40% of net
4.38%, 8/15/2012 (k)		5,500	5,964		assets.
				(d)	Security is Illiquid
4.25%, 8/15/2013 (k)		11,100	11,883
				(e)	Security purchased on a when-issued basis.
4.75%, 5/15/2014 (k)		15,000	16,459
				(f)	Variable Rate. Rate shown is in effect at October 31, 2008.
4.25%, 11/15/2014 (k)		7,675	8,231	(g)	Market value is determined in accordance with procedures established in
6.00%, 2/15/2026 (k)		37,150	42,348		good faith by the Board of Directors. At the end of the period, the value
6.75%, 8/15/2026		3,000	3,696		of these securities totaled $8,703 or 0.35% of net assets.
6.13%, 8/15/2029		25	30	(h)	Security or a portion of the security was pledged to cover margin
					requirements for futures contracts. At the end of the period, the value of
4.50%, 2/15/2036 (k)		25,000	25,463		these securities totaled $1,056 or 0.04% of net assets.
			327,353	(i)	This Senior Floating Rate Note will settle after October 31, 2008, at
					which time the interest rate will be determined.
TOTAL U.S. GOVERNMENT & GOVERNMENT				(j)	Security was purchased in a "to-be-announced" ("TBA") transaction.
AGENCY OBLIGATIONS		$ 1,383,585			See Notes to Financial Statements.
SHORT TERM INVESTMENTS (4.68%)				(k)	Security or a portion of the security was on loan at the end of the period.
Commercial Paper (4.68%)
Investment in Joint Trading Account; HSBC				Unrealized Appreciation (Depreciation)
Funding				The net federal income tax unrealized appreciation (depreciation) and federal tax cost
0.25%, 11/ 3/2008	$ 55,624 $		55,624	of investments held by the fund as of the period end were as follows:
Investment in Joint Trading Account;
Prudential Funding				Unrealized Appreciation			$ 13,039
0.30%, 11/ 3/2008		55,624	55,624	Unrealized Depreciation				(564,041)
Vulcan Materials Co				Net Unrealized Appreciation (Depreciation)				(551,002)
3.00%, 11/ 3/2008 (b)		4,000	3,998	Cost for federal income tax purposes				3,824,987
			115,246	All dollar amounts are shown in thousands (000's)
TOTAL SHORT TERM INVESTMENTS		$ 115,246

See accompanying notes

195

Schedule of Investments
Bond & Mortgage Securities Fund
October 31, 2008
	Portfolio Summary (unaudited)
Sector		Percent
Mortgage Securities		63.03%
Financial		22.59%
Government		13.39%
Asset Backed Securities		10.66%
Communications		6.83%
Consumer, Non-cyclical		5.27%
Energy		2.59%
Utilities		2.57%
Consumer, Cyclical		2.31%
Industrial		1.78%
Basic Materials		1.10%
Technology		0.55%
Diversified		0.18%
Liabilities in Excess of Other Assets, Net		(32.85%)
TOTAL NET ASSETS		100.00%
Other Assets Summary (unaudited)
Asset Type		Percent
Futures		0.58%
Credit Default Swaps		0.10%
Futures Contracts
					Current		Unrealized
				Original	Market		Appreciation/
Type		Buy/Sell	Contracts	Value	Value	(Depreciation)
US 10 Year Note; December 2008		Buy	127	$ 14,636	$ 14,360 $		(276)
All dollar amounts are shown in thousands (000's)
Credit Default Swaps
							Unrealized
			Buy/Sell	(Pay)/Receive	Expiration	Notional	Appreciation/
Counterparty (Issuer)	Reference Entity		Protection	Fixed Rate	Date	Amount	(Depreciation)
Merrill Lynch	CDX.NA.IG.10		Sell	1.55 %	06/20/2013 $	84,912	$ (2,387)
All dollar amounts are shown in thousands (000's)

See accompanying notes

196

Schedule of Investments
California Municipal Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
TAX-EXEMPT BONDS (104.51%)				TAX-EXEMPT BONDS (continued)
California (104.19%)				California (continued)
Abag Finance Authority for Nonprofit Co				California State Department of Veterans
5.25%, 10/ 1/2026	$ 1,240 $		1,111	Affairs/CA
Abag Finance Authority for Nonprofit Co ACA				5.15%, 12/ 1/2027	$ 2,000 $	1,675
5.70%, 11/ 1/2013		2,280	2,228	California State Department of Water
Anaheim Public Financing Authority/CA				Resources FGIC
AMBAC				5.00%, 12/ 1/2014	2,955	3,141
5.25%, 8/ 1/2013		2,000	2,066	California State Department of Water
Baldwin Park Public Financing Authority/CA				Resources FSA
4.63%, 8/ 1/2016		1,130	1,086	5.00%, 12/ 1/2018	10	11
Barstow Redevelopment Agency/CA MBIA				5.00%, 12/ 1/2018	1,660	1,680
7.00%, 9/ 1/2014		895	1,001	California State Department of Water
				Resources MBIA
7.00%, 9/ 1/2014		470	511
				5.25%, 5/ 1/2015	1,675	1,749
Bay Area Governments Association XLCA
				California State Enterprise Development
5.25%, 9/ 1/2029		2,000	1,554
				Authority
California County TOB Securitization Agency				5.30%, 9/ 1/2047	1,200	845
0.00%, 6/ 1/2028 (a)(b)		2,000	1,178
				California State Public Works Board
5.13%, 6/ 1/2038		2,000	1,216	5.40%, 10/ 1/2022	3,000	2,948
5.25%, 6/ 1/2045		2,000	1,199	5.00%, 4/ 1/2023	4,200	4,041
California Educational Facilities Authority				5.50%, 6/ 1/2023	1,980	1,988
6.63%, 6/ 1/2020		130	140
				5.00%, 6/ 1/2024	3,000	2,791
California Educational Facilities Authority
				5.00%, 6/ 1/2025	1,750	1,614
MBIA
5.10%, 3/ 1/2014		2,000	1,970	California Statewide Communities
				Development Authority
California Health Facilities Financing
				5.00%, 5/15/2020	1,000	833
Authority/CA
6.50%, 10/ 1/2038 (c)		1,000	999	5.20%, 12/ 1/2029	1,000	998
California Housing Finance Agency				5.13%, 4/ 1/2037 (e)	1,500	1,039
5.05%, 8/ 1/2027		2,500	1,992	5.38%, 12/ 1/2037	1,000	746
5.00%, 2/ 1/2028		5,000	3,982	5.00%, 7/ 1/2039 (d)	2,500	1,609
4.70%, 8/ 1/2036 (d)		3,150	2,142	5.00%, 11/15/2043	5,985	4,829
4.80%, 8/ 1/2036 (d)		2,500	1,737	California Statewide Communities
4.88%, 8/ 1/2041 (d)		6,760	4,666	Development Authority CAL MTG INS
				6.25%, 8/15/2028	2,250	2,156
4.75%, 8/ 1/2042 (d)		8,400	5,583
				California Statewide Communities
California Housing Finance Agency AMBAC				Development Authority FNMA
5.10%, 2/ 1/2009		1,000	1,005	4.20%, 10/15/2018	1,480	1,418
California Infrastructure & Economic				California Statewide Communities
Development Bank				Development Authority MBIA
5.50%, 10/ 1/2015		1,000	1,020	6.50%, 8/ 1/2012	1,675	1,764
California Infrastructure & Economic				Carson Redevelopment Agency MBIA
Development Bank FGIC				5.50%, 10/ 1/2016	1,000	1,026
5.00%, 8/15/2018		1,155	1,169
				Chino Valley Unified School District FSA
California Mobilehome Park Financing
				5.25%, 9/ 1/2013	1,240	1,292
Authority/CA
4.50%, 12/15/2036		1,000	614	Chula Vista Community Facilities District/CA
				5.45%, 9/ 1/2036	1,000	718
California Pollution Control Financing Authority
5.00%, 1/ 1/2022		2,000	1,465	City of Alhambra CA MBIA
				6.13%, 9/ 2/2018	4,710	4,871
5.13%, 11/ 1/2023		4,500	3,212
				City of Azusa CA
5.00%, 7/ 1/2027		5,500	3,679
				6.00%, 9/ 1/2026	2,210	1,871
California Pollution Control Financing
				City of Burbank CA FSA
Authority AMBAC
5.85%, 6/ 1/2021		2,500	2,295	5.25%, 5/ 1/2024	3,155	3,109
California Rural Home Mortgage Financing				City of Chula Vista CA MBIA
Authority GNMA/FNMA/FHLMC				5.00%, 8/ 1/2027	3,000	2,693
5.40%, 12/ 1/2036		985	865

See accompanying notes

197

Schedule of Investments
California Municipal Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
TAX-EXEMPT BONDS (continued)			TAX-EXEMPT BONDS (continued)
California (continued)			California (continued)
City of Hawthorne CA			Fontana Redevelopment Agency/CA MBIA
4.60%, 9/ 1/2021	$ 1,000 $	736	5.20%, 9/ 1/2030	$ 1,000 $	936
5.00%, 9/ 1/2030	5,000	3,439	Foothill Eastern Transportation Corridor
City of Los Angeles CA AMBAC			Agency/CA
5.00%, 3/ 1/2022	1,445	1,434	0.00%, 1/15/2026 (a)(b)	9,000	7,985
City of Los Angeles CA GNMA			0.00%, 1/15/2030 (a)	20,000	3,587
6.25%, 9/20/2039	1,000	881	0.00%, 1/15/2032 (a)	10,000	1,508
City of Modesto CA			0.00%, 1/15/2033 (a)	10,000	1,390
5.15%, 9/ 1/2036	1,000	685	0.00%, 1/15/2034 (a)	10,000	1,281
City of Oceanside CA AMBAC			0.00%, 1/15/2036 (a)	10,000	1,074
5.25%, 4/ 1/2016	1,575	1,624	0.00%, 1/15/2037 (a)	10,000	990
5.25%, 4/ 1/2018	1,500	1,508	0.00%, 1/15/2038 (a)	9,000	812
City of Pacifica CA AMBAC			Fresno Joint Powers Financing Authority FSA
5.00%, 10/ 1/2024	1,090	1,046	5.75%, 6/ 1/2026	2,000	2,008
City of Pasadena CA			Gilroy Unified School District/CA ASSURED
5.00%, 2/ 1/2033	2,000	1,781	GTY
City of Redding CA MBIA			5.00%, 4/ 1/2039	4,000	3,439
6.22%, 7/ 1/2022 (b)	2,135	2,708	Golden Valley Unified School District/CA FSA
City of Riverside CA MBIA			5.00%, 8/ 1/2041	3,555	3,149
5.50%, 9/ 1/2013	1,100	1,137	Golden West Schools Financing Authority
City of Sacramento CA			MBIA
5.00%, 9/ 2/2020	1,020	817	5.65%, 2/ 1/2012	685	731
City of San Jose CA AMBAC			Gonzales Redevelopment Agency/CA
5.00%, 3/ 1/2037	5,000	3,617	4.63%, 8/ 1/2011	1,000	969
City of San Jose CA FNMA			Hesperia Public Financing Authority/CA XLCA
5.88%, 3/ 1/2033	1,000	862	5.00%, 9/ 1/2037	2,775	2,170
City of Santa Rosa CA FHA			Hesperia Unified School District/CA
6.70%, 12/ 1/2024	4,040	4,042	5.00%, 9/ 1/2030 (c)	1,065	741
Coachella Redevelopment Agency			Hi-Desert Memorial Health Care District/CA
5.88%, 12/ 1/2028	2,000	1,597	5.50%, 10/ 1/2015	1,000	906
Contra Costa Community College District			Highland Redevelopment Agency/CA AMBAC
MBIA			5.00%, 12/ 1/2028	3,000	2,668
5.00%, 8/ 1/2029	3,000	2,808	Huntington Beach Union High School
Contra Costa Water District FSA			District/CA FSA
5.00%, 10/ 1/2018	1,520	1,537	5.00%, 8/ 1/2029	5,000	4,740
County of Alameda CA MBIA			Imperial CA FGIC
5.38%, 6/ 1/2009	255	257	5.00%, 10/15/2020	1,250	1,110
County of Riverside CA FGIC			Imperial Irrigation District/CA AMBAC
5.00%, 11/ 1/2025	1,160	1,096	5.50%, 7/ 1/2029	3,000	2,931
County of San Diego CA			Indio Redevelopment Agency/CA
5.00%, 9/ 1/2020	1,000	839	5.63%, 8/15/2035	2,605	2,397
Desert Hot Springs Redevelopment Agency			Irvine CA
Tax Allocation/CA			5.00%, 9/ 2/2025	1,125	851
5.60%, 9/ 1/2038	2,000	1,635	5.00%, 9/ 2/2026	1,285	961
Dinuba Financing Authority/CA			5.00%, 9/ 2/2029	1,500	1,067
5.38%, 9/ 1/2038	1,000	702	Irvine CA FSA
Eastern Municipal Water District/CA			2.15%, 9/ 2/2032	900	900
5.20%, 9/ 1/2037 (c)	750	515	Irvine Public Facilities & Infrastructure
Emeryville Public Financing Authority/CA			Authority/CA AMBAC
MBIA			5.00%, 9/ 2/2020	1,455	1,372
5.25%, 9/ 1/2015	1,265	1,297	5.00%, 9/ 2/2021	3,630	3,380
5.25%, 9/ 1/2017	1,400	1,412	5.00%, 9/ 2/2023	2,000	1,829
Fairfield Housing Authority/CA
5.63%, 9/ 1/2023	1,215	1,009

See accompanying notes

198

Schedule of Investments
California Municipal Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
TAX-EXEMPT BONDS (continued)			TAX-EXEMPT BONDS (continued)
California (continued)			California (continued)
Irvine Unified School District/CA			Riverside County Public Financing Authority
5.00%, 9/ 1/2026	$ 2,600 $	1,945	5.80%, 5/15/2029	$ 2,100 $	1,720
La Canada Unified School District MBIA			Rocklin Unified School District/CA FGIC
5.50%, 8/ 1/2028	1,825	1,812	0.00%, 8/ 1/2019 (a)	1,360	719
La Quinta Financing Authority AMBAC			0.00%, 8/ 1/2020 (a)	1,415	693
5.25%, 9/ 1/2024	1,000	981	0.00%, 8/ 1/2023 (a)	1,225	480
La Verne Public Financing Authority			Sacramento County Public Financing Authority
7.25%, 9/ 1/2026	1,500	1,458	ASSURED GTY
Lake Elsinore Public Financing Authority/CA			5.00%, 12/ 1/2038	3,000	2,588
5.80%, 9/ 2/2015	1,385	1,325	Sacramento Municipal Utility District FSA
Loma Linda CA			5.00%, 8/15/2024	3,000	2,907
5.00%, 12/ 1/2022	1,000	823	Saddleback Valley Unified School District/CA
Long Beach Bond Finance Authority AMBAC			FSA
5.25%, 11/ 1/2013	1,080	1,111	5.00%, 8/ 1/2029	4,000	3,792
5.00%, 8/ 1/2022	410	392	Salinas Valley Solid Waste Authority/CA
			AMBAC
Los Angeles Community Redevelopment
			5.25%, 8/ 1/2027	1,975	1,612
Agency/CA MBIA
5.40%, 7/ 1/2024	2,500	2,451	5.25%, 8/ 1/2031	2,000	1,580
Los Angeles State Building Authority/CA			San Bernardino Redevelopment Agency
MBIA			RADIAN
5.63%, 5/ 1/2011	1,500	1,508	5.00%, 9/ 1/2018	1,565	1,441
Morongo Band of Mission Indians			San Diego Redevelopment Agency/CA
5.50%, 3/ 1/2018 (e)(f)	1,925	1,691	6.40%, 9/ 1/2019	1,000	942
6.50%, 3/ 1/2028 (e)(f)	1,825	1,512	San Francisco City & County Airports
			Commission FSA-CR FGIC
Needles Public Utility Authority/CA
			5.00%, 5/ 1/2030	4,000	3,095
6.50%, 2/ 1/2022	2,785	2,516
			San Francisco City & County Airports
Oceanside Community Facilities District/CA
			Commission MBIA
5.50%, 9/ 1/2029	1,485	1,120
			5.25%, 5/ 1/2026	4,000	3,289
Ontario Redevelopment Financing
			San Jose Financing Authority MBIA
Authority/CA AMBAC
			5.00%, 9/ 1/2016	1,200	1,229
5.50%, 8/ 1/2016	1,055	1,110
			San Juan Unified School District/CA MBIA
Ontario Redevelopment Financing
			5.00%, 8/ 1/2027	3,780	3,637
Authority/CA MBIA
5.25%, 8/ 1/2016	1,060	1,075	Santa Maria Redevelopment Agency/CA
			AMBAC
Orange County Public Financing Authority/CA
			5.25%, 6/ 1/2015	1,085	1,127
AMBAC
5.38%, 6/ 1/2016	1,000	1,045	Sierra View Local Health Care District/CA
Oxnard Harbor District/CA			5.25%, 7/ 1/2032	1,500	1,173
5.75%, 8/ 1/2020	1,200	1,074	South Gate Public Financing Authority
			AMBAC
Palm Desert Financing Authority MBIA
			5.25%, 9/ 1/2022	2,090	1,978
5.00%, 8/ 1/2022	1,280	1,220
			South Gate Public Financing Authority XLCA
Perris Public Financing Authority/CA
			5.00%, 9/ 1/2016	2,075	2,078
5.30%, 10/ 1/2026	2,805	2,114
			South Tahoe Redevelopment Agency/CA
Pomona Public Financing Authority MBIA
			5.00%, 10/ 1/2031	1,000	689
5.00%, 2/ 1/2021	5,000	4,796
			Southern California Logistics Airport
Pomona Unified School District/CA MBIA
			Authority/CA
6.15%, 8/ 1/2030	1,000	999
			6.15%, 12/ 1/2043	1,900	1,570
Port of Oakland FGIC
			Stanton CA AMBAC
5.75%, 11/ 1/2029	5,000	4,279
			5.63%, 8/ 1/2029	850	860
Poway Redevelopment Agency/CA AMBAC
			State of California
5.38%, 6/15/2019	1,000	1,008
			4.60%, 12/ 1/2032 (d)	10,650	7,474
Rancho Mirage Joint Powers Financing
			5.70%, 12/ 1/2032	1,280	1,130
Authority/CA
5.00%, 7/ 1/2047 (c)	1,200	885	Stockton-East Water District/CA FGIC
			5.25%, 4/ 1/2022	1,780	1,587

See accompanying notes

199

Schedule of Investments
California Municipal Fund
October 31, 2008
		Principal		(a)	Non-Income Producing Security
		Amount	Value	(b)	Variable Rate. Rate shown is in effect at October 31, 2008.
		(000's)	(000's)	(c)	Security purchased on a when-issued basis.
TAX-EXEMPT BONDS (continued)				(d)	Security or portion of underlying security related to Inverse Floaters
					entered into by the Fund. See notes.
California (continued)				(e)	Security exempt from registration under Rule 144A of the Securities Act
Sunnyvale CA AMBAC					of 1933. These securities may be resold in transactions exempt from
5.50%, 10/ 1/2014	$ 1,000 $		988		registration, normally to qualified institutional buyers. Unless otherwise
5.50%, 10/ 1/2016		1,000	963		indicated, these securities are not considered illiquid. At the end of the
Sweetwater Union High School District FSA					period, the value of these securities totaled $4,242 or 1.33% of net
5.00%, 8/ 1/2029		3,000	2,823		assets.
				(f)	Security is Illiquid
Sweetwater Union High School District MBIA
				(g)	Floating rate securities. The interest rate(s) shown reflect the rates in
5.00%, 9/ 1/2020		1,225	1,155
					effect at October 31, 2008.
Tejon Ranch Public Facilities Finance
Authority/CA				Unrealized Appreciation (Depreciation)
5.63%, 9/ 1/2037		1,000	735
				The net federal income tax unrealized appreciation (depreciation) and federal tax cost
Temecula Redevelopment Agency/CA MBIA				of investments held by the fund as of the period end were as follows:
5.25%, 8/ 1/2036		3,270	3,016
Tobacco Securitization Authority of Northern				Unrealized Appreciation		$ 2,234
California/CA
				Unrealized Depreciation			(59,008)
5.38%, 6/ 1/2038		10,000	6,340
				Net Unrealized Appreciation (Depreciation)			(56,774)
5.50%, 6/ 1/2045		9,080	5,686
				Cost for federal income tax purposes			372,872
Tobacco Securitization Authority of Southern
				All dollar amounts are shown in thousands (000's)
California/CA
5.00%, 6/ 1/2037		3,000	1,794
5.13%, 6/ 1/2046 (d)		13,000	7,602		Portfolio Summary (unaudited)
Torrance CA				Sector			Percent
6.00%, 6/ 1/2022		1,000	975	Insured			50.72%
Tracy Area Public Facilities Financing Agency				Revenue			38.38%
MBIA				Revenue - Special Tax			7.65%
5.88%, 10/ 1/2013		985	1,033	Tax Allocation			3.22%
				General Obligation			2.69%
Turlock CA				Prerefunded			1.29%
5.13%, 10/15/2031		1,000	728	Certificate Participation			0.56%
5.38%, 10/15/2034		1,900	1,422	Liability for Floating Rate Notes Issued			(5.51%)
5.13%, 10/15/2037		1,000	696	Other Assets in Excess of Liabilities, Net			1.00%
Tustin Community Facilities District				TOTAL NET ASSETS			100.00%
5.38%, 9/ 1/2029		1,000	746
Walnut Public Financing Authority/CA
AMBAC
5.38%, 9/ 1/2022		2,305	2,308
			332,693
Virgin Islands (0.32%)
Virgin Islands Public Finance Authority
6.38%, 10/ 1/2019		1,000	1,012
TOTAL TAX-EXEMPT BONDS		$ 333,705
Total Investments			333,705
LIABILITY FOR FLOATING RATE NOTES ISSUED IN
CONJUNCTION WITH SECURITIES HELD (-5.51%)
Notes with interest rates ranging from 1.91%
to 2.07% at October 31, 2008 and
contractual maturity of collateral from
2013 to 2046. (g)		(17,607)	(17,607)
Total Net Investments		$ 316,098
Other Assets in Excess of Liabilities, Net - 1.00%			3,207
TOTAL NET ASSETS - 100.00%		$ 319,305

See accompanying notes

200

Schedule of Investments
Disciplined LargeCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.08%)			COMMON STOCKS (continued)
Aerospace & Defense (1.73%)			Coal (continued)
General Dynamics Corp	203,514 $	12,276	Peabody Energy Corp	242,961 $	8,385
Lockheed Martin Corp	154,792	13,165			12,349
Raytheon Co	186,866	9,551
			Coatings & Paint (0.17%)
		34,992	Sherwin-Williams Co/The	60,799	3,460
Aerospace & Defense Equipment (1.37%)
Goodrich Corp	137,880	5,041	Commercial Banks (0.93%)
United Technologies Corp	412,759	22,685	Bank of Hawaii Corp	107,208	5,437
		27,726	BB&T Corp	181,285	6,499
			Commerce Bancshares Inc	146,815	6,941
Agricultural Chemicals (1.22%)
					18,877
CF Industries Holdings Inc	68,482	4,396
Monsanto Co	228,653	20,345	Commercial Services - Finance (0.98%)
		24,741	Mastercard Inc	52,273	7,727
			Visa Inc	90,291	4,998
Airlines (0.19%)
			Western Union Co/The	465,530	7,104
Southwest Airlines Co	322,889	3,804
					19,829
Apparel Manufacturers (0.16%)			Computer Aided Design (0.21%)
VF Corp	58,909	3,246	Autodesk Inc (a)	203,519	4,337
Applications Software (1.80%)			Computer Services (0.10%)
Compuware Corp (a)	154,946	989	Accenture Ltd	63,844	2,110
Microsoft Corp	1,583,039	35,349
		36,338	Computers (4.74%)
			Apple Inc (a)	257,979	27,756
Athletic Footwear (0.50%)
			Hewlett-Packard Co	790,642	30,266
Nike Inc	175,624	10,121
			IBM Corp	406,505	37,793
					95,815
Beverages - Non-Alcoholic (2.11%)
Coca-Cola Co/The	350,743	15,454	Computers - Integrated Systems (0.12%)
Coca-Cola Enterprises Inc	629,990	6,332	Brocade Communications Systems Inc (a)	643,761	2,427
Pepsi Bottling Group Inc	316,965	7,328
PepsiCo Inc	238,138	13,576	Consumer Products - Miscellaneous (0.45%)
		42,690	Kimberly-Clark Corp	149,742	9,178
Brewery (0.72%)			Containers - Metal & Glass (0.09%)
Anheuser-Busch Cos Inc	235,145	14,586	Crown Holdings Inc (a)	94,650	1,910
Cable TV (0.59%)			Cosmetics & Toiletries (2.74%)
Comcast Corp - Class A	152,804	2,408	Colgate-Palmolive Co	70,089	4,399
DIRECTV Group Inc/The (a)	433,896	9,498	Procter & Gamble Co	789,437	50,950
		11,906			55,349
Chemicals - Diversified (0.12%)			Diversified Banking Institutions (4.10%)
FMC Corp	53,568	2,332	Bank of America Corp	674,048	16,292
			Citigroup Inc	613,136	8,369
Chemicals - Specialty (0.38%)
			Goldman Sachs Group Inc/The	156,312	14,459
Sigma-Aldrich Corp	98,460	4,318
			JP Morgan Chase & Co	1,063,840	43,883
Terra Industries Inc	150,703	3,314
					83,003
		7,632
			Diversified Financial Services (0.26%)
Coal (0.61%)
			IntercontinentalExchange Inc (a)	61,779	5,286
Massey Energy Co	171,687	3,964

See accompanying notes

201

Schedule of Investments
Disciplined LargeCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Diversified Manufacturing Operations (2.71%)			Fiduciary Banks (1.67%)
3M Co	52,325 $	3,364	Bank of New York Mellon Corp/The	411,803 $	13,425
General Electric Co (b)	2,158,411	42,111	Northern Trust Corp	160,222	9,022
Honeywell International Inc	305,660	9,307	State Street Corp	262,407	11,375
		54,782			33,822
Electric - Integrated (3.25%)			Finance - Other Services (0.25%)
American Electric Power Co Inc	311,617	10,168	Nasdaq OMX Group, Inc (a)	158,630	5,149
CMS Energy Corp	671,988	6,888
FirstEnergy Corp	216,599	11,298	Food - Miscellaneous/Diversified (1.77%)
FPL Group Inc	238,700	11,276	General Mills Inc	168,654	11,425
PG&E Corp	98,461	3,611	HJ Heinz Co	252,857	11,080
Progress Energy Inc	99,170	3,904	Kraft Foods Inc	208,457	6,074
Public Service Enterprise Group Inc	13,585	383	Sara Lee Corp	649,783	7,265
Southern Co	407,106	13,980			35,844
Xcel Energy Inc	246,519	4,294	Food - Retail (0.50%)
		65,802	Kroger Co/The	369,418	10,144
Electric Products - Miscellaneous (0.70%)
			Gold Mining (0.01%)
Ametek Inc	147,781	4,913
			Newmont Mining Corp	7,421	195
Emerson Electric Co	282,150	9,235
		14,148	Health Care Cost Containment (0.39%)
Electronic Components - Semiconductors (1.66%)			McKesson Corp	215,919	7,944
Altera Corp	400,417	6,947
Intel Corp	1,005,560	16,089	Human Resources (0.05%)
			Hewitt Associates Inc (a)	36,160	1,009
MEMC Electronic Materials Inc (a)	165,119	3,035
QLogic Corp (a)	620,759	7,462
			Instruments - Scientific (0.47%)
		33,533
			Thermo Fisher Scientific Inc (a)	235,252	9,551
Electronic Connectors (0.23%)
Amphenol Corp	165,608	4,745	Insurance Brokers (0.11%)
			Aon Corp	50,920	2,154
Electronic Forms (0.47%)
Adobe Systems Inc (a)	358,765	9,558	Internet Security (0.45%)
			Symantec Corp (a)	719,112	9,046
Electronics - Military (0.30%)
L-3 Communications Holdings Inc	74,876	6,078	Investment Management & Advisory Services (0.20%)
			Ameriprise Financial Inc	188,055	4,062
Engineering - Research & Development Services (0.62%)
Fluor Corp	146,119	5,835	Life & Health Insurance (0.96%)
Jacobs Engineering Group Inc (a)	184,746	6,730	Aflac Inc	203,211	8,998
		12,565	Torchmark Corp	26,057	1,089
			Unum Group	586,349	9,235
Engines - Internal Combustion (0.23%)
					19,322
Cummins Inc	178,708	4,620
			Machinery - Construction & Mining (0.12%)
Enterprise Software & Services (1.37%)			Bucyrus International Inc	103,284	2,492
BMC Software Inc (a)	197,350	5,095
Oracle Corp (a)	1,240,125	22,682	Machinery - Farm (0.16%)
		27,777	AGCO Corp (a)	102,097	3,218
Entertainment Software (0.24%)			Machinery - Pumps (0.17%)
Activision Blizzard Inc (a)	389,745	4,856	Flowserve Corp	61,947	3,526

See accompanying notes

202

Schedule of Investments
Disciplined LargeCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Medical - Biomedical/Gene (2.74%)			Oil & Gas Drilling (1.12%)
Amgen Inc (a)	419,658 $	25,133	Diamond Offshore Drilling Inc	23,546 $	2,091
Biogen Idec Inc (a)	192,464	8,189	ENSCO International Inc	20,893	794
Gilead Sciences Inc (a)	406,703	18,647	Helmerich & Payne Inc	134,186	4,604
Invitrogen Corp (a)	120,889	3,481	Transocean Inc	184,304	15,174
		55,450			22,663
Medical - Drugs (3.47%)			Oil Company - Exploration & Production (2.35%)
Abbott Laboratories	528,286	29,135	Apache Corp	179,202	14,754
Bristol-Myers Squibb Co	646,021	13,276	Devon Energy Corp	168,753	13,645
Merck & Co Inc/NJ	177,829	5,504	Occidental Petroleum Corp	343,504	19,078
Pfizer Inc	1,090,289	19,309			47,477
Wyeth	90,667	2,917
			Oil Company - Integrated (6.83%)
		70,141	Chevron Corp	507,827	37,884
Medical - HMO (0.54%)			ConocoPhillips	210,124	10,930
Aetna Inc	339,519	8,444	Exxon Mobil Corp	1,148,258	85,109
Humana Inc (a)	86,558	2,561	Hess Corp	3,683	222
		11,005	Murphy Oil Corp	79,918	4,047
					138,192
Medical Instruments (0.90%)
Intuitive Surgical Inc (a)	25,369	4,383	Oil Field Machinery & Equipment (1.12%)
Medtronic Inc	34,659	1,398	Cameron International Corp (a)	455,712	11,056
St Jude Medical Inc (a)	326,510	12,417	National Oilwell Varco Inc (a)	387,322	11,577
		18,198			22,633
Medical Laboratory & Testing Service (0.02%)			Oil Refining & Marketing (0.23%)
Quest Diagnostics Inc	8,868	415	Valero Energy Corp	224,813	4,627
Medical Products (4.39%)			Pharmacy Services (0.70%)
Baxter International Inc	289,481	17,511	Express Scripts Inc (a)	232,458	14,089
Becton Dickinson & Co	148,483	10,305
Covidien Ltd	283,891	12,573	Property & Casualty Insurance (1.41%)
Johnson & Johnson (b)	788,479	48,365	Chubb Corp	265,808	13,774
		88,754	Travelers Cos Inc/The	348,465	14,827
					28,601
Multi-Line Insurance (0.20%)
Assurant Inc	155,548	3,963	Regional Banks (2.90%)
			PNC Financial Services Group Inc	218,627	14,576
Multimedia (0.92%)			US Bancorp	270,009	8,049
Time Warner Inc	122,466	1,236	Wells Fargo & Co	1,059,658	36,081
Viacom Inc (a)	9,595	194			58,706
Walt Disney Co/The	659,752	17,087
			REITS - Apartments (0.30%)
		18,517	AvalonBay Communities Inc	84,577	6,007
Networking Products (1.52%)
Cisco Systems Inc (a)	1,728,962	30,724	REITS - Office Property (0.31%)
			Boston Properties Inc	88,457	6,270
Office Automation & Equipment (0.25%)
Pitney Bowes Inc	202,988	5,030	Retail - Apparel & Shoe (0.39%)
			Gap Inc/The	398,764	5,160
Oil - Field Services (0.33%)			Guess ? Inc	128,283	2,793
Baker Hughes Inc	5,851	205			7,953
Schlumberger Ltd	123,471	6,377
		6,582

See accompanying notes

203

Schedule of Investments
Disciplined LargeCap Blend Fund
October 31, 2008
	Shares	Value			Shares	Value
	Held	(000's)			Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Auto Parts (0.46%)			Tools - Hand Held (0.35%)
Autozone Inc (a)	72,318 $	9,205	Snap-On Inc		193,660 $	7,156
Retail - Computer Equipment (0.36%)			Toys (0.49%)
GameStop Corp (a)	266,679	7,304	Hasbro Inc		338,078	9,828
Retail - Discount (2.09%)			Transport - Rail (1.38%)
Big Lots Inc (a)	306,263	7,482	Burlington Northern Santa Fe Corp		89,389	7,961
Family Dollar Stores Inc	42,806	1,152	CSX Corp		174,717	7,988
Wal-Mart Stores Inc	601,242	33,555	Norfolk Southern Corp		201,154	12,057
		42,189				28,006
Retail - Drug Store (0.18%)			Transport - Services (0.07%)
CVS/Caremark Corp	116,755	3,579	United Parcel Service Inc		28,491	1,504
Retail - Major Department Store (0.55%)			Vitamins & Nutrition Products (0.12%)
TJX Cos Inc	416,883	11,156	Herbalife Ltd		100,291	2,450
Retail - Restaurants (1.72%)			Web Portals (0.67%)
McDonald's Corp	442,211	25,617	Google Inc (a)		37,814	13,589
Yum! Brands Inc	314,911	9,136
		34,753	Wireless Equipment (0.65%)
			American Tower Corp (a)		196,000	6,333
Savings & Loans - Thrifts (0.52%)
			Qualcomm Inc		177,507	6,791
Hudson City Bancorp Inc	562,844	10,587
						13,124
Schools (0.45%)			TOTAL COMMON STOCKS		$ 1,923,511
Apollo Group Inc (a)	131,393	9,133			Principal
					Amount	Value
Steel - Producers (1.04%)
					(000's)	(000's)
AK Steel Holding Corp	254,360	3,540
			REPURCHASE AGREEMENTS (4.92%)
Nucor Corp	329,049	13,330
			Money Center Banks (4.92%)
United States Steel Corp	113,144	4,173
			Investment in Joint Trading Account; Bank
		21,043	of America Repurchase Agreement;
Telecommunication Equipment (0.21%)			0.15%; dated 10/31/2008 maturing
			11/03/2008 (collateralized by Sovereign
Harris Corp	118,601	4,264	Agency Issues; $93,457,000; 2.75% -
			5.38%; dated 11/28/08 - 02/13/17)	$ 90,735$		90,734
Telecommunication Services (0.30%)			Investment in Joint Trading Account;
Embarq Corp	200,206	6,006	Morgan Stanley Repurchase Agreement;
			0.15%; dated 10/31/2008 maturing
Telephone - Integrated (2.50%)			11/03/2008 (collateralized by Sovereign
AT&T Inc	1,079,864	28,908	Agency Issues; $8,966,000; 2.63% -
			4.63%; dated 09/09/09 - 06/12/15)		8,705	8,705
CenturyTel Inc	149,943	3,765
						99,439
Verizon Communications Inc	451,767	13,404
Windstream Corp	594,525	4,465	TOTAL REPURCHASE AGREEMENTS		$ 99,439
		50,542	Total Investments		$ 2,022,950
Tobacco (2.58%)			Other Assets in Excess of Liabilities, Net - 0.00%			3
Altria Group Inc	928,572	17,820	TOTAL NET ASSETS - 100.00%		$ 2,022,953
Philip Morris International Inc	633,707	27,547
Reynolds American Inc	137,729	6,743
		52,110

See accompanying notes

204

Schedule of Investments
Disciplined LargeCap Blend Fund

October 31, 2008

(a)	Non-Income Producing Security
(b)	Security or a portion of the security was pledged to cover margin requirements for futures contracts. At the end of the period, the value of these securities totaled $14,575 or 0.72% of net assets.

Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 57,954
Unrealized Depreciation		(564,356)
Net Unrealized Appreciation (Depreciation)		(506,402)
Cost for federal income tax purposes		2,529,352
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Consumer, Non-cyclical		25.62%
Financial		19.04%
Energy		12.58%
Technology		10.96%
Industrial		10.73%
Communications		7.80%
Consumer, Cyclical		7.08%
Utilities		3.25%
Basic Materials		2.94%
Other Assets in Excess of Liabilities, Net		0.00%
TOTAL NET ASSETS		100.00%
Other Assets Summary (unaudited)
Asset Type		Percent
Futures		4.81%
		Futures Contracts
					Current	Unrealized
				Original	Market	Appreciation/
Type		Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500; December 2008		Buy	402	$ 96,215	$ 97,214	$ 999
All dollar amounts are shown in thousands (000's)

See accompanying notes

205

Schedule of Investments
Diversified International Fund

October 31, 2008

	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (93.41%)			COMMON STOCKS (continued)
Advertising Sales (0.05%)			Auto/Truck Parts & Equipment - Replacement (0.03%)
Teleperformance	28,449 $	614	Weichai Power Co Ltd	177,000 $	422
Advertising Services (0.02%)			Beverages - Wine & Spirits (0.04%)
Aegis Group PLC	219,789	233	Central European Distribution Corp (a)	16,592	478
Aerospace & Defense (0.53%)			Bicycle Manufacturing (0.25%)
BAE Systems PLC	1,067,662	5,993	Shimano Inc	106,500	3,046
VT Group PLC	75,395	607
		6,600	Brewery (0.62%)
			Asahi Breweries Ltd	326,300	5,386
Aerospace & Defense Equipment (0.41%)
			Cia de Bebidas das Americas ADR	10,824	460
Cobham PLC	1,677,180	5,089
			Fomento Economico Mexicano SAB de CV	286,405	725
			Hite Brewery Co Ltd (a)	8,515	1,138
Agricultural Chemicals (0.66%)
Agruim Inc (a)	79,500	3,045			7,709
Syngenta AG	27,604	5,160	Building - Heavy Construction (0.45%)
		8,205	ACS Actividades de Construccion y
			Servicios SA	140,594	5,220
Agricultural Operations (0.05%)
			Trevi Finanziaria SpA	31,121	362
Hokuto Corp	21,400	567
					5,582
Airlines (0.04%)			Building - Maintenance & Service (0.31%)
Tam SA ADR (a)	48,716	515	Aeon Delight Co Ltd	19,800	488
			Babcock International Group	534,965	3,347
Apparel Manufacturers (0.02%)					3,835
Benetton Group SpA	35,312	249
			Building & Construction - Miscellaneous (0.44%)
Appliances (0.03%)			GS Engineering & Construction Corp	11,200	532
SEB SA	11,669	392	Koninklijke Boskalis Westminster NV	116,633	3,850
			Murray & Roberts Holdings Ltd	104,814	710
Applications Software (0.32%)			Orascom Construction Industries	11,977	400
Check Point Software Technologies Ltd (a)	65,531	1,325			5,492
Infosys Technologies Ltd ADR	67,903	1,991
			Building & Construction Products -
NSD CO LTD	22,300	166	Miscellaneous (0.03%)
Satyam Computer Services Ltd ADR	29,426	463	Bauer AG	9,919	354
		3,945
			Building Products - Cement & Aggregate (0.04%)
Audio & Video Products (0.69%)
			Adelaide Brighton Ltd	220,304	335
Foster Electric Co Ltd	19,728	212
			Cemex SAB de CV (a)	277,877	209
Matsushita Electric Industrial Co Ltd	522,000	8,406
					544
		8,618
			Cable TV (0.03%)
Auto - Car & Light Trucks (1.51%)
			SKY Perfect JSAT Holdings Inc	1,091	412
Daihatsu Motor Co Ltd	316,000	2,340
Denway Motors Ltd	1,970,000	491	Cellular Telecommunications (2.19%)
Honda Motor Co Ltd	393,800	9,792	Advanced Info Service PCL (a)(b)	515,800	1,037
Toyota Motor Corp	155,852	6,086	America Movil SAB de CV ADR	103,123	3,191
		18,709	China Mobile Ltd	389,639	3,430
Auto/Truck Parts & Equipment - Original (0.15%)			China Unicom Hong Kong Ltd	1,066,156	1,522
Hyundai Mobis	23,815	1,398	Hutchison Telecommunications International
Landi Renzo SpA	60,127	226	Ltd (a)	2,775,825	2,999
Musashi Seimitsu Industry Co Ltd	21,500	270	Mobile Telesystems OJSC ADR	23,949	938
			MTN Group Ltd	130,075	1,461
		1,894

See accompanying notes

206

Schedule of Investments
Diversified International Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Cellular Telecommunications (continued)			Commercial Banks (continued)
NTT DoCoMo Inc	7,031 $	11,151	Royal Bank of Canada (a)	240,700 $	9,354
SK Telecom Co Ltd ADR	84,274	1,450	Sberank RF GDR (a)(b)	4,954	883
		27,179	Seven Bank Ltd	1,329	3,828
			Siam Commercial Bank Public (a)(b)	449,400	673
Chemicals - Diversified (0.39%)
K+S AG	63,575	2,472	Standard Bank Group Ltd	101,462	806
Nufarm Ltd	248,489	1,798	Standard Chartered PLC	385,012	6,357
Tessenderlo Chemie NV	8,952	354	State Bank of India Ltd	11,149	514
Toagosei Co Ltd	127,000	273	Sumitomo Mitsui Financial Group Inc	1,584	6,350
		4,897	Suruga Bank Ltd	315,000	2,965
			Svenska Handelsbanken AB	237,018	4,356
Chemicals - Other (0.02%)			Torinto Dominion Bank (a)	170,600	8,056
Nippon Carbon Co Ltd	91,786	215	Turkiye Is Bankasi	354,079	1,007
			Turkiye Vakiflar Bankasi Tao	532,887	520
Chemicals - Specialty (0.18%)
			Unibanco - Uniao de Bancos Brasileiros SA	13,244	835
Lintec Corp	17,014	199
			United Overseas Bank Ltd	859,000	7,766
SGL Carbon AG (a)	101,727	1,997
			Yamaguchi Financial Group Inc	29,000	277
		2,196
					128,724
Coal (0.12%)
Banpu Public Co Ltd (a)(b)	79,800	382	Commercial Services (0.25%)
			Aggreko PLC	340,647	2,394
Exxaro Resources Ltd	66,833	441
			Daiseki Co Ltd	30,900	704
Felix Resources Ltd	24,481	195
					3,098
MacArthur Coal Ltd	25,944	105
Straits Asia Resources Ltd	175,000	117	Computer Data Security (0.28%)
Tambang Batubara Bukit Asam Tbk PT	432,500	217	Gemalto NV (a)	124,974	3,501
		1,457
			Computer Services (0.02%)
Commercial Banks (10.37%)			Alten Ltd (a)	10,391	262
Alpha Bank AE	350,314	5,115
Banco do Brasil SA	87,169	575	Computers (0.23%)
Banco Santander SA	1,225,913	13,258	Acer Inc	1,034,285	1,334
Bangkok Bank Public Co (a)(b)	354,000	715	HTC Corp	45,000	534
Bank of China Ltd	4,779,000	1,395	Quanta Computer Inc	917,000	965
Bank of Kyoto Ltd/The	669,000	7,037			2,833
Bank of Novia Scotia (a)	203,200	6,776
			Computers - Integrated Systems (0.02%)
Bank Rakyat Indonesia	2,129,500	652
			Ingenico	14,005	219
BOC Hong Kong Holdings Ltd	3,384,500	3,875
Canadian Western Bank	3,338	51	Computers - Peripheral Equipment (0.01%)
China Construction Bank Corp	4,809,000	2,386	Ferrotec Corp	16,300	180
Commercial Bank of Qatar (a)(b)	178,675	536
DnB NOR ASA	437,061	2,533	Consulting Services (0.03%)
Hang Seng Bank Ltd	328,100	4,094	Bureau Veritas SA	10,741	383
Industrial and Commercial Bank of China
Asia Ltd	216,000	228	Cosmetics & Toiletries (0.02%)
Industrial and Commercial Bank of China Ltd	4,185,000	1,969	Oriflame Cosmetics SA	8,925	279
Intesa Sanpaolo SpA	2,391,216	8,752
Komercni Banka AS	6,426	978	Distribution & Wholesale (0.02%)
			Matsuda Sangyo Co Ltd	22,770	261
Laurentian Bank of Canada	7,300	248
Nordea Bank AB	908,000	7,278
			Diversified Banking Institutions (3.49%)
Oversea-Chinese Banking Corp	1,519,000	5,136
			Barclays PLC	1,063,208	3,036
Powszechna Kasa Oszczednosci Bank Polski
			BNP Paribas	160,509	11,589
SA	52,223	590

See accompanying notes

207

Schedule of Investments
Diversified International Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Diversified Banking Institutions (continued)			Electric - Integrated (continued)
HSBC Holdings PLC	1,864,487 $	22,091	Cia Paranaense de Energia	86,600 $	952
Mitsubishi UFJ Financial Group Inc	836,100	5,254	E.ON AG	358,021	13,702
UniCredito Italiano SpA	542,045	1,327	Enel SpA	1,442,215	9,649
		43,297	Fortum Oyj	230,591	5,667
			RWE AG	91,496	7,609
Diversified Financial Services (0.29%)
First Financial Holding Co Ltd	396	-	Scottish & Southern Energy PLC	275,518	5,401
Fubon Financial Holding Co Ltd	2,317,000	1,405	Tenaga Nasional BHD	356,800	606
Hitachi Capital Corp	32,274	258			44,170
International Personal Finance	155,784	353	Electric - Transmission (0.34%)
KB Financial Group Inc (a)	47,538	1,178	Terna Rete Elettrica Nazionale SpA	1,289,777	4,160
SinoPac Financial Holdings Co Ltd	2,121,000	450
		3,644	Electric Products - Miscellaneous (0.54%)
			LG Electronics Inc	18,941	1,414
Diversified Manufacturing Operations (0.13%)
			Mitsubishi Electric Corp	761,000	4,718
Cookson Group PLC	389,603	1,263
			Vossloh AG	7,486	570
Ten Cate NV	14,102	299
					6,702
		1,562
			Electronic Components - Miscellaneous (0.09%)
Diversified Minerals (1.33%)
			Chemring Group PLC	17,717	455
African Rainbow Minerals Ltd	25,912	265
			Hon Hai Precision Industry Co Ltd	181,507	438
Anglo American PLC	195,880	4,918
			Hosiden Corp	21,500	226
BHP Billiton Ltd	167,549	3,219
					1,119
BHP Billiton PLC	166,990	2,838
Mitsui Mining Co Ltd	168,500	322	Electronic Components - Semiconductors (0.40%)
Pan Australian Resources Ltd (a)	566,436	82	MediaTek Inc	181,000	1,621
Straits Resources Ltd	82,253	72	Samsung Electronics Co Ltd	8,047	3,393
Tek Cominco Limited (a)	192,300	1,914			5,014
Xstrata PLC	165,442	2,830	E-Marketing & Information (0.04%)
		16,460	CyberAgent Inc	537	479
Diversified Operations (1.78%)
			Energy (0.04%)
GEA Group AG	214,860	3,096
			Centennial Coal Company Ltd	185,102	435
Groupe Bruxelles Lambert SA	77,868	5,720
GS Holdings Corp	20,191	403	Engineering - Research & Development Services (0.04%)
Haci Omer Sabanci Holding AS ADR	3	-	Imtech NV	13,491	206
Hutchison Whampoa Ltd	834,000	4,507	WSP Group PLC	64,220	300
Inmarsat PLC	322,590	2,201			506
LG Corp	20,683	828
			Enterprise Software & Services (1.02%)
Mitie Group	241,542	736
			Autonomy Corp PLC (a)	295,736	4,703
Noble Group Ltd	3,644,400	2,653
			Aveva Group PLC	22,383	286
Shanghai Industrial Holdings Ltd	370,000	588
			Axon Group PLC	47,666	487
Wharf Holdings Ltd	708,972	1,415
			Hitachi Software Engineering Co Ltd	26,200	369
		22,147
			Open Text Corp (a)	9,500	241
E-Commerce - Services (0.43%)			SAP AG	176,107	6,216
Rakuten Inc	10,701	5,305	Temenos Group AG (a)	32,886	412
					12,714
Electric - Generation (0.08%)
CEZ	22,233	972	Entertainment Software (0.26%)
			UBISOFT Entertainment (a)	62,158	3,286
Electric - Integrated (3.56%)
Atco Ltd	17,900	584

See accompanying notes

208

Schedule of Investments
Diversified International Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Feminine Health Care Products (0.09%)			Gas - Distribution (continued)
Hengan International Group Co Ltd	410,000 $	1,144	Korea Gas Corp	19,815 $	746
					10,628
Finance - Credit Card (0.20%)
			Gold Mining (0.52%)
Aeon Credit Service Co Ltd	173,654	1,850
			Barrick Gold Corp. (a)	268,800	6,146
Redecard SA	61,200	664
			Red Back Mining Inc (a)	73,862	291
		2,514
					6,437
Finance - Investment Banker & Broker (0.36%)
			Import & Export (1.78%)
Mediobanca SpA	339,599	3,877
			ITOCHU Corp	981,000	5,184
Tullett Prebon PLC	112,595	431
			Marubeni Corp	844,000	3,279
Van der Moolen Holding NV (a)	50,940	174
			Mitsubishi Corp	493,900	8,279
		4,482
			Mitsui & Co Ltd	550,000	5,329
Finance - Mortgage Loan/Banker (0.06%)					22,071
Housing Development Finance Corp	20,651	750
			Industrial Audio & Video Products (0.03%)
Finance - Other Services (0.42%)			EVS Broadcast Equipment SA	6,555	423
Grupo Financiero Banorte SAB de CV	314,500	576
			Industrial Automation & Robots (0.01%)
IG Group Holdings PLC	879,119	4,111
			Manz Automation AG (a)	1,040	97
Intermediate Capital Group PLC	17,683	275
Japan Securities Finance Co Ltd	64,500	297
			Industrial Gases (0.51%)
		5,259	Air Water Inc	48,000	452
Food - Catering (0.56%)			Linde AG	69,203	5,821
Compass Group PLC	1,494,515	6,956			6,273
			Instruments - Controls (0.02%)
Food - Miscellaneous/Diversified (3.06%)
			Rotork PLC	21,797	261
Fuji Oil Co Ltd	43,000	494
Maruha Nichiro Holdings Inc	181,000	276
			Internet Application Software (0.15%)
Nestle SA	666,763	25,928	Tencent Holdings Ltd	250,800	1,826
Nisshin Oillio Group Ltd/The	76,000	360
Nutreco Holding NV	13,363	426	Internet Content - Information & News (0.04%)
Unilever PLC	469,105	10,546	Kakaku.com Inc	188	553
		38,030
			Investment Companies (0.47%)
Food - Retail (1.98%)
			Investor AB	359,000	5,414
Casino Guichard Perrachon SA	48,229	3,371
			Pargesa Holding SA	5,488	421
Cia Brasileira de Distribuicao Grupo Pao de
Acucar ADR	24,895	745			5,835
Colruyt SA	21,472	4,826	Leisure & Recreation Products (0.03%)
Jeronimo Martins SGPS SA	678,791	3,464	Fields Corp	293	363
Koninklijke Ahold NV	629,298	6,756
WM Morrison Supermarkets PLC	1,208,171	5,149	Life & Health Insurance (0.93%)
X 5 Retail Group NV (a)	23,425	239	China Life Insurance Co Ltd	435,000	1,163
		24,550	Power Corp Of Canada	181,900	3,954
			Sanlam Ltd	604,072	991
Forestry (0.20%)
			T&D Holdings Inc	141,950	5,423
Sino-Forest Corp (a)	267,800	2,506
					11,531
Gambling (Non-Hotel) (0.03%)			Machinery - Construction & Mining (0.02%)
Paddy Power PLC	25,240	430	Danieli & Co SpA	16,553	206
Gas - Distribution (0.86%)
GDF Suez	222,003	9,882

See accompanying notes

209

Schedule of Investments
Diversified International Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Machinery - Electrical (0.04%)			Metal - Diversified (0.82%)
Konecranes Oyj	25,667 $	436	Nippon Denko Co Ltd	48,000 $	220
			Rio Tinto Ltd	61,933	3,204
Machinery - General Industry (0.06%)			Rio Tinto PLC	145,078	6,779
Bucher Industries AG	4,125	446			10,203
STX Engine Co Ltd	22,720	249
			Metal - Iron (0.02%)
		695
			Labrador Iron Ore Royalty Income Fund	10,300	283
Machinery Tools & Related Products (0.04%)
Gildemeister AG	30,578	298	Metal Processors & Fabrication (0.04%)
Meyer Burger Technology AG (a)	1,708	238	Jiangxi Copper Co Ltd	935,000	460
		536
			Miscellaneous Manufacturers (0.02%)
Medical - Biomedical/Gene (0.42%)
			Faiveley SA	4,052	239
CSL Ltd/Australia	204,000	4,961
			RHI AG (a)	1,744	27
Intercell AG (a)	9,163	257
					266
		5,218
			Mortgage Banks (0.04%)
Medical - Drugs (9.36%)
			Home Capital Group Inc	23,500	544
Actelion Ltd (a)	86,652	4,578
Astellas Pharma Inc	152,400	6,138	Multi-Line Insurance (2.29%)
AstraZeneca PLC	334,567	14,184	ACE Ltd	69,263	3,973
China Pharmaceutical Group Ltd	2,298,000	453	AXA SA	185,239	3,539
Cipla Ltd/India	214,159	779	Baloise Holding AG	75,274	4,024
GlaxoSmithKline PLC	647,094	12,445	Ping An Insurance Group Co of China Ltd	231,500	990
Grifols SA	214,999	4,279	Sampo Oyj	396,479	7,945
Hisamitsu Pharmaceutical Co Inc	118,900	4,956	Zurich Financial Services AG	38,949	7,902
Mitsubishi Tanabe Pharma Corp	461,000	4,852			28,373
Nichi-iko Pharmaceutical Co Ltd	15,400	325
			Multimedia (0.85%)
Novartis AG	423,487	21,495
			Vivendi	405,558	10,601
Novo Nordisk A/S	182,850	9,801
Roche Holding AG	126,869	19,402	Non-Ferrous Metals (0.03%)
Shire PLC	315,074	4,131	Korea Zinc Co Ltd	6,128	307
Takeda Pharmaceutical Co Ltd	167,600	8,327
		116,145	Oil - Field Services (0.65%)
			Fugro NV	75,964	2,714
Medical - Generic Drugs (0.29%)
			John Wood Group PLC	552,710	2,139
Teva Pharmaceutical Industries Ltd ADR	84,016	3,603
			Petrofac Ltd	466,862	3,219
Medical - Nursing Homes (0.03%)					8,072
Orpea (a)	12,481	406	Oil & Gas Drilling (0.19%)
			Precision Drilling Trust (a)	218,500	2,357
Medical Instruments (0.02%)
Sysmex Corp	8,795	273	Oil Company - Exploration & Production (1.79%)
			Afren PLC (a)	277,869	214
Medical Products (0.09%)
			Birchcliff Energy Ltd (a)	33,300	164
Hogy Medical Co Ltd	7,800	431
			Canadian Oil Sands Trust	107,400	2,882
SSL International PLC	94,664	640
			CNOOC Ltd	2,509,000	2,060
		1,071
			Crescent Point Energy Trust (a)	24,294	563
Metal - Copper (0.08%)			EnCana Corp (a)	128,698	6,538
Antofagasta PLC	137,788	853	Gazprom OAO ADR	20,250	403
Quadra Mining Ltd (a)	40,400	168	JKX Oil & Gas PLC	60,109	147
		1,021	NAL Oil & Gas Trust	32,100	261

See accompanying notes

210

Schedule of Investments
Diversified International Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Oil Company - Exploration & Production			Property & Casualty Insurance (continued)
(continued)			Fairfax Financial Holdings Ltd (a)	14,100 $	3,872
NovaTek OAO	14,416 $	567
			Hiscox Ltd	72,937	289
Oao Gazprom (a)(b)(c)	6,868	351
			Millea Holdings Inc	278,900	8,603
Oao Gazprom (a)	160,541	3,283
			Mitsui Sumitomo Insurance Group Holdings
Origin Energy Ltd	371,429	3,895	Inc	246,000	6,836
PTT Exploration & Production PCL	89,300	218	RSA Insurance Group PLC	3,097,999	6,895
TriStar Oil and Gas Ltd (a)	46,600	396			27,608
Vermilion Energy Trust	10,339	256
			Publishing - Books (0.47%)
		22,198
			Reed Elsevier NV	439,013	5,868
Oil Company - Integrated (6.65%)
BG Group PLC	861,506	12,647	Real Estate Management & Services (0.08%)
BP PLC	2,259,928	18,431	Deutsche Euroshop AG	27,895	715
China Petroleum & Chemical Corp	1,046,000	687	PSP Swiss Property AG (a)	6,857	297
ENI SpA	475,122	11,340			1,012
LUKOIL ADR	57,972	2,249	Real Estate Operator & Developer (1.31%)
PetroChina Co Ltd	1,955,494	1,470	Brookfield Asset Management Inc (a)	290,638	5,088
Petroleo Brasileiro SA ADR	159,054	4,277	Cheung Kong Holdings Ltd	517,000	4,964
Royal Dutch Shell PLC - A shares	201,903	5,554	Cyrela Brazil Realty SA	86,700	413
Royal Dutch Shell PLC - B shares	228,706	6,201	Mitsui Fudosan Co Ltd	333,000	5,808
Sasol Ltd	65,414	1,931			16,273
StatoilHydro ASA	317,000	6,376
			REITS - Diversified (0.55%)
Total SA	206,087	11,337
			Eurocommercial Properties NV	20,712	686
		82,500
			Suntec Real Estate Investment Trust	541,258	259
Oil Field Machinery & Equipment (0.01%)			Unibail-Rodamco	38,826	5,823
Wellstream Holdings PLC	20,629	144			6,768
Oil Refining & Marketing (0.21%)			REITS - Office Property (0.02%)
Reliance Industries Ltd (c)	29,006	1,656	Cofinimmo	1,694	211
Tupras-Turkiye Petrol Rafinerileri AS	77,530	979
			REITS - Shopping Centers (0.06%)
		2,635
			Vastned Retail NV	13,778	705
Pastoral&Agricultural (0.01%)
Great Wall Enterprise Co	140,000	86	Retail - Apparel & Shoe (0.47%)
			Fast Retailing Co Ltd	55,243	5,889
Petrochemicals (0.01%)
PTT Chemical PLC (a)(b)	153,700	145	Retail - Automobile (0.04%)
			PT Astra International Tbk	662,000	551
Platinum (0.04%)
Impala Platinum Holdings Ltd	45,026	470	Retail - Bookstore (0.03%)
			WH Smith PLC	70,484	424
Power Converter & Supply Equipment (0.02%)
Canadian Solar Inc (a)	13,749	133	Retail - Building Products (0.04%)
Chloride Group PLC	54,422	116	Kohnan Shoji Co Ltd	42,400	464
		249
			Retail - Computer Equipment (0.22%)
Printing - Commercial (0.05%)			Game Group PLC	1,321,002	2,766
Nissha Printing Co Ltd	11,100	617
			Retail - Consumer Electronics (0.03%)
Property & Casualty Insurance (2.22%)			JB Hi-Fi Ltd	53,880	316
Beazley Group PLC	411,205	703
Dongbu Insurance Co Ltd	40,300	410

See accompanying notes

211

Schedule of Investments
Diversified International Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Convenience Store (1.31%)			Telecommunication Services (0.87%)
Circle K Sunkus Co Ltd	18,200 $	309	Bharti Airtel Ltd (a)	76,028 $	1,026
FamilyMart Co Ltd	223,500	8,855	Cable & Wireless PLC	2,414,002	4,788
Lawson Inc	144,000	7,038	Chunghwa Telecom Co Ltd	1,252,950	2,073
		16,202	Digi.Com BHD	143,900	749
			Telefonica O2 Czech Republic AS	37,713	806
Retail - Drug Store (0.36%)
Shoppers Drug Mart Corp	116,600	4,489	Telekomunikacja Polska SA	143,325	1,083
			Telenet Group Holding NV (a)	18,467	287
Retail - Major Department Store (0.03%)					10,812
David Jones Ltd	184,715	380	Telephone - Integrated (5.25%)
			Bezeq Israeli Telecommunication Corp Ltd	621,334	928
Retail - Music Store (0.03%)
			Deutsche Telekom AG	596,891	8,863
HMV Group PLC	259,427	413
			France Telecom SA	362,586	9,143
Rubber & Plastic Products (0.08%)			KDDI Corp	913	5,470
Ansell Ltd	78,675	662	Koninklijke (Royal) KPN NV	713,105	10,043
Kureha Corp	76,000	337	Magyar Telekom Telecommunications PLC	76,029	240
		999	Nippon Telegraph & Telephone Corp	2,179	8,892
			Tele Norte Leste Participacoes SA ADR	70,351	955
Rubber & Vinyl (0.03%)
			Telefonica SA	670,268	12,410
TSRC Corp	551,000	385
			Telefonos de Mexico SAB de CV ADR	68,705	1,231
Satellite Telecommunications (0.25%)			Telstra Corp Ltd	2,551,756	7,024
Eutelsat Communications	145,046	3,113			65,199
			Textile - Apparel (0.00%)
Schools (0.36%)			Far Eastern Textile Co Ltd	540	-
Benesse Corp	105,300	4,423
			Tobacco (2.29%)
Security Services (0.40%)			British American Tobacco PLC	361,046	9,909
G4S PLC	1,489,942	4,515	Imperial Tobacco Group PLC	309,511	8,301
Prosegur Cia de Seguridad SA	14,833	421	Japan Tobacco Inc	2,624	9,309
		4,936	KT&G Corp	15,069	967
Semiconductor Component - Integrated Circuits (0.20%)					28,486
Taiwan Semiconductor Manufacturing Co Ltd	1,703,075	2,478	Tools - Hand Held (0.03%)
			Hitachi Koki Co Ltd	44,024	338
Soap & Cleaning Products (0.67%)
Reckitt Benckiser Group PLC	196,200	8,277	Toys (0.89%)
			Nintendo Co Ltd	34,400	11,053
Steel - Producers (0.52%)
Angang Steel Co Ltd	398,000	244	Transport - Marine (0.24%)
ArcelorMittal	154,111	4,001	Euronav NV	10,266	150
Dongkuk Steel Mill Co Ltd	28,410	462	Inui Steamship Co Ltd	36,800	278
Evraz Group SA (b)	25,809	399	Jinhui Shipping & Transportation Ltd	38,528	52
POSCO ADR	19,381	1,302	Mitsui OSK Lines Ltd	479,700	2,505
		6,408			2,985
Steel - Specialty (0.35%)			Transport - Rail (0.79%)
Hitachi Metals Ltd	551,000	4,143	East Japan Railway Co	898	6,390
Sanyo Special Steel Co Ltd	86,000	246	MTR Corp	1,521,000	3,371
		4,389			9,761
Telecommunication Equipment (0.49%)			Transport - Services (0.55%)
Vodafone Group PLC	3,171,537	6,101	Firstgroup Plc	485,050	3,193

See accompanying notes

212

Schedule of Investments
Diversified International Fund
October 31, 2008
						Principal
	Shares	Value				Amount	Value
	Held	(000's)				(000's)	(000's)
COMMON STOCKS (continued)			SHORT TERM INVESTMENTS (3.81%)
Transport - Services (continued)			Commercial Paper (3.81%)
Koninklijke Vopak NV	11,103 $	360	Investment in Joint Trading Account; HSBC
Viterra Inc (a)	524,180	3,327	Funding
			0.25%, 11/ 3/2008		$ 23,666 $		23,666
		6,880
			Investment in Joint Trading Account;
Transport - Truck (0.04%)			Prudential Funding
Hitachi Transport System Ltd	38,200	511	0.30%, 11/ 3/2008			23,666	23,666
							47,332
Travel Services (0.02%)
			TOTAL SHORT TERM INVESTMENTS			$ 47,332
Flight Centre Ltd	31,941	299
			REPURCHASE AGREEMENTS (2.56%)
Water (0.07%)			Money Center Banks (2.56%)
Northumbrian Water Group PLC	164,515	827	Investment in Joint Trading Account; Bank
			of America Repurchase Agreement;
Water Treatment Systems (0.29%)			0.15%; dated 10/31/2008 maturing
Kurita Water Industries Ltd	159,900	3,648	11/03/2008 (collateralized by Sovereign
			Agency Issues; $32,746,000; 2.75% -
			5.38%; dated 11/28/08 - 02/13/17)		$ 31,792$		31,792
Web Portals (0.23%)
Iliad SA	2,936	232	TOTAL REPURCHASE AGREEMENTS			$ 31,792
LG Dacom Corp	60,740	859	Total Investments			$ 1,247,667
Netease.com ADR (a)	22,961	517	Liabilities in Excess of Other Assets, Net - (0.50)%				(6,180)
NHN Corp (a)	7,665	816	TOTAL NET ASSETS - 100.00%			$ 1,241,487
So-net Entertainment Corp	222	408
		2,832
			(a)	Non-Income Producing Security
TOTAL COMMON STOCKS	$ 1,159,678		(b)	Market value is determined in accordance with procedures established in
				good faith by the Board of Directors. At the end of the period, the value
PREFERRED STOCKS (0.72%)
				of these securities totaled $5,121 or 0.41% of net assets.
Commercial Banks (0.16%)			(c)	Security exempt from registration under Rule 144A of the Securities Act
Banco Itau Holding Financeira SA	179,501	1,939		of 1933. These securities may be resold in transactions exempt from
				registration, normally to qualified institutional buyers. Unless otherwise
Diversified Minerals (0.31%)				indicated, these securities are not considered illiquid. At the end of the
Cia Vale do Rio Doce	329,780	3,825		period, the value of these securities totaled $2,007 or 0.16% of net
				assets.
Electric - Distribution (0.09%)
			Unrealized Appreciation (Depreciation)
Eletropaulo Metropolitana Eletricidade de
Sao Paulo SA	90,340	1,109	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			of investments held by the fund as of the period end were as follows:
Food - Meat Products (0.01%)
			Unrealized Appreciation			$ 16,469
Sadia SA	80,608	161
			Unrealized Depreciation				(572,392)
Investment Companies (0.00%)			Net Unrealized Appreciation (Depreciation)				(555,923)
Lereko Mobility Pty Ltd	3,348	11	Cost for federal income tax purposes				1,803,590
			All dollar amounts are shown in thousands (000's)
Steel - Producers (0.15%)
Gerdau SA	89,500	569
Usinas Siderurgicas de Minas Gerais SA	97,829	1,251
		1,820
TOTAL PREFERRED STOCKS	$ 8,865

See accompanying notes

213

	Schedule of Investments
	Diversified International Fund
	October 31, 2008
Portfolio Summary (unaudited)
Country	Percent
Japan	19.94%
United Kingdom	18.85%
Switzerland	7.82%
United States	6.41%
France	6.28%
Canada	5.99%
Germany	4.17%
Netherlands	3.53%
Italy	3.23%
Hong Kong	3.05%
Spain	2.87%
Australia	2.17%
Brazil	1.55%
Korea, Republic Of	1.44%
Sweden	1.37%
Finland	1.13%
China	1.10%
Singapore	1.07%
Belgium	0.96%
Taiwan, Province Of China	0.95%
Denmark	0.79%
Russian Federation	0.72%
Norway	0.72%
India	0.58%
South Africa	0.57%
Mexico	0.48%
Israel	0.47%
Greece	0.41%
Luxembourg	0.38%
Portugal	0.28%
Thailand	0.26%
Czech Republic	0.22%
Turkey	0.20%
Poland	0.14%
Indonesia	0.12%
Malaysia	0.11%
Qatar	0.04%
Ireland	0.04%
Egypt	0.03%
Bermuda	0.02%
Austria	0.02%
Hungary	0.02%
Liabilities in Excess of Other Assets, Net	(0.50%)
TOTAL NET ASSETS	100.00%

See accompanying notes

214

Schedule of Investments
Equity Income Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.75%)			COMMON STOCKS (continued)
Aerospace & Defense (1.45%)			Diversified Manufacturing Operations (3.43%)
Boeing Co	377,500 $	19,732	General Electric Co	1,532,700 $	29,903
General Dynamics Corp	191,100	11,527	Honeywell International Inc	420,700	12,810
		31,259	Parker Hannifin Corp	523,700	20,304
			Tyco International Ltd	436,000	11,022
Agricultural Operations (0.66%)
Archer-Daniels-Midland Co	690,200	14,308			74,039
			Electric - Integrated (4.60%)
Apparel Manufacturers (0.57%)			FPL Group Inc	813,700	38,439
VF Corp	224,200	12,353	Progress Energy Inc	1,000,400	39,386
			Xcel Energy Inc	1,231,000	21,444
Applications Software (1.43%)
					99,269
Microsoft Corp	1,385,000	30,927
			Electric Products - Miscellaneous (0.99%)
Auto - Car & Light Trucks (0.73%)			Emerson Electric Co	648,800	21,235
Daimler AG	458,588	15,821
			Electronic Components - Semiconductors (2.80%)
Auto - Medium & Heavy Duty Trucks (0.49%)			Intel Corp	3,034,200	48,547
Paccar Inc	360,500	10,541	Microchip Technology Inc	477,900	11,771
					60,318
Auto/Truck Parts & Equipment - Original (0.29%)
Johnson Controls Inc	357,400	6,337	Electronics - Military (1.18%)
			L-3 Communications Holdings Inc	312,600	25,374
Beverages - Non-Alcoholic (1.16%)
Coca-Cola Co/The	567,800	25,017	Fiduciary Banks (3.19%)
			Bank of New York Mellon Corp/The	1,512,380	49,303
Beverages - Wine & Spirits (0.59%)			State Street Corp	450,400	19,525
Diageo PLC ADR	203,800	12,674			68,828
			Food - Miscellaneous/Diversified (2.64%)
Brewery (0.32%)
			Cadbury PLC ADR	594,900	21,999
Molson Coors Brewing Co	185,700	6,938
			Kraft Foods Inc	1,196,423	34,864
Chemicals - Diversified (1.29%)					56,863
Bayer AG ADR	182,800	10,092	Food - Retail (0.40%)
EI Du Pont de Nemours & Co	553,400	17,709	Safeway Inc	404,400	8,602
		27,801
			Forestry (0.78%)
Commercial Banks (1.79%)
			Weyerhaeuser Co	437,700	16,729
BB&T Corp	1,078,064	38,649
			Gas - Distribution (1.41%)
Commercial Services - Finance (0.51%)
			Sempra Energy	714,600	30,435
Automatic Data Processing Inc	313,300	10,950
			Industrial Gases (0.42%)
Computers (1.73%)
			Air Products & Chemicals Inc	154,100	8,958
Hewlett-Packard Co	975,300	37,334
			Investment Companies (0.32%)
Distribution & Wholesale (1.21%)
			American Capital Ltd	488,397	6,862
Genuine Parts Co	663,441	26,106
			Investment Management & Advisory Services (2.14%)
Diversified Banking Institutions (3.40%)
			AllianceBernstein Holding LP	639,291	14,985
Barclays PLC ADR	1,004,370	10,817
			Franklin Resources Inc	459,300	31,232
JP Morgan Chase & Co	1,512,500	62,391
					46,217
		73,208
			Life & Health Insurance (0.81%)
			Lincoln National Corp	506,300	8,729
See accompanying notes		215

Schedule of Investments
Equity Income Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Life & Health Insurance (continued)			Regional Banks (4.98%)
Unum Group	560,700 $	8,831	PNC Financial Services Group Inc	567,300 $	37,822
		17,560	US Bancorp	859,400	25,619
			Wells Fargo & Co	1,288,900	43,887
Medical - Drugs (8.08%)
Abbott Laboratories	456,600	25,182			107,328
AstraZeneca PLC ADR	342,500	14,543	REITS - Diversified (0.32%)
Bristol-Myers Squibb Co	2,058,600	42,304	Vornado Realty Trust	99,000	6,984
Merck & Co Inc/NJ	645,500	19,978
Novartis AG ADR	542,900	27,682	REITS - Hotels (0.31%)
Wyeth	1,386,000	44,601	Host Hotels & Resorts Inc	638,100	6,598
		174,290
			REITS - Mortgage (1.09%)
Medical - Generic Drugs (1.13%)			Annaly Capital Management Inc	1,689,300	23,481
Teva Pharmaceutical Industries Ltd ADR	566,900	24,309
			REITS - Shopping Centers (0.18%)
Metal - Aluminum (0.53%)			Kimco Realty Corp	171,900	3,882
Alcoa Inc	989,000	11,383
			REITS - Warehouse & Industrial (0.57%)
Metal - Diversified (0.63%)			AMB Property Corp	251,800	6,051
Freeport-McMoRan Copper & Gold Inc	469,100	13,651	Prologis	448,300	6,276
					12,327
Motorcycle/Motor Scooter (0.86%)
Harley-Davidson Inc	758,036	18,557	Retail - Discount (3.58%)
			Wal-Mart Stores Inc	1,382,700	77,169
Multi-Line Insurance (5.25%)
ACE Ltd	1,037,300	59,499	Retail - Drug Store (0.41%)
Allstate Corp/The	674,409	17,798	CVS/Caremark Corp	285,600	8,754
Hartford Financial Services Group Inc	1,363,442	14,071
			Retail - Restaurants (1.94%)
MetLife Inc	659,800	21,918
			McDonald's Corp	722,600	41,860
		113,286
Multimedia (0.68%)			Semiconductor Component - Integrated Circuits (1.35%)
Walt Disney Co/The	566,600	14,675	Taiwan Semiconductor Manufacturing Co
			Ltd ADR	3,525,385	29,120
Oil Company - Exploration & Production (2.27%)
Enerplus Resources Fund	668,100	17,845	Steel - Producers (0.43%)
Penn West Energy Trust	1,273,600	22,747	United States Steel Corp	251,700	9,283
XTO Energy Inc	232,300	8,351
			Telecommunication Equipment (0.80%)
		48,943
			Vodafone Group PLC ADR	894,662	17,240
Oil Company - Integrated (1.87%)
Chevron Corp	312,200	23,290	Telephone - Integrated (6.45%)
Marathon Oil Corp	584,100	16,997	AT&T Inc	2,265,600	60,650
		40,287	Telstra Corp Ltd ADR	414,400	5,773
			Verizon Communications Inc	2,191,200	65,013
Oil Refining & Marketing (0.45%)
			Windstream Corp	1,006,284	7,557
Valero Energy Corp	475,700	9,790
					138,993
Pipelines (2.01%)			Television (1.14%)
Enterprise Products Partners LP	299,100	7,298	CBS Corp	2,537,083	24,635
Kinder Morgan Energy Partners LP	416,700	22,523
Spectra Energy Corp	693,900	13,413	Tobacco (1.05%)
		43,234	Lorillard Inc	344,100	22,662

See accompanying notes

216

Schedule of Investments
Equity Income Fund
October 31, 2008
							Principal
		Shares	Value				Amount	Value
		Held	(000's)				(000's)	(000's)
COMMON STOCKS (continued)				REPURCHASE AGREEMENTS (3.72%)
Toys (1.74%)				Money Center Banks (3.72%)
Mattel Inc		2,502,194 $	37,583	Investment in Joint Trading Account; Bank
				of America Repurchase Agreement;
Transport - Rail (2.92%)				0.15%; dated 10/31/2008 maturing
				11/03/2008 (collateralized by Sovereign
Norfolk Southern Corp		267,300	16,022
				Agency Issues; $82,520,000; 2.75% -
Union Pacific Corp		703,400	46,966	5.38%; dated 11/28/08 - 02/13/17)		$ 80,117$		80,117
			62,988	TOTAL REPURCHASE AGREEMENTS			$ 80,117
TOTAL COMMON STOCKS		$ 2,064,804		Total Investments			$ 2,165,298
		Principal		Liabilities in Excess of Other Assets, Net - (0.41)%				(8,738)
		Amount	Value	TOTAL NET ASSETS - 100.00%			$ 2,156,560
		(000's)	(000's)
BONDS (0.93%)
Diversified Banking Institutions (0.59%)				(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
Bank of America Corp
8.00%, 12/29/2049 (a)	$ 17,030		12,751	Unrealized Appreciation (Depreciation)
				The net federal income tax unrealized appreciation (depreciation) and federal tax cost
Electric - Integrated (0.09%)				of investments held by the fund as of the period end were as follows:
Texas-New Mexico Power Co
6.25%, 1/15/2009		1,875	1,868	Unrealized Appreciation			$ 159,367
				Unrealized Depreciation				(590,269)
Medical - Drugs (0.05%)				Net Unrealized Appreciation (Depreciation)				(430,902)
Wyeth				Cost for federal income tax purposes				2,596,200
7.25%, 3/ 1/2023		1,175	1,118	All dollar amounts are shown in thousands (000's)
Telecommunication Services (0.17%)					Portfolio Summary (unaudited)
Telus Corp				Sector				Percent
8.00%, 6/ 1/2011		3,775	3,710
				Financial				28.66%
				Consumer, Non-cyclical				16.59%
Television (0.03%)				Consumer, Cyclical				11.83%
CBS Corp				Industrial				9.97%
7.88%, 9/ 1/2023		950	680	Communications				9.27%
TOTAL BONDS		$ 20,127		Technology				7.31%
				Energy				6.60%
U.S. GOVERNMENT & GOVERNMENT AGENCY				Utilities				6.10%
OBLIGATIONS (0.01%)				Basic Materials				4.07%
Federal Home Loan Mortgage Corporation				Mortgage Securities				0.01%
(FHLMC) (0.01%)				Liabilities in Excess of Other Assets, Net				(0.41%)
6.50%, 9/ 1/2030		187	191	TOTAL NET ASSETS				100.00%
7.00%, 9/ 1/2030		58	59
			250
TOTAL U.S. GOVERNMENT & GOVERNMENT
AGENCY OBLIGATIONS		$ 250

See accompanying notes

217

Schedule of Investments
Global Real Estate Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (93.42%)			COMMON STOCKS (continued)
Public Thoroughfares (0.68%)			REITS - Diversified (continued)
Macquarie Infrastructure Group	24,242 $	32	Hammerson PLC	3,666 $	42
			Klepierre	290	7
Real Estate Management & Services (6.78%)			Land Securities Group PLC	6,024	107
Aeon Mall Co Ltd	1,219	30	Liberty International PLC	3,614	40
Castellum AB	2,700	18	Mercialys SA	720	23
Citycon Oyj	4,919	12	Mirvac Group (b)	25,655	17
Conwert Immobilien Invest SE (a)	2,460	12	Mirvac Industrial Trust	58,051	7
Deutsche Euroshop AG	802	21	Mucklow A & J Group PLC	1,512	6
Hufvudstaden AB	2,388	15	PS Business Parks Inc	860	39
Mitsubishi Estate Co Ltd	7,677	137	Segro PLC	5,192	24
PSP Swiss Property AG (a)	745	32	Shaftesbury PLC	2,852	15
Servcorp Ltd	18,950	38	Stockland	14,076	38
		315	Unibail-Rodamco	1,041	156
Real Estate Operator & Developer (14.31%)			Vornado Realty Trust	1,870	132
APN Property Group Ltd	24,958	3	Wereldhave Belgium NV	176	10
CapitaLand Ltd	14,579	29	Wereldhave NV	312	26
China Overseas Land & Investment Ltd	66,330	75			1,050
FKP Property Group	23,341	18	REITS - Healthcare (6.93%)
Hang Lung Properties Ltd	18,476	45	HCP Inc	866	26
Helical Bar PLC	3,257	16	Health Care REIT Inc	479	21
Hongkong Land Holdings Ltd	11,238	31	LTC Properties Inc	1,120	27
Hysan Development Co Ltd	22,985	36	National Health Investors Inc	780	23
Mitsui Fudosan Co Ltd	6,393	111	Nationwide Health Properties Inc	2,327	70
Sino Land Co	35,052	31	Omega Healthcare Investors Inc	1,990	30
Sumitomo Realty & Development Co Ltd	4,647	76	Parkway Life Real Estate Investment Trust	22,600	12
Sun Hung Kai Properties Ltd	22,087	193	Senior Housing Properties Trust	2,000	38
		664	Ventas Inc	2,070	75
REITS - Apartments (7.71%)					322
American Campus Communities Inc	1,110	29	REITS - Hotels (0.82%)
AvalonBay Communities Inc	1,157	82	Host Hotels & Resorts Inc	3,691	38
Boardwalk Real Estate Investment Trust (a)	1,200	26
Equity Residential	1,578	55	REITS - Office Property (8.91%)
Essex Property Trust Inc	900	88	Alexandria Real Estate Equities Inc	677	47
Home Properties Inc	1,370	55	Boston Properties Inc	2,040	145
Northern Property Real Estate Investment			Cofinimmo	204	26
Trust	1,550	23	Corporate Office Properties Trust SBI MD	1,130	35
		358	Douglas Emmett Inc	2,200	33
REITS - Diversified (22.61%)			Macquarie Office Trust	50,980	10
Ascendas Real Estate Investment Trust	23,616	26	Nippon Building Fund Inc	8	77
Babcock & Brown Japan Property Trust	61,291	18	Nomura Real Estate Office Fund Inc	2	11
British Land Co PLC	4,721	47	Societe Immobiliere de Location pour
Canadian Real Estate Investment Trust	1,900	41	l'Industrie et le Commerce	224	20
Cominar Real Estate Investment Trust	1,700	28	Tishman Speyer Office Fund	48,749	10
Corio NV	907	49			414
Cromwell Group	78,209	32	REITS - Regional Malls (5.61%)
Digital Realty Trust Inc	1,500	50	General Growth Properties Inc	966	4
Entertainment Properties Trust	1,570	59	Simon Property Group Inc	2,990	200
Goodman Group	17,619	11

See accompanying notes

218

Schedule of Investments
Global Real Estate Securities Fund
October 31, 2008
		Shares	Value	(a)	Non-Income Producing Security
		Held	(000's)	(b)	Market value is determined in accordance with procedures established in
					good faith by the Board of Directors. At the end of the period, the value
COMMON STOCKS (continued)					of these securities totaled $17 or 0.37% of net assets.
REITS - Regional Malls (continued)
Taubman Centers Inc		1,680 $	56	Unrealized Appreciation (Depreciation)
			260	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
				of investments held by the fund as of the period end were as follows:
REITS - Shopping Centers (13.99%)
Acadia Realty Trust		1,300	23	Unrealized Appreciation		$ 24
CapitaMall Trust		22,626	30	Unrealized Depreciation			(2,767)
Centro Retail Group		109,370	8	Net Unrealized Appreciation (Depreciation)			(2,743)
Federal Realty Investment Trust		1,420	87	Cost for federal income tax purposes			7,193
Japan Retail Fund Investment Corp		4	14	All dollar amounts are shown in thousands (000's)
Kimco Realty Corp		1,560	35
Link REIT/The		39,460	71		Portfolio Summary (unaudited)
Macquarie CountryWide Trust		28,071	4	Country			Percent
Macquarie DDR Trust		204,007	13	United States			44.60%
RioCan Real Estate Investment Trust		4,800	67	Hong Kong			10.37%
Saul Centers Inc		900	33	Japan			9.85%
				Australia			8.96%
Tanger Factory Outlet Centers		1,620	59	United Kingdom			6.38%
Urstadt Biddle Properties Inc		1,650	27	France			4.44%
Vastned Retail NV		412	21	Canada			3.98%
				Singapore			2.09%
Westfield Group		14,174	157
				Netherlands			2.06%
			649	Belgium			0.77%
				Sweden			0.72%
REITS - Single Tenant (1.11%)				Switzerland			0.69%
National Retail Properties Inc		2,890	52	Germany			0.44%
				Austria			0.26%
REITS - Storage (3.09%)				Finland			0.25%
Public Storage		1,760	143	Other Assets in Excess of Liabilities, Net			4.14%
				TOTAL NET ASSETS			100.00%
REITS - Warehouse & Industrial (0.87%)					Other Assets Summary (unaudited)
EastGroup Properties Inc		1,210	40
				Asset Type			Percent
TOTAL COMMON STOCKS		$ 4,337
				Currency Contracts			60.20%
		Principal
		Amount	Value
		(000's)	(000's)
REPURCHASE AGREEMENTS (2.44%)
Money Center Banks (2.44%)
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $58,000; 2.75% - 5.38%;
dated 11/28/08 - 02/13/17)	$ 57$		56
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $58,000; 2.63% - 4.63%;
dated 09/09/09 - 06/12/15)		57	57
			113
TOTAL REPURCHASE AGREEMENTS		$ 113
Total Investments		$ 4,450
Other Assets in Excess of Liabilities, Net - 4.14%			192
TOTAL NET ASSETS - 100.00%		$ 4,642

See accompanying notes

219

		Schedule of Investments
		Global Real Estate Securities Fund
			October 31, 2008
		Foreign Currency Contracts
					Net Unrealized
Foreign Currency	Delivery	Contracts			Appreciation
Purchase Contracts	Date	to Accept	In Exchange For	Value	(Depreciation)
Australian Dollar	11/14/2008	596,050	$434	$395	$(39)
British Pound	11/14/2008	24,463	42	39	(3)
Canadian Dollar	11/14/2008	2,883	2	2	-
Danish Kroner	11/14/2008	329	-	-	-
Euro	11/14/2008	144,407	204	183	(21)
Hong Kong Dollar	11/14/2008	1,947,286	250	251	1
Japanese Yen	11/14/2008	42,185,900	406	428	22
New Zealand Dollar	11/14/2008	9,836	7	6	(1)
Norwegian Krone	11/14/2008	17,298	3	3	-
Poland Zloty	11/14/2008	26,903	11	10	(1)
Singapore Dollar	11/14/2008	125,320	88	85	(3)
Swedish Krona	11/14/2008	86,971	12	11	(1)
Swiss Franc	11/14/2008	8,740	8	8	-
					Net Unrealized
Foreign Currency	Delivery	Contracts			Appreciation
Sale Contracts	Date	to Deliver	In Exchange For	Value	(Depreciation)
Australian Dollar	11/14/2008	705,945	$545	$468	$77
British Pound	11/14/2008	11,514	20	18	2
Canadian Dollar	11/14/2008	40,463	38	34	4
Euro	11/14/2008	138,830	197	177	20
Hong Kong Dollar	11/14/2008	2,291,824	295	295	-
Japanese Yen	11/14/2008	34,135,834	340	347	(7)
Singapore Dollar	11/14/2008	23,673	17	16	1
Swedish Krona	11/14/2008	137,312	21	18	3
All dollar amounts are shown in thousands (000's)

See accompanying notes

220

Schedule of Investments
Government & High Quality Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (44.81%)				BONDS (continued)
Asset Backed Securities (4.21%)				Home Equity - Other (continued)
Chase Funding Mortgage Loan Asset-Backed				First NLC Trust
Certificates				3.49%, 5/25/2035 (a)	$ 1,678 $		1,393
3.55%, 9/25/2033 (a)	$ 225 $		174	JP Morgan Mortgage Acquisition Corp
3.49%, 12/25/2033 (a)		379	335	3.52%, 7/25/2035 (a)		470	464
Countrywide Asset-Backed Certificates				Morgan Stanley Home Equity Loan Trust
3.43%, 6/25/2037 (a)		3,500	2,038	3.43%, 2/25/2036 (a)		5,250	4,668
Credit-Based Asset Servicing and				Soundview Home Equity Loan Trust
Securitization LLC				3.35%, 7/25/2036 (a)(b)		949	932
3.43%, 3/25/2036 (a)		2,000	1,563				12,150
GMAC Mortgage Corp Loan Trust
3.44%, 8/25/2035 (a)		745	407	Mortgage Backed Securities (27.22%)
Long Beach Mortgage Loan Trust				Banc of America Commercial Mortgage Inc
3.37%, 10/25/2036 (a)		2,000	1,386	1.02%, 11/10/2038 (a)		1,821	34
SACO I Inc				0.31%, 3/11/2041 (a)(d)		31,742	176
3.40%, 6/25/2036 (a)		1,111	789	Banc of America Funding Corp
Saxon Asset Securities Trust				4.36%, 7/20/2036 (a)		1,753	1,594
3.42%, 3/25/2036 (a)(b)		5,000	4,457	4.56%, 7/20/2036 (a)		1,494	399
Structured Asset Investment Loan Trust				Bear Stearns Alt-A Trust
3.48%, 1/25/2036 (a)(b)		1,802	1,634	3.43%, 4/25/2037 (a)		1,042	495
Swift Master Auto Receivables Trust				Bear Stearns Commercial Mortgage Securities
4.66%, 6/15/2012 (a)		2,750	2,400	0.83%, 2/11/2041 (a)(d)		7,907	200
			15,183	Bear Stearns Mortgage Funding Trust
				3.47%, 7/25/2036 (a)		3,364	2,102
Automobile Sequential (0.16%)
				Chase Mortgage Finance Corp
Capital Auto Receivables Asset Trust				5.01%, 7/25/2037 (a)		1,728	1,581
4.59%, 10/15/2009 (a)(b)		574	574
				Commercial Mortgage Pass Through Certificates
				0.07%, 12/10/2046 (a)(d)		25,877	226
Credit Card Asset Backed Securities (0.65%)
				Countrywide Alternative Loan Trust
Discover Card Master Trust
				3.56%, 5/25/2035 (a)		316	139
5.65%, 3/16/2020		1,917	1,362
				Credit Suisse Mortgage Capital Certificates
Discover Card Master Trust I
				5.47%, 9/15/2039		4,500	3,394
4.58%, 5/15/2011 (a)(b)		1,000	998
				6.00%, 9/15/2039 (a)		1,000	611
			2,360
				0.09%, 12/15/2039		16,805	205
Finance - Mortgage Loan/Banker (9.20%)				5.38%, 2/15/2040 (a)		2,650	1,961
Fannie Mae				6.43%, 2/15/2041 (a)(d)		1,250	774
3.38%, 5/19/2011		5,800	5,827
				CS First Boston Mortgage Securities Corp
5.25%, 8/ 1/2012 (c)		11,800	11,795	0.50%, 11/15/2036 (a)(d)		11,420	379
5.00%, 5/11/2017		7,750	7,615	Fannie Mae
6.63%, 11/15/2030		1,300	1,469	3.56%, 10/25/2018 (a)		505	497
Freddie Mac				5.00%, 8/25/2026		2,117	2,131
5.75%, 6/27/2016		2,400	2,309	3.46%, 4/25/2034 (a)		4,782	4,784
SLM Student Loan Trust				0.23%, 3/25/2036		28,341	278
3.62%, 10/25/2016 (a)(b)		1,356	1,351
				6.50%, 2/25/2047		2,405	2,475
3.01%, 9/17/2018 (a)(b)		2,891	2,772
				Fannie Mae Grantor Trust
			33,138	3.61%, 5/25/2035 (a)		1,906	1,938
Home Equity - Other (3.37%)				Fannie Mae Whole Loan
ACE Securities Corp				3.41%, 5/25/2035 (a)(b)		1,954	1,942
3.47%, 9/25/2035 (a)(b)		236	234	Federal Home Loan Banks
American Home Mortgage Investment Trust				5.46%, 11/27/2015		2,719	2,777
3.45%, 11/25/2030 (a)		1,951	907	Freddie Mac
Asset Backed Securities Corp Home Equity				4.50%, 7/15/2017		4,900	4,842
3.36%, 7/25/2036 (a)(b)		3,600	3,552	4.89%, 6/15/2018 (a)		3,038	2,987
				4.99%, 7/15/2023 (a)		5,061	4,840

See accompanying notes

221

Schedule of Investments
Government & High Quality Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Mortgage Backed Securities (continued)			Mortgage Backed Securities (continued)
Freddie Mac (continued)			Merrill Lynch/Countrywide Commercial
4.79%, 4/15/2030 (a)	$ 4,438 $	4,336	Mortgage Trust (continued)
5.50%, 9/15/2031 (a)	1,375	1,354	0.12%, 12/12/2049 (a)(d)	$ 49,425 $		523
4.99%, 9/15/2033 (a)	308	296	Morgan Stanley Capital I
			0.36%, 8/13/2042		159,688	2,185
GE Capital Commercial Mortgage Corp
5.61%, 4/10/2017 (a)	3,475	2,105	0.06%, 12/15/2043 (a)(d)		27,059	261
G-Force LLC			Residential Accredit Loans Inc
3.56%, 12/25/2039 (a)(d)	2,800	1,995	3.41%, 2/25/2037 (a)		1,361	671
Ginnie Mae			3.45%, 7/25/2037 (a)		2,392	1,453
1.57%, 10/16/2012 (a)	52,085	1,721	Wachovia Bank Commercial Mortgage Trust
3.89%, 7/16/2026	1,562	1,546	0.25%, 3/15/2042 (a)(d)		28,859	212
5.08%, 1/16/2030 (a)	1,502	1,513	0.64%, 5/15/2044 (a)(d)		93,426	1,462
4.26%, 2/16/2032	2,267	2,251	5.82%, 5/15/2046 (a)		2,600	1,564
0.88%, 6/17/2045 (a)	35,284	1,322	WaMu Mortgage Pass Through Certificates
			4.23%, 7/25/2044 (a)		223	208
0.75%, 11/16/2045	3,578	132
			3.49%, 4/25/2045 (a)		481	288
1.12%, 5/16/2046 (a)	10,608	476
			Washington Mutual Alternative Mortgage
1.06%, 10/16/2046	15,691	824
			Pass-Through Certificates
Greenpoint Mortgage Funding Trust			3.54%, 6/25/2046 (a)		3,666	747
3.56%, 6/25/2045 (a)	220	106
						98,090
Greenwich Capital Commercial Funding Corp
0.27%, 6/10/2036 (a)(d)	16,005	101	TOTAL BONDS		$ 161,495
5.91%, 7/10/2038	2,500	1,994	U.S. GOVERNMENT & GOVERNMENT AGENCY
0.32%, 3/10/2039 (a)(d)	54,769	824	OBLIGATIONS (73.08%)
GS Mortgage Securities Corp II			Federal Home Loan Mortgage Corporation
0.67%, 11/10/2039 (d)	30,349	846	(FHLMC) (20.35%)
Impac CMB Trust			5.00%, 11/ 1/2038 (e)		4,525	4,282
3.57%, 4/25/2035 (a)	619	265	5.50%, 1/ 1/2039 (e)		4,025	3,914
Indymac Index Mortgage Loan Trust			6.00%, 1/ 1/2039 (e)		6,135	6,102
3.59%, 4/25/2035 (a)	292	123	6.50%, 6/ 1/2017		227	233
JP Morgan Chase Commercial Mortgage			6.00%, 7/ 1/2017		86	87
Securities Corp			5.50%, 4/ 1/2018		652	654
0.34%, 9/12/2037 (a)	84,224	857
			5.50%, 12/ 1/2018		3	3
6.01%, 6/15/2049 (a)	2,225	1,362
			5.00%, 1/ 1/2019		1,466	1,443
JP Morgan Mortgage Trust
			6.00%, 1/ 1/2021		291	293
4.95%, 11/25/2035 (a)	3,000	2,314
			6.50%, 8/ 1/2022		350	358
5.30%, 4/25/2036 (a)(b)	481	474
			5.00%, 10/ 1/2025		1,092	1,054
5.82%, 6/25/2036 (a)	1,600	1,008
			6.00%, 6/ 1/2028		85	86
5.95%, 8/25/2036 (a)	2,400	1,700
			5.50%, 1/ 1/2029		23	22
6.00%, 8/25/2036 (a)	2,346	2,109
			5.50%, 3/ 1/2029		17	17
5.56%, 10/25/2036 (a)	4,725	3,096
			6.50%, 3/ 1/2029		60	61
5.80%, 1/25/2037 (a)	3,215	2,864
			8.00%, 8/ 1/2030		3	3
LB-UBS Commercial Mortgage Trust
0.08%, 11/15/2038 (a)(d)	13,338	167	8.00%, 11/ 1/2030		2	3
0.72%, 11/15/2038 (a)(d)	21,742	677	7.50%, 12/ 1/2030		23	24
0.07%, 2/15/2040 (a)(d)	5,923	48	7.00%, 1/ 1/2031		10	10
0.49%, 2/15/2040 (a)	7,426	163	7.50%, 2/ 1/2031		13	13
0.74%, 7/15/2040 (a)	101,552	2,033	6.50%, 6/ 1/2031		4	4
Merrill Lynch Mortgage Trust			6.00%, 10/ 1/2031		39	39
0.56%, 5/12/2043	47,684	862	6.00%, 2/ 1/2032		91	91
Merrill Lynch/Countrywide Commercial			6.50%, 2/ 1/2032		29	29
Mortgage Trust			6.50%, 2/ 1/2032		97	99
0.54%, 8/12/2048 (a)	33,575	891	6.50%, 4/ 1/2032		79	81

See accompanying notes

222

Schedule of Investments
Government & High Quality Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)				OBLIGATIONS (continued)
Federal Home Loan Mortgage Corporation				Federal National Mortgage Association (FNMA)
(FHLMC) (continued)				(continued)
7.50%, 4/ 1/2032	$ 146 $		155	6.50%, 11/ 1/2038 (e)	$ 3,485 $		3,532
6.50%, 8/ 1/2032		219	223	6.00%, 5/ 1/2009		7	7
6.50%, 8/ 1/2032		103	105	4.50%, 3/ 1/2010		62	62
5.00%, 12/ 1/2032		910	863	6.50%, 4/ 1/2010		10	10
5.50%, 5/ 1/2033		560	548	6.50%, 6/ 1/2016		25	26
5.50%, 10/ 1/2033		199	195	6.00%, 1/ 1/2017		70	71
5.50%, 12/ 1/2033		4,836	4,728	6.00%, 4/ 1/2017		139	141
5.00%, 1/ 1/2034		6,667	6,324	5.50%, 9/ 1/2017		347	348
5.00%, 5/ 1/2034		1,458	1,383	5.50%, 9/ 1/2017		81	81
6.00%, 9/ 1/2034		984	984	5.00%, 1/ 1/2018		558	551
5.00%, 12/ 1/2034		482	457	5.50%, 3/ 1/2018		352	354
6.00%, 2/ 1/2035		699	700	5.00%, 4/ 1/2019		518	509
6.50%, 4/ 1/2035		66	67	5.50%, 6/ 1/2019		89	89
5.00%, 5/ 1/2035		1,172	1,110	5.50%, 6/ 1/2019		114	114
5.00%, 7/ 1/2035		67	64	5.50%, 7/ 1/2019		253	253
5.00%, 7/ 1/2035		656	621	5.50%, 7/ 1/2019		54	54
5.00%, 10/ 1/2035		125	119	5.50%, 7/ 1/2019		108	108
6.00%, 8/ 1/2036		3,429	3,425	5.50%, 7/ 1/2019		124	124
6.00%, 10/ 1/2036 (a)		849	848	5.50%, 7/ 1/2019		244	244
6.50%, 2/ 1/2037		440	446	5.50%, 8/ 1/2019		63	63
6.00%, 3/ 1/2037		1,579	1,577	5.50%, 8/ 1/2019		450	451
6.00%, 4/ 1/2037		4,155	4,150	5.50%, 9/ 1/2019		445	445
6.00%, 5/ 1/2037		1,259	1,257	4.50%, 12/ 1/2019		592	567
5.50%, 7/ 1/2037		712	694	4.50%, 1/ 1/2020		1,933	1,850
6.50%, 12/ 1/2037		989	1,003	7.00%, 5/ 1/2022		90	94
6.00%, 1/ 1/2038 (a)		478	478	6.00%, 12/ 1/2022		177	178
6.00%, 1/ 1/2038		3,837	3,833	5.00%, 1/ 1/2026		1,564	1,499
6.00%, 3/ 1/2038		893	892	5.50%, 6/ 1/2026		1,516	1,489
5.50%, 4/ 1/2038		504	492	7.50%, 1/ 1/2031		9	9
6.00%, 4/ 1/2038		1,564	1,562	7.50%, 5/ 1/2031		11	12
5.50%, 5/ 1/2038		1,070	1,044	6.50%, 9/ 1/2031		100	102
6.00%, 6/ 1/2038		2,340	2,338	6.00%, 12/ 1/2031		110	110
7.10%, 10/ 1/2032 (a)		8	9	6.00%, 12/ 1/2031		36	37
5.25%, 9/ 1/2033 (a)		107	109	6.50%, 12/ 1/2031		18	19
4.65%, 8/ 1/2035 (a)		1,631	1,654	6.50%, 4/ 1/2032		79	81
6.78%, 3/ 1/2036 (a)		1,139	1,149	7.50%, 8/ 1/2032		111	117
6.53%, 7/ 1/2036 (a)		2,157	2,191	6.00%, 11/ 1/2032		133	133
6.54%, 10/ 1/2036 (a)		926	946	4.54%, 3/ 1/2033 (a)		803	802
5.87%, 11/ 1/2036 (a)		312	317	5.50%, 9/ 1/2033		2,516	2,464
6.51%, 1/ 1/2037 (a)		1,575	1,601	6.13%, 11/ 1/2033 (a)		13	14
5.69%, 6/ 1/2037 (a)		1,299	1,314	5.09%, 12/ 1/2033 (a)		687	689
5.69%, 6/ 1/2037 (a)		2,320	2,346	4.91%, 9/ 1/2034 (a)		3,227	3,298
			73,326	4.70%, 2/ 1/2035 (a)		3,934	3,947
				4.91%, 3/ 1/2035 (a)		1,263	1,260
Federal National Mortgage Association (FNMA) (34.97%)
4.50%, 11/ 1/2023 (e)		3,705	3,526	5.00%, 4/ 1/2035		997	945
5.00%, 11/ 1/2023 (e)		1,990	1,945	4.30%, 5/ 1/2035 (a)		1,025	1,029
5.00%, 11/ 1/2038 (e)		4,955	4,693	5.00%, 5/ 1/2035		1,349	1,279
5.50%, 11/ 1/2038 (e)		25,345	24,759	4.71%, 7/ 1/2035 (a)		1,094	1,114

See accompanying notes

223

	Schedule of Investments
Government & High Quality Bond Fund
	October 31, 2008
Principal		Principal
Amount	Value	Amount	Value
(000's)	(000's)	(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY	U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)	OBLIGATIONS (continued)
Federal National Mortgage Association (FNMA)	Government National Mortgage Association
(continued)	(GNMA) (continued)

5.00%, 7/ 1/2035	$ 478 $		453	8.00%, 12/15/2016	$ 14 $	16
5.00%, 7/ 1/2035		3,563	3,379	7.50%, 4/15/2017	8	8
5.00%, 8/ 1/2035		606	575	7.50%, 4/15/2017	55	59
5.07%, 8/ 1/2035 (a)		4,186	4,207	7.50%, 4/15/2017	59	63
5.59%, 11/ 1/2035 (a)		903	914	8.00%, 4/15/2017	15	16
6.50%, 4/ 1/2036		118	119	8.00%, 4/15/2017	11	12
6.50%, 8/ 1/2036		2,015	2,044	8.00%, 4/15/2017	19	21
6.50%, 8/ 1/2036		852	864	7.50%, 5/15/2017	15	16
6.00%, 9/ 1/2036		1,917	1,918	8.00%, 5/15/2017	13	13
6.50%, 10/ 1/2036		477	484	8.00%, 6/15/2017	15	16
6.50%, 11/ 1/2036		525	533	8.00%, 6/15/2017	20	22
5.50%, 2/ 1/2037		3,660	3,578	8.00%, 7/15/2017	10	11
5.50%, 2/ 1/2037		115	113	7.50%, 7/15/2018	37	39
5.74%, 5/ 1/2037 (a)		3,883	3,935	7.50%, 12/15/2021	40	42
6.19%, 5/ 1/2037 (a)		1,915	1,945	7.50%, 12/15/2021	32	34
5.00%, 6/ 1/2037		9,504	9,008	7.50%, 2/15/2022	54	57
5.50%, 6/ 1/2037		1,717	1,679	8.00%, 2/15/2022	58	62
6.50%, 7/ 1/2037		207	210	7.50%, 3/15/2022	5	6
6.50%, 7/ 1/2037		275	279	7.50%, 3/15/2022	13	14
6.50%, 8/ 1/2037		930	944	7.50%, 3/15/2022	34	36
6.50%, 10/ 1/2037		1,265	1,283	7.50%, 4/15/2022	22	23
6.00%, 11/ 1/2037		2,081	2,082	7.50%, 4/15/2022	19	20
6.50%, 1/ 1/2038		131	132	7.50%, 4/15/2022	39	41
5.50%, 2/ 1/2038		3,448	3,370	7.50%, 4/15/2022	22	23
6.00%, 2/ 1/2038		1,489	1,489	7.50%, 5/15/2022	37	40
6.00%, 2/ 1/2038 (a)		1,396	1,396	7.50%, 7/15/2022	62	66
6.50%, 2/ 1/2038		185	188	7.50%, 8/15/2022	24	25
5.50%, 3/ 1/2038		2,005	1,960	7.50%, 8/15/2022	30	32
6.00%, 3/ 1/2038		443	443	7.50%, 8/15/2022	7	7
6.00%, 3/ 1/2038		1,487	1,487	7.50%, 8/15/2022	2	2
6.50%, 3/ 1/2038		165	168	7.50%, 8/15/2022	10	11
6.00%, 4/ 1/2038		1,759	1,759	7.50%, 8/15/2022	23	24
5.50%, 5/ 1/2038		1,969	1,924	7.50%, 8/15/2022	82	86
6.50%, 5/ 1/2038		95	96	7.50%, 8/15/2022	69	73
6.00%, 7/ 1/2038		2,460	2,460	7.00%, 11/15/2022	40	42
5.50%, 9/ 1/2038		2,997	2,929	7.00%, 11/15/2022	21	21
			126,045	7.00%, 11/15/2022	63	65
				7.00%, 11/15/2022	39	40
Government National Mortgage Association
(GNMA) (4.49%)				7.50%, 11/15/2022	41	44
5.00%, 11/ 1/2038 (e)		1,010	964	7.00%, 12/15/2022	15	16
5.50%, 11/ 1/2038 (e)		2,815	2,760	7.00%, 12/15/2022	148	153
6.50%, 3/15/2009		1	1	7.00%, 1/15/2023	61	62
5.50%, 12/15/2013		20	20	7.00%, 1/15/2023	21	22
5.50%, 1/15/2014		103	105	7.00%, 1/15/2023	21	22
5.50%, 1/15/2014		80	81	7.00%, 2/15/2023	319	329
5.50%, 2/15/2014		63	64	7.50%, 2/15/2023	6	6
5.50%, 3/15/2014		186	190	7.50%, 2/15/2023	21	22
8.00%, 8/15/2016		73	78	7.00%, 3/15/2023	28	29

See accompanying notes

224

Schedule of Investments
Government & High Quality Bond Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)				OBLIGATIONS (continued)
Government National Mortgage Association				Government National Mortgage Association
(GNMA) (continued)				(GNMA) (continued)
7.50%, 5/15/2023	$ 21 $		23	7.25%, 9/15/2025	$ 77 $	81
7.50%, 5/15/2023		8	9	6.50%, 10/15/2025	43	43
7.50%, 5/15/2023		82	87	6.50%, 1/15/2026	34	34
7.50%, 6/15/2023		23	25	7.00%, 1/15/2026	59	61
7.00%, 7/15/2023		28	29	6.50%, 3/15/2026	69	70
7.00%, 7/15/2023		10	11	7.00%, 5/15/2026	9	9
7.00%, 7/15/2023		95	98	7.00%, 1/15/2027	70	72
7.00%, 7/15/2023		30	31	7.00%, 3/15/2027	40	41
7.00%, 8/15/2023		28	28	7.50%, 4/15/2027	6	6
6.50%, 9/15/2023		37	37	7.50%, 5/15/2027	66	70
6.50%, 9/15/2023		63	64	7.50%, 5/15/2027	16	17
6.50%, 9/15/2023		56	57	7.50%, 6/15/2027	39	42
6.50%, 9/15/2023		68	69	7.00%, 11/15/2027	150	155
6.00%, 10/15/2023		317	322	7.00%, 12/15/2027	58	60
6.50%, 10/15/2023		54	55	6.50%, 2/15/2028	37	38
6.50%, 10/15/2023		27	27	7.00%, 4/15/2028	3	3
7.00%, 10/15/2023		54	56	7.00%, 4/15/2028	107	110
7.50%, 10/15/2023		10	11	8.00%, 12/15/2030	17	18
6.00%, 11/15/2023		155	157	7.00%, 5/15/2031	35	37
6.00%, 11/15/2023		119	121	6.50%, 7/15/2031	10	10
6.50%, 11/15/2023		21	22	7.00%, 7/15/2031	10	10
7.50%, 11/15/2023		53	56	7.00%, 7/15/2031	1	1
6.00%, 12/15/2023		89	91	7.00%, 9/15/2031	11	12
6.00%, 12/15/2023		69	70	6.50%, 10/15/2031	69	70
6.00%, 12/15/2023		6	6	6.50%, 7/15/2032	84	86
6.50%, 12/15/2023		129	131	6.00%, 8/15/2032	381	382
6.50%, 12/15/2023		98	99	6.00%, 9/15/2032	372	373
6.50%, 12/15/2023		97	99	6.00%, 2/15/2033	91	91
6.50%, 12/15/2023		40	41	5.00%, 2/15/2034	1,040	1,000
7.00%, 12/15/2023		34	35	6.00%, 8/15/2038	1,995	1,997
7.00%, 12/15/2023		67	69	6.00%, 1/20/2024	45	46
6.00%, 1/15/2024		79	79	6.00%, 4/20/2024	85	86
6.50%, 1/15/2024		72	73	6.50%, 4/20/2024	45	45
6.50%, 1/15/2024		27	28	6.00%, 5/20/2024	96	97
6.50%, 1/15/2024		93	95	6.00%, 5/20/2024	34	34
6.50%, 1/15/2024		39	40	6.00%, 10/20/2024	57	57
6.50%, 1/15/2024		79	81	6.00%, 9/20/2025	33	33
6.50%, 1/15/2024		77	78	6.00%, 11/20/2025	40	41
6.50%, 1/15/2024		30	31	6.50%, 7/20/2026	24	24
6.50%, 1/15/2024		42	43	6.00%, 10/20/2028	49	49
6.00%, 2/15/2024		62	62	6.50%, 10/20/2028	41	41
6.00%, 2/15/2024		140	141	5.50%, 5/20/2035	1,271	1,248
6.00%, 2/15/2024		64	64			16,173
6.00%, 3/15/2024		36	36
				U.S. Treasury (6.92%)
6.50%, 3/15/2024		33	34	4.13%, 8/15/2010 (f)	5,000	5,242
6.50%, 4/15/2024		68	69	1.50%, 10/31/2010	10,000	9,979
6.50%, 7/15/2024		200	204	4.13%, 5/15/2015 (f)	8,750	9,118
7.50%, 8/15/2024		6	7

See accompanying notes

225

Schedule of Investments
Government & High Quality Bond Fund
October 31, 2008
		Principal		(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
		Amount	Value	(b)	Security was purchased with the cash proceeds from securities loans.
		(000's)	(000's)	(c)	Security or a portion of the security was pledged to cover margin
					requirements for futures contracts. At the end of the period, the value of
U.S. GOVERNMENT & GOVERNMENT AGENCY					these securities totaled $600 or 0.17% of net assets.
OBLIGATIONS (continued)				(d)	Security exempt from registration under Rule 144A of the Securities Act
U.S. Treasury (continued)					of 1933. These securities may be resold in transactions exempt from
6.13%, 8/15/2029	$ 500 $		593		registration, normally to qualified institutional buyers. Unless otherwise
			24,932		indicated, these securities are not considered illiquid. At the end of the
					period, the value of these securities totaled $8,871 or 2.46% of net
U.S. Treasury Inflation-Indexed Obligations (3.00%)					assets.
3.00%, 7/15/2012 (f)		11,088	10,814	(e)	Security was purchased in a "to-be-announced" ("TBA") transaction.
					See Notes to Financial Statements.
U.S. Treasury Strip (3.35%)				(f)	Security or a portion of the security was on loan at the end of the period.
0.00%, 11/15/2015 (g)		4,000	2,983	(g)	Non-Income Producing Security
0.00%, 5/15/2020 (g)		13,800	7,623
0.00%, 11/15/2021 (g)		2,900	1,463	Unrealized Appreciation (Depreciation)
			12,069	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
				of investments held by the fund as of the period end were as follows:
TOTAL U.S. GOVERNMENT & GOVERNMENT
AGENCY OBLIGATIONS		$ 263,359		Unrealized Appreciation		$ 1,824
REPURCHASE AGREEMENTS (4.80%)				Unrealized Depreciation			(37,518)
Money Center Banks (4.80%)				Net Unrealized Appreciation (Depreciation)			(35,694)
BNP Paribas Securities Corporation				Cost for federal income tax purposes			477,846
Repurchase Agreement; 0.20% dated				All dollar amounts are shown in thousands (000's)
10/31/08 maturing 11/03/08 (collateralized
by U.S. Government Agency Issues;					Portfolio Summary (unaudited)
$4,631,000; 0.00% - 6.25%; dated
12/23/08 - 07/13/37) (b)	$ 4,594$		4,594	Sector			Percent
Investment in Joint Trading Account; Bank				Mortgage Securities			87.03%
of America Repurchase Agreement;				Government			21.32%
0.15%; dated 10/31/2008 maturing				Asset Backed Securities			9.54%
11/03/2008 (collateralized by Sovereign				Financial			4.80%
Agency Issues; $6,542,000; 2.75% -				Liabilities in Excess of Other Assets, Net			(22.69%)
5.38%; dated 11/28/08 - 02/13/17)		6,352	6,352	TOTAL NET ASSETS			100.00%
Investment in Joint Trading Account;					Other Assets Summary (unaudited)
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing				Asset Type			Percent
11/03/2008 (collateralized by Sovereign				Futures			4.83%
Agency Issues; $6,542,000; 2.63% -				Interest Rate Swaps			0.01%
4.63%; dated 09/09/09 - 06/12/15)		6,352	6,352
			17,298
TOTAL REPURCHASE AGREEMENTS		$ 17,298
Total Investments		$ 442,152
Liabilities in Excess of Other Assets, Net - (22.69)%			(81,761)
TOTAL NET ASSETS - 100.00%		$ 360,391

See accompanying notes

226

Schedule of Investments
Government & High Quality Bond Fund
October 31, 2008
Futures Contracts
					Current		Unrealized
				Original	Market		Appreciation/
Type		Buy/Sell	Contracts	Value	Value		(Depreciation)
US Long Bond; December 2008		Buy	14	$ 1,653	$ 1,584 $			(69)
US 10 Year Note; December 2008		Sell	140	16,318	15,831			487
All dollar amounts are shown in thousands (000's)
Interest Rate Swaps
						Notional/		Unrealized
		(Pay)/Receive	Fixed	Expiration		Principal		Appreciation/
Counterparty (Issuer)	Floating Rate Index	Floating Rate	Rate	Date	Currency	Amount		(Depreciation)
UBS AG	3-month LIBOR	Receive	4.68 %	07/02/2018	USD $	3,000 $		(53)
All dollar amounts are shown in thousands (000's)

See accompanying notes

227

Schedule of Investments
High Yield Fund
October 31, 2008
	Shares	Value			Shares	Value
	Held	(000's)			Held	(000's)
COMMON STOCKS (4.16%)			COMMON STOCKS (continued)
Applications Software (0.04%)			Transport - Services (0.61%)
Jingwei International Ltd (a)	400,000 $	544	Student Transportation of America Inc (b)(c)		1,123,000 $	8,479
			TOTAL COMMON STOCKS		$ 57,400
Auto - Medium & Heavy Duty Trucks (1.56%)
New Flyer Industries Inc (b)(c)	2,653,300	21,463	CONVERTIBLE PREFERRED STOCKS (1.17%)
			Airlines (0.47%)
Building - Residential & Commercial (0.09%)			Continental Airlines Finance Trust II		280,000	6,493
Desarrolladora Homex SAB de CV ADR (a)	56,100	1,306
			Finance - Commercial (0.19%)
Cable TV (0.31%)			CIT Group Inc		461,000	2,651
Time Warner Cable Inc (a)	215,629	4,222
			Reinsurance (0.51%)
Casino Hotels (0.00%)			Aspen Insurance Holdings Ltd		177,000	6,947
Aladdin Gaming Holdings LLC - Warrants (a)	78,250	-	TOTAL CONVERTIBLE PREFERRED STOCKS		$ 16,091
(d)(e)
			PREFERRED STOCKS (0.15%)
Food - Catering (0.04%)			Finance - Investment Banker & Broker (0.00%)
FU JI Food and Catering Services Holdings			Lehman Brothers Holdings Inc		820,000	5
Ltd	962,000	509
			Finance - Mortgage Loan/Banker (0.15%)
Food - Dairy Products (0.14%)			Freddie Mac 8.38%; Series Z		1,300,000	2,015
American Dairy Inc (a)	161,200	1,980	TOTAL PREFERRED STOCKS		$ 2,020
					Principal
Food - Miscellaneous/Diversified (0.79%)
B&G Foods Inc	658,400	6,584			Amount	Value
					(000's)	(000's)
China Foods Ltd	5,050,000	1,329
			BONDS (82.44%)
Zhongpin Inc (a)	346,500	2,983
			Agricultural Operations (1.15%)
		10,896
			Southern States Cooperative Inc
Medical - Biomedical/Gene (0.19%)			10.50%, 11/ 1/2010 (d)(f)	$ 16,500		15,840
American Oriental Bioengineering Inc (a)	422,600	2,582
Neuro-Hitech Inc - Warrants (a)(d)(e)	125,000	-	Appliances (0.47%)
Neuro-Hitech Inc (a)	250,000	35	ALH Finance LLC/ALH Finance Corp
			8.50%, 1/15/2013		8,250	6,435
		2,617
REITS - Healthcare (0.08%)			Applications Software (1.09%)
Omega Healthcare Investors Inc	71,700	1,081	SS&C Technologies Inc
			11.75%, 12/ 1/2013		16,000	15,040
Satellite Telecommunications (0.02%)
ICO Global Communications Holdings Ltd (a)	189,757	311	Auto - Medium & Heavy Duty Trucks (0.81%)
			New Flyer Industries Ltd
Special Purpose Entity (0.03%)			14.00%, 8/19/2020 (d)(e)(f)		13,600	11,171
Adelphia Recovery Trust (a)(e)	2,437,336	341
Adelphia Recovery Trust (a)	5,641,292	85	Auto/Truck Parts & Equipment - Original (0.75%)
Neoview Holdings Inc - Warrants (a)(d)(e)	120,000	-	Accuride Corp
			8.50%, 2/ 1/2015		26,000	10,400
		426
Therapeutics (0.00%)			Beverages - Wine & Spirits (1.08%)
Vion Pharmaceuticals Inc - Warrants (a)(e)	130,000	-	Beverages & More Inc
Vion Pharmaceuticals Inc (a)	50,938	20	9.25%, 3/ 1/2012 (f)		17,500	14,875
Transport - Marine (0.26%)			Cable TV (0.03%)
Teekay LNG Partners LP	197,000	3,546	Adelphia Communications Corp
			0.00%, 6/15/2011 (a)		5,650	141
			Frontiervision
			0.00%, 9/15/2010 (a)(e)		9,250	278

See accompanying notes

228

Schedule of Investments
High Yield Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
BONDS (continued)			BONDS (continued)
Cable TV (continued)			Electric - Integrated (4.36%)
Frontiervision Operating PRT			CILCORP Inc
0.00%, 10/15/2010 (a)(e)	$ 7,250 $	-	9.38%, 10/15/2029	$ 3,000 $	3,690
		419	Commonwealth Edison Co
			6.95%, 7/15/2018	6,700	5,582
Casino Hotels (0.58%)
			Duquesne Light Holdings Inc
MGM Mirage			5.50%, 8/15/2015	20,000	15,994
13.00%, 11/15/2013 (f)(g)	9,000	8,010
			Energy Future Holdings Corp
			5.55%, 11/15/2014	1	1
Casino Services (0.97%)
			Mirant Americas Generation LLC
OED Corp/Diamond Jo LLC
			8.50%, 10/ 1/2021	32,500	22,750
8.75%, 4/15/2012	19,250	13,331
			Sierra Pacific Resources
			6.75%, 8/15/2017	15,500	12,191
Commercial Banks (0.31%)
KeyBank NA			TECO Energy Inc
7.41%, 5/ 6/2015	6,000	4,326	7.50%, 6/15/2010	1	1
					60,209
Commercial Services (3.76%)			Electronics - Military (1.82%)
ARAMARK Corp			L-3 Communications Corp
8.50%, 2/ 1/2015	37,000	31,635	5.88%, 1/15/2015	19,000	15,580
Ceridian Corp			6.38%, 10/15/2015	11,500	9,545
11.25%, 11/15/2015 (f)	32,500	20,231
					25,125
		51,866
			Finance - Commercial (1.37%)
Containers - Metal & Glass (1.58%)
			CIT Group Inc
Crown Americas LLC / Crown Americas			2.94%, 3/12/2010 (h)	5,000	3,463
Capital Corp
7.75%, 11/15/2015	12,000	10,470	3.80%, 7/28/2011 (h)	21,000	11,217
Crown Cork & Seal Co Inc			5.00%, 2/13/2014	8,000	4,163
8.00%, 4/15/2023	5,500	4,070			18,843
7.38%, 12/15/2026	10,500	7,245	Finance - Credit Card (0.91%)
		21,785	Discover Financial Services
			6.45%, 6/12/2017	20,000	12,592
Containers - Paper & Plastic (1.30%)
Graphic Packaging International Inc
			Finance - Leasing Company (0.13%)
8.50%, 8/15/2011	21,500	17,952
			DVI Inc
			0.00%, 2/ 1/2004 (a)(d)(e)	8,575	1,029
Cruise Lines (1.57%)
Royal Caribbean Cruises Ltd			0.00%, 2/ 1/2004 (a)(d)(e)	6,850	822
8.75%, 2/ 2/2011	14,000	12,040			1,851
7.25%, 3/15/2018	15,000	9,600	Finance - Mortgage Loan/Banker (2.21%)
		21,640	Freddie Mac
			4.63%, 10/25/2012	30,000	30,559
Dialysis Centers (2.26%)
DaVita Inc
			Food - Miscellaneous/Diversified (0.91%)
6.63%, 3/15/2013	35,500	31,151
			B&G Foods Inc
			8.00%, 10/ 1/2011	9,000	7,650
Diversified Banking Institutions (3.23%)
Bank of America Corp			12.00%, 10/30/2016 (e)	620	4,963
8.00%, 12/29/2049 (h)	37,500	28,077			12,613
JP Morgan Chase & Co			Independent Power Producer (0.33%)
7.90%, 4/29/2049 (h)	20,300	16,452	NRG Energy Inc
		44,529	7.38%, 2/ 1/2016	2	2
Electric - Generation (0.00%)			Reliant Energy Inc
AES Corp/The			6.75%, 12/15/2014	5,250	4,574
8.75%, 5/15/2013 (f)	1	1			4,576

See accompanying notes

229

Schedule of Investments
High Yield Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Medical - Drugs (1.55%)				Pipelines (continued)
Elan Finance PLC/Elan Finance Corp				Energy Maintenance Services Group LLC
7.75%, 11/15/2011	$ 17,500 $		11,637	11.50%, 3/ 1/2014 (d)(e)	$ 12,298 $		9,346
8.88%, 12/ 1/2013		15,500	9,765	Energy Maintenance Services Group LLC -
			21,402	Rights
				0.00%, 3/ 1/2014 (a)(d)(e)		-	-
Medical - HMO (2.03%)							43,123
Multiplan Inc
10.38%, 4/15/2016 (f)		30,500	28,060	Publishing - Periodicals (1.76%)
				Nielsen Finance LLC / Nielsen Finance Co
Medical - Hospitals (6.06%)				10.00%, 8/ 1/2014		33,500	24,288
HCA Inc
9.25%, 11/15/2016		13,500	11,475	Radio (0.58%)
7.50%, 11/ 6/2033		16,000	9,120	Sirius Satellite Radio Inc
				9.63%, 8/ 1/2013		26,000	8,060
HCA Inc/DE
6.50%, 2/15/2016		10,000	5,875
				Regional Banks (4.99%)
IASIS Healthcare LLC / IASIS Capital Corp
8.75%, 6/15/2014		33,750	26,662	Keycorp
				6.50%, 5/14/2013		3,000	2,641
Tenet Healthcare Corp
9.25%, 2/ 1/2015 (h)		37,000	30,525	Wachovia Corp
				7.98%, 2/28/2049 (h)		55,500	41,918
			83,657
				Wells Fargo Capital XV
MRI - Medical Diagnostic Imaging (2.24%)				9.75%, 12/29/2049 (h)		25,000	24,250
Alliance Imaging Inc							68,809
7.25%, 12/15/2012		36,000	30,960
				REITS - Healthcare (0.60%)
Non-Hazardous Waste Disposal (2.43%)				Omega Healthcare Investors Inc
				7.00%, 4/ 1/2014		10,000	8,300
Allied Waste North America Inc
7.88%, 4/15/2013		14,000	13,020
				REITS - Office Property (0.71%)
6.88%, 6/ 1/2017		23,500	20,445
				Reckson Operating Partnership LP
			33,465	6.00%, 3/31/2016		13,000	9,788
Oil Company - Exploration & Production (1.43%)
Chesapeake Energy Corp				Rental - Auto & Equipment (0.00%)
6.88%, 1/15/2016		14,000	11,235	United Rentals North America Inc
6.50%, 8/15/2017		11,500	8,467	6.50%, 2/15/2012		1	1
			19,702
				Retail - Automobile (1.95%)
Oil Refining & Marketing (1.50%)				Asbury Automotive Group Inc
Tesoro Corp				8.00%, 3/15/2014		13,250	6,625
6.63%, 11/ 1/2015		30,500	20,740	7.63%, 3/15/2017		3,500	1,540
				Penske Auto Group Inc
Pharmacy Services (1.46%)				7.75%, 12/15/2016		19,500	9,311
Omnicare Inc				Sonic Automotive Inc
6.13%, 6/ 1/2013		12,350	10,127	8.63%, 8/15/2013		20,500	9,430
6.88%, 12/15/2015		13,000	10,010				26,906
			20,137
				Retail - Regional Department Store (1.73%)
Physical Therapy & Rehabilitation Centers (2.39%)				Neiman Marcus Group Inc/The
Healthsouth Corp				10.38%, 10/15/2015		36,000	23,940
10.75%, 6/15/2016		36,500	33,032
				Retail - Sporting Goods (0.99%)
Pipelines (3.12%)				Remington Arms Co Inc
Dynegy Holdings Inc				10.50%, 2/ 1/2011		18,500	13,690
8.38%, 5/ 1/2016		32,000	23,680
El Paso Natural Gas Co
8.38%, 6/15/2032		12,500	10,097

See accompanying notes

230

Schedule of Investments
High Yield Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				SENIOR FLOATING RATE INTERESTS (continued)
Savings & Loans - Thrifts (0.01%)				Medical - HMO (continued)
Washington Mutual Bank/Henderson NV				Multiplan Inc, Term Loan C
0.00%, 6/15/2011 (a)	$ 3,500 $		17	5.63%, 4/12/2013 (h)	$ 2,874 $		2,127
0.00%, 1/15/2013 (a)		3,000	15				6,107
0.00%, 1/15/2015 (h)		2,000	10
				TOTAL SENIOR FLOATING RATE INTERESTS		$ 30,763
Washington Mutual Preferred Funding LLC
0.00%, 10/29/2049 (a)(f)		34,000	43	CONVERTIBLE BONDS (7.09%)
			85	Agricultural Chemicals (0.26%)
				Sinofert Holdings Ltd
Sovereign (3.25%)
				0.00%, 8/ 7/2011 (a)		24,000	3,592
Brazilian Government International Bond
12.50%, 1/ 5/2016		43,600	17,711
				Food - Catering (1.69%)
12.50%, 1/ 5/2022		14,500	5,488	FU JI Food and Catering Services Holdings Ltd
Mexican Bonos				0.00%, 11/ 9/2009 (a)		46,500	5,326
8.00%, 12/19/2013		288,474	21,688	0.00%, 10/18/2010 (a)		220,000	18,016
			44,887				23,342
Special Purpose Entity (6.33%)				Footwear & Related Apparel (0.89%)
CCM Merger Inc				Iconix Brand Group Inc
8.00%, 8/ 1/2013 (f)		26,500	15,635	1.88%, 6/30/2012		24,500	12,250
CDX North America High Yield
8.88%, 6/29/2013 (f)		30,000	24,900	Medical - Biomedical/Gene (0.02%)
ISA Capital do Brasil SA				Cell Therapeutics Inc
8.80%, 1/30/2017 (f)		16,500	11,880	4.00%, 7/ 1/2010		5,000	250
TRAINS HY-1-2006
2.18%, 5/ 1/2016 (e)		40,590	33,078	Pharmacy Services (0.24%)
UCI Holdco Inc				Omnicare Inc
10.32%, 12/15/2013 (h)		4,897	1,861	3.25%, 12/15/2035		7,000	3,378
			87,354
				Retail - Automobile (0.26%)
Telecommunication Services (1.11%)
				Asbury Automotive Group Inc
Qwest Corp
				3.00%, 9/15/2012		7,500	3,609
8.88%, 3/15/2012 (h)		17,500	15,312
				Retail - Regional Department Store (0.31%)
Transactional Software (0.46%)
				Golden Eagle Retail Group Ltd
Open Solutions Inc
				0.00%, 10/23/2011 (a)		38,000	4,297
9.75%, 2/ 1/2015 (f)		15,000	6,375
				Semiconductor Component - Integrated Circuits (0.16%)
Transport - Services (0.78%)
				Jazz Technologies Inc
Trailer Bridge Inc
				8.00%, 12/31/2011 (f)		6,000	2,153
9.25%, 11/15/2011		14,000	10,745
TOTAL BONDS		$ 1,137,957		Therapeutics (2.88%)
SENIOR FLOATING RATE INTERESTS (2.23%)				CV Therapeutics Inc
Commercial Services (1.79%)				2.75%, 5/16/2012		5,000	3,356
Quintiles Transnational, Term Loan Lien 1				3.25%, 8/16/2013		48,900	35,330
5.77%, 3/31/2013 (h)		28,691	22,881	Vion Pharmaceuticals Inc
Quintiles Transnational, Term Loan Lien 2				7.75%, 2/15/2012 (f)		2,500	563
7.77%, 3/31/2014 (h)		2,500	1,775	7.75%, 2/15/2012		2,000	450
			24,656				39,699
Medical - HMO (0.44%)				Transport - Marine (0.38%)
Multiplan Inc, Term Loan B				Horizon Lines Inc
5.63%, 4/12/2013 (h)		5,379	3,980	4.25%, 8/15/2012		10,000	5,325
				TOTAL CONVERTIBLE BONDS		$ 97,895

See accompanying notes

231

Schedule of Investments
High Yield Fund
October 31, 2008
					Portfolio Summary (unaudited)
			Principal
					Sector	Percent
			Amount	Value
			(000's)	(000's)	Consumer, Non-cyclical	31.39%
					Financial	20.73%
REPURCHASE AGREEMENTS (1.34%)					Consumer, Cyclical	15.13%
Money Center Banks (1.34%)					Industrial	9.16%
Investment in Joint Trading Account; Bank					Energy	6.05%
of America Repurchase Agreement;					Government	5.61%
0.15%; dated 10/31/2008 maturing					Utilities	4.69%
11/03/2008 (collateralized by Sovereign					Communications	3.81%
Agency Issues; $9,548,000; 2.75% -					Technology	1.75%
5.38%; dated 11/28/08 - 02/13/17)		$ 9,270$		9,270	Basic Materials	0.26%
					Other Assets in Excess of Liabilities, Net	1.42%
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;					TOTAL NET ASSETS	100.00%
0.15%; dated 10/31/2008 maturing					Other Assets Summary (unaudited)
11/03/2008 (collateralized by Sovereign
Agency Issues; $9,548,000; 2.63% -					Asset Type	Percent
4.63%; dated 09/09/09 - 06/12/15)			9,270	9,270	Credit Default Swaps	0.00%
				18,540
TOTAL REPURCHASE AGREEMENTS			$ 18,540
Total Investments			$ 1,360,666
Other Assets in Excess of Liabilities, Net - 1.42%				19,623
TOTAL NET ASSETS - 100.00%			$ 1,380,289
(a)	Non-Income Producing Security
(b)	Affiliated Security as defined by the Investment Company Act of 1940
	(the Fund controls 5.0% or more of the outstanding voting shares of the
	security).
(c)	Affiliated Security
(d)	Security is Illiquid
(e)	Market value is determined in accordance with procedures established in
	good faith by the Board of Directors. At the end of the period, the value
	of these securities totaled $61,028 or 4.42% of net assets.
(f)	Security exempt from registration under Rule 144A of the Securities Act
	of 1933. These securities may be resold in transactions exempt from
	registration, normally to qualified institutional buyers. Unless otherwise
	indicated, these securities are not considered illiquid. At the end of the
	period, the value of these securities totaled $159,737 or 11.57% of net
	assets.
(g)	Security purchased on a when-issued basis.
(h)	Variable Rate. Rate shown is in effect at October 31, 2008.
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation			$ 5,744
Unrealized Depreciation				(514,265)
Net Unrealized Appreciation (Depreciation)				(508,521)
Cost for federal income tax purposes				1,869,187
All dollar amounts are shown in thousands (000's)

See accompanying notes

232

Schedule of Investments
High Yield Fund
October 31, 2008
Credit Default Swaps
											Unrealized
						Buy/Sell	(Pay)/Receive		Expiration	Notional	Appreciation/
Counterparty (Issuer)	Reference Entity				Protection		Fixed Rate		Date	Amount	(Depreciation)
UBS AG	CDX.NA.HY.11					Sell	5.00 %		12/20/2013 $	30,000 $	9
All dollar amounts are shown in thousands (000's)
Affiliated Securities
		October 31, 2007		Purchases				Sales		October 31, 2008
		Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
New Flyer Industries Inc		2,003,300 $	15,739	650,000	$ 7,319		-	$ -		2,653,300 $	23,058
Student Transportation of America Inc		968,000	9,121	155,000		1,328	-		-	1,123,000	10,449
		$ 24,860			$ 8,647			$ -		$ 33,507
						Realized Gain/Loss			Realized Gain/Loss from
			Dividends			on Investments			Other Investment Companies
			(000's)			(000's)				(000's)
New Flyer Industries Inc		$ 867			$ -				$ -
Student Transportation of America Inc				1,055				-			-
		$ 1,922			$ -				$ -

See accompanying notes

233

Schedule of Investments
Income Fund
October 31, 2008
					Principal
		Shares	Value		Amount	Value
		Held	(000's)		(000's)	(000's)
COMMON STOCKS (0.18%)				BONDS (continued)
Cable TV (0.17%)				Casino Hotels (continued)
Time Warner Cable Inc (a)		80,164 $	1,570	MGM Mirage
				13.00%, 11/15/2013 (d)(f)	$ 9,000 $	8,010
Special Purpose Entity (0.01%)						13,874
Adelphia Recovery Trust (a)(b)		658,740	92
				Casino Services (0.90%)
TOTAL COMMON STOCKS		$ 1,662		OED Corp/Diamond Jo LLC
PREFERRED STOCKS (0.05%)				8.75%, 4/15/2012	12,000	8,310
Finance - Investment Banker & Broker (0.00%)
				Cellular Telecommunications (0.85%)
Lehman Brothers Holdings Inc		280,000	2
				Vodafone Group PLC
				7.75%, 2/15/2010	8,000	7,778
Finance - Mortgage Loan/Banker (0.05%)
Freddie Mac 8.38%; Series Z		300,000	465
				Commercial Banks (1.16%)
TOTAL PREFERRED STOCKS		$ 467		US Bank NA/Cincinnati OH
		Principal		6.38%, 8/ 1/2011	5,000	4,949
		Amount	Value	4.95%, 10/30/2014	6,000	5,676
		(000's)	(000's)			10,625
BONDS (70.93%)
				Containers - Paper & Plastic (0.42%)
Aerospace & Defense (0.32%)				Sealed Air Corp
Lockheed Martin Corp				5.63%, 7/15/2013 (d)	4,000	3,857
7.75%, 5/ 1/2026	$ 3,000		2,900
				Cruise Lines (0.95%)
Auto - Medium & Heavy Duty Trucks (0.63%)				Royal Caribbean Cruises Ltd
New Flyer Industries Ltd				8.75%, 2/ 2/2011	4,000	3,440
14.00%, 8/19/2020 (b)(c)(d)		7,000	5,749
				6.88%, 12/ 1/2013	6,000	4,020
				7.25%, 3/15/2018	2,000	1,280
Cable TV (3.11%)
Comcast Cable Communications Inc						8,740
7.13%, 6/15/2013		7,000	6,659	Diversified Banking Institutions (6.42%)
Comcast Cable Communications LLC				Bank of America Corp
6.20%, 11/15/2008		550	550	5.42%, 3/15/2017	5,000	3,800
Comcast Cable Holdings LLC				6.80%, 3/15/2028	670	519
7.88%, 8/ 1/2013		2,000	1,946	8.00%, 12/29/2049 (g)	4,000	2,995
Comcast Corp				8.13%, 12/29/2049 (g)	7,000	5,425
6.95%, 8/15/2037		3,000	2,446
				Citigroup Inc
COX Communications Inc				5.85%, 8/ 2/2016	12,000	10,418
6.75%, 3/15/2011		8,000	7,780
				8.40%, 4/29/2049	2,000	1,390
6.45%, 12/ 1/2036 (d)		4,000	2,822
				Goldman Sachs Group Inc/The
Frontiervision				6.60%, 1/15/2012	10,000	9,452
0.00%, 9/15/2010 (a)(b)		2,500	75
				5.35%, 1/15/2016	2,000	1,644
Frontiervision Operating PRT
				JP Morgan Chase & Co
0.00%, 10/15/2010 (a)(b)		2,000	-
				5.13%, 9/15/2014	12,000	10,681
Time Warner Cable Inc
				7.90%, 4/29/2049 (g)	5,000	4,052
6.55%, 5/ 1/2037		6,000	4,569
				Morgan Stanley
7.30%, 7/ 1/2038		2,000	1,673
				4.75%, 4/ 1/2014	5,000	3,556
			28,520
				6.25%, 8/ 9/2026	7,000	5,018
Casino Hotels (1.51%)						58,950
Harrah's Operating Co Inc
6.50%, 6/ 1/2016		6,000	945	Electric - Integrated (12.61%)
				Arizona Public Service Co
Mandalay Resort Group
				6.50%, 3/ 1/2012	5,000	4,604
7.00%, 11/15/2036 (e)		5,000	4,919
				Dominion Resources Inc/VA
				5.00%, 3/15/2013	10,000	8,890

See accompanying notes

234

Schedule of Investments
Income Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Electric - Integrated (continued)			Finance - Investment Banker & Broker (2.29%)
Exelon Generation Co LLC			Jefferies Group Inc
6.20%, 10/ 1/2017	$ 9,000 $	7,134	7.75%, 3/15/2012	$ 7,500 $		7,142
Florida Power Corp			6.25%, 1/15/2036		5,000	3,302
5.90%, 3/ 1/2033	8,000	6,649	Merrill Lynch & Co Inc
6.35%, 9/15/2037	2,000	1,749	6.00%, 2/17/2009		5,000	4,966
Illinois Power Co			5.00%, 1/15/2015		3,000	2,484
7.50%, 6/15/2009	9,000	9,025	6.50%, 7/15/2018		2,000	1,723
Metropolitan Edison Co			6.75%, 6/ 1/2028		2,000	1,434
4.95%, 3/15/2013	7,000	6,341				21,051
Mirant Americas Generation LLC
8.50%, 10/ 1/2021	15,000	10,500	Finance - Leasing Company (0.11%)
Nisource Finance Corp			DVI Inc
6.15%, 3/ 1/2013	5,000	4,090	0.00%, 2/ 1/2004 (a)(b)(c)		8,125	975
5.40%, 7/15/2014	5,000	3,852	0.00%, 2/ 1/2004 (a)(b)(c)		400	48
5.25%, 9/15/2017	2,000	1,361				1,023
Ohio Edison Co			Food - Miscellaneous/Diversified (1.11%)
5.45%, 5/ 1/2015	5,000	4,233	Corn Products International Inc
Oncor Electric Delivery Co			8.45%, 8/15/2009		10,200	10,220
7.00%, 9/ 1/2022	11,000	8,793
Pacific Gas & Electric Co			Food - Retail (0.55%)
4.20%, 3/ 1/2011	10,250	9,766	Safeway Inc
6.05%, 3/ 1/2034	2,000	1,526	7.50%, 9/15/2009		5,000	5,013
Pacificorp
4.95%, 8/15/2014	7,500	6,735	Forestry (0.11%)
5.25%, 6/15/2035	5,000	3,563	Weyerhaeuser Co
PPL Energy Supply LLC			7.38%, 3/15/2032		1,500	1,029
6.40%, 11/ 1/2011	5,000	4,795
Southwestern Electric Power Co			Gas - Distribution (0.92%)
5.38%, 4/15/2015	6,500	5,343	Sempra Energy
Texas-New Mexico Power Co			6.00%, 2/ 1/2013		9,000	8,480
6.25%, 1/15/2009	6,845	6,821
			Medical - Drugs (0.45%)
		115,770
			Elan Finance PLC/Elan Finance Corp
Electronics - Military (0.11%)			7.75%, 11/15/2011		6,250	4,156
Lockheed Martin Tactical Systems Inc
7.63%, 6/15/2025	1,000	979	Medical - Hospitals (1.78%)
			HCA Inc
Finance - Commercial (0.49%)			9.25%, 11/15/2016		6,000	5,100
CIT Group Inc			7.50%, 11/ 6/2033		1,700	969
5.00%, 2/ 1/2015	2,000	1,017	Tenet Healthcare Corp
5.40%, 1/30/2016	7,000	3,455	6.38%, 12/ 1/2011		12,000	10,320
		4,472				16,389
Finance - Consumer Loans (0.45%)			Medical - Wholesale Drug Distribution (1.05%)
American General Finance Corp			Cardinal Health Inc
4.63%, 5/15/2009	6,500	4,122	6.75%, 2/15/2011		10,000	9,661
Finance - Credit Card (0.75%)			Metal - Diversified (1.04%)
FIA Card Services NA			Xstrata Canada Corp
7.13%, 11/15/2012 (d)	5,000	4,875	6.00%, 10/15/2015		12,000	9,543
MBNA Corp
7.50%, 3/15/2012	2,000	1,981
		6,856

See accompanying notes

235

Schedule of Investments
Income Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
MRI - Medical Diagnostic Imaging (1.12%)				Pipelines (continued)
Alliance Imaging Inc				Energy Maintenance Services Group LLC -
7.25%, 12/15/2012	$ 12,000 $		10,320	Rights
				0.00%, 3/ 1/2014 (a)(b)(c)	$ 48 $	1
Multi-Line Insurance (0.57%)				Enterprise Products Operating LP
Farmers Insurance Exchange				6.38%, 2/ 1/2013	2,500	2,275
6.00%, 8/ 1/2014 (d)		6,000	5,233	Express Pipeline LP
				7.39%, 12/31/2017 (d)	4,514	5,166
Multimedia (1.19%)				Southern Natural Gas Co
Historic TW Inc				8.00%, 3/ 1/2032	4,000	3,090
9.15%, 2/ 1/2023		5,260	4,883	Tennessee Gas Pipeline Co
News America Inc				8.38%, 6/15/2032	2,000	1,615
6.40%, 12/15/2035		8,000	6,055	TransCanada Pipelines Ltd
			10,938	7.25%, 8/15/2038	7,000	5,549
						34,665
Non-Hazardous Waste Disposal (1.72%)
Allied Waste North America Inc				Publishing - Books (1.12%)
7.88%, 4/15/2013		1,000	930	Reed Elsevier Capital Inc
7.25%, 3/15/2015		9,000	8,010	6.75%, 8/ 1/2011	10,000	10,327
Waste Management Inc
6.88%, 5/15/2009		3,450	3,474	Regional Banks (2.72%)
7.38%, 8/ 1/2010		3,500	3,343	Bank One Corp
			15,757	10.00%, 8/15/2010	400	417
				FleetBoston Financial Corp
Oil Company - Exploration & Production (0.80%)				6.88%, 1/15/2028	995	814
OPTI Canada Inc				Wachovia Corp
7.88%, 12/15/2014		6,000	3,600	7.98%, 2/28/2049 (g)	15,000	11,329
XTO Energy Inc				Wells Fargo & Co
6.75%, 8/ 1/2037		5,000	3,705	4.63%, 4/15/2014	11,000	10,032
			7,305	Wells Fargo Capital XV
Oil Company - Integrated (1.52%)				9.75%, 12/29/2049 (g)	2,500	2,425
Petro-Canada						25,017
4.00%, 7/15/2013		3,000	2,551	Reinsurance (0.23%)
9.25%, 10/15/2021		8,500	8,023	Aspen Insurance Holdings Ltd
6.80%, 5/15/2038		5,000	3,366	6.00%, 8/15/2014	2,500	2,145
			13,940
				REITS - Healthcare (3.50%)
Oil Refining & Marketing (0.38%)
				HCP Inc
Tesoro Corp				6.45%, 6/25/2012	3,000	2,734
6.25%, 11/ 1/2012		4,600	3,519
				6.00%, 3/ 1/2015	1,750	1,385
Pharmacy Services (0.31%)				7.07%, 6/ 8/2015	2,250	1,891
Omnicare Inc				Health Care REIT Inc
6.13%, 6/ 1/2013		3,500	2,870	6.00%, 11/15/2013	8,000	6,873
				6.20%, 6/ 1/2016	3,000	2,369
Physical Therapy & Rehabilitation Centers (0.84%)				Healthcare Realty Trust Inc
Healthsouth Corp				8.13%, 5/ 1/2011	7,500	7,708
10.75%, 6/15/2016		8,500	7,692	5.13%, 4/ 1/2014	1,000	849
				Nationwide Health Properties Inc
Pipelines (3.78%)				6.00%, 5/20/2015	12,000	8,327
El Paso Natural Gas Co						32,136
7.50%, 11/15/2026		10,000	7,622
				REITS - Office Property (0.94%)
Energy Maintenance Services Group LLC
11.50%, 3/ 1/2014 (b)(c)		12,299	9,347	Arden Realty LP
				5.20%, 9/ 1/2011	3,000	2,843

See accompanying notes

236

Schedule of Investments
Income Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
REITS - Office Property (continued)				Transport - Services (1.00%)
Arden Realty LP (continued)				Trailer Bridge Inc
5.25%, 3/ 1/2015	$ 7,000 $		5,824	9.25%, 11/15/2011	$ 12,000 $		9,210
			8,667	TOTAL BONDS		$ 651,300
REITS - Shopping Centers (0.96%)				SENIOR FLOATING RATE INTERESTS (0.20%)
Developers Diversified Realty Corp				Commercial Services (0.20%)
4.63%, 8/ 1/2010		10,000	8,797	Quintiles Transnational, Term Loan Lien 2
				7.77%, 3/31/2014 (g)		2,500	1,775
REITS - Storage (0.98%)
				TOTAL SENIOR FLOATING RATE INTERESTS		$ 1,775
Shurgard Storage Centers LLC
5.88%, 3/15/2013		9,000	8,985	CONVERTIBLE BONDS (2.27%)
				Containers - Paper & Plastic (0.67%)
Retail - Regional Department Store (0.72%)				Sealed Air Corp
Neiman Marcus Group Inc/The				3.00%, 6/30/2033 (d)(g)		7,250	6,153
10.38%, 10/15/2015		10,000	6,650
				Pharmacy Services (0.26%)
Savings & Loans - Thrifts (0.00%)				Omnicare Inc
Washington Mutual Preferred Funding LLC				3.25%, 12/15/2035		5,000	2,413
0.00%, 10/29/2049 (a)(d)(e)		7,000	9
				Therapeutics (1.34%)
Special Purpose Entity (1.81%)				CV Therapeutics Inc
CCM Merger Inc				3.25%, 8/16/2013		17,000	12,282
8.00%, 8/ 1/2013 (d)		11,000	6,490	TOTAL CONVERTIBLE BONDS		$ 20,848
CDX North America High Yield
7.63%, 6/29/2012 (d)		11,760	10,172	U.S. GOVERNMENT & GOVERNMENT AGENCY
				OBLIGATIONS (25.34%)
			16,662
				Federal Home Loan Mortgage Corporation
Telecommunication Equipment - Fiber Optics (1.16%)				(FHLMC) (14.85%)
				5.50%, 11/ 1/2017		3,531	3,539
Corning Inc
5.90%, 3/15/2014		12,000	10,607	5.50%, 1/ 1/2018		1,144	1,147
				6.50%, 1/ 1/2029		367	376
Telecommunication Services (1.73%)				6.50%, 5/ 1/2029		468	479
Qwest Corp				6.50%, 6/ 1/2029		331	338
8.88%, 3/15/2012 (g)		8,000	7,000	6.50%, 6/ 1/2029		1,026	1,049
Telus Corp				6.50%, 8/ 1/2029		419	428
8.00%, 6/ 1/2011		9,000	8,845
				6.00%, 3/ 1/2031		329	330
			15,845
				5.50%, 5/ 1/2031		1,716	1,680
Telephone - Integrated (0.54%)				7.00%, 1/ 1/2032		546	561
Deutsche Telekom International Finance BV				6.00%, 5/ 1/2032		1,931	1,935
8.50%, 6/15/2010 (g)		5,000	4,925	5.00%, 5/ 1/2033		13,479	12,786
				4.50%, 8/ 1/2033		10,185	9,261
Toys (0.12%)
				4.50%, 8/ 1/2033		8,959	8,147
Mattel Inc
7.30%, 6/13/2011		1,000	1,072	4.50%, 8/ 1/2033		14,432	13,123
				5.50%, 6/ 1/2035		17,229	16,823
Transport - Rail (1.08%)				5.00%, 11/ 1/2035		15,847	15,012
Norfolk Southern Corp				5.50%, 1/ 1/2036		18,790	18,347
6.20%, 4/15/2009		5,000	4,983	5.50%, 4/ 1/2036		15,762	15,383
Union Pacific Corp				6.00%, 6/ 1/2038		15,652	15,633
3.88%, 2/15/2009		5,000	4,957				136,377
			9,940
				Federal National Mortgage Association (FNMA) (5.07%)
				7.45%, 6/ 1/2016		141	147
				5.00%, 1/ 1/2018		3,402	3,353
				6.50%, 9/ 1/2028		93	96

See accompanying notes

237

Schedule of Investments
Income Fund
October 31, 2008
		Principal
		Amount	Value	(a)	Non-Income Producing Security
		(000's)	(000's)	(b)	Market value is determined in accordance with procedures established in
					good faith by the Board of Directors. At the end of the period, the value
U.S. GOVERNMENT & GOVERNMENT AGENCY					of these securities totaled $16,287 or 1.77% of net assets.
OBLIGATIONS (continued)				(c)	Security is Illiquid
Federal National Mortgage Association (FNMA)
				(d)	Security exempt from registration under Rule 144A of the Securities Act
(continued)
6.50%, 11/ 1/2028	$ 106 $		109		of 1933. These securities may be resold in transactions exempt from
					registration, normally to qualified institutional buyers. Unless otherwise
7.00%, 1/ 1/2030		33	34		indicated, these securities are not considered illiquid. At the end of the
6.50%, 5/ 1/2031		384	392		period, the value of these securities totaled $58,536 or 6.37% of net
6.00%, 4/ 1/2032		1,076	1,080		assets.
6.50%, 4/ 1/2032		1,244	1,269	(e)	Security or a portion of the security was on loan at the end of the period.
				(f)	Security purchased on a when-issued basis.
6.50%, 5/ 1/2032		1,217	1,242
				(g)	Variable Rate. Rate shown is in effect at October 31, 2008.
5.00%, 10/ 1/2032		3,647	3,465
				(h)	Security was purchased with the cash proceeds from securities loans.
5.50%, 3/ 1/2033		5,096	4,990
5.50%, 6/ 1/2033		14,786	14,494
				Unrealized Appreciation (Depreciation)
5.50%, 2/ 1/2035		16,261	15,904	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			46,575	of investments held by the fund as of the period end were as follows:
Government National Mortgage Association
(GNMA) (0.29%)				Unrealized Appreciation		$ 3,808
7.00%, 6/20/2031		271	276	Unrealized Depreciation			(171,674)
6.00%, 5/20/2032 (g)		2,387	2,393	Net Unrealized Appreciation (Depreciation)			(167,866)
			2,669	Cost for federal income tax purposes			1,083,244
				All dollar amounts are shown in thousands (000's)
U.S. Treasury (5.13%)
4.50%, 2/15/2036		17,000	17,315
					Portfolio Summary (unaudited)
5.00%, 5/15/2037		15,000	16,521
				Sector			Percent
4.38%, 2/15/2038		3,000	3,009
				Financial			24.12%
4.50%, 5/15/2038		10,000	10,221	Mortgage Securities			20.21%
			47,066	Utilities			13.53%
				Communications			9.86%
TOTAL U.S. GOVERNMENT & GOVERNMENT				Consumer, Non-cyclical			9.02%
AGENCY OBLIGATIONS		$ 232,687		Energy			6.47%
REPURCHASE AGREEMENTS (0.72%)				Industrial			5.31%
				Government			5.18%
Money Center Banks (0.72%)				Consumer, Cyclical			4.84%
BNP Paribas Securities Corporation				Basic Materials			1.15%
Repurchase Agreement; 0.20% dated				Other Assets in Excess of Liabilities, Net			0.31%
10/31/08 maturing 11/03/08 (collateralized				TOTAL NET ASSETS			100.00%
by U.S. Government Agency Issues;
$1,509,000; 0.00% - 6.25%; dated
12/23/08 - 07/13/37) (h)	$ 1,497$		1,497
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $2,648,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)		2,571	2,571
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $2,648,000; 2.63% -
4.63%; dated 09/09/09 - 06/12/15)		2,571	2,571
			6,639
TOTAL REPURCHASE AGREEMENTS		$ 6,639
Total Investments		$ 915,378
Other Assets in Excess of Liabilities, Net - 0.31%			2,873
TOTAL NET ASSETS - 100.00%		$ 918,251

See accompanying notes

238

Schedule of Investments
Inflation Protection Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (55.90%)			BONDS (continued)
Appliances (0.12%)			Asset Backed Securities (continued)
Whirlpool Corp			SACO I Inc
3.32%, 6/15/2009 (a)(b)	$ 500 $	499	3.40%, 9/25/2036 (a)	$ 892 $		180
			SLM Student Loan Trust
Asset Backed Securities (7.86%)			2.97%, 6/15/2016 (a)(b)(d)		37	36
Ameriquest Mortgage Securities Inc			2.88%, 3/15/2017 (a)(b)		1,136	1,094
3.57%, 4/25/2034 (a)	380	311	Swift Master Auto Receivables Trust
Argent Securities Inc			4.66%, 6/15/2012 (a)		1,400	1,222
3.38%, 4/25/2036 (a)(b)	570	554				32,050
3.41%, 7/25/2036 (a)	3,000	2,155
			Auto - Car & Light Trucks (0.93%)
Carrington Mortgage Loan Trust
3.49%, 12/25/2035 (a)(b)	215	207	Daimler Finance North America LLC
			3.25%, 3/13/2009 (a)(b)		1,500	1,427
3.54%, 12/25/2035 (a)	250	228
			Daimler North America Corp
Citigroup Mortgage Loan Trust Inc
			3.17%, 3/13/2009 (a)(b)		2,500	2,351
3.41%, 3/25/2037 (a)	2,000	1,720
						3,778
Countrywide Asset-Backed Certificates
4.38%, 12/25/2032 (a)	78	58	Automobile Sequential (2.18%)
3.63%, 2/25/2036 (a)(b)	270	259	AmeriCredit Automobile Receivables Trust
3.51%, 3/25/2036 (a)	1,538	1,316	4.07%, 4/ 6/2012 (a)(b)		900	857
3.42%, 2/25/2037 (a)	4,000	2,724	AmeriCredit Prime Automobile Receivable Trust
3.76%, 2/25/2037 (a)	3,000	272	4.47%, 2/ 8/2009 (a)(b)		429	425
3.43%, 6/25/2037 (a)	2,000	1,164	Capital Auto Receivables Asset Trust
			4.59%, 10/15/2009 (a)(b)		418	417
3.39%, 11/25/2037 (a)	2,670	2,188
			4.79%, 3/15/2010 (a)(b)		1,470	1,457
Countrywide Home Equity Loan Trust
4.80%, 2/15/2036 (a)	380	287	Capital One Auto Finance Trust
			4.57%, 7/15/2011 (a)(b)		577	555
Fannie Mae Grantor Trust
3.40%, 4/25/2035 (a)	174	169	4.60%, 10/15/2012 (a)(b)		3,480	3,197
3.42%, 6/25/2035 (a)	5	5	Ford Credit Auto Owner Trust
			5.30%, 6/15/2012		300	259
Fannie Mae Whole Loan
3.56%, 11/25/2033 (a)(b)	8	8	Hyundai Auto Receivables Trust
			4.96%, 1/17/2012 (a)(b)		1,800	1,734
First Franklin Mortgage Loan Asset Backed
Certificates						8,901
3.50%, 11/25/2035 (a)(b)	1,333	1,301
			Beverages - Wine & Spirits (0.39%)
First Horizon Asset Backed Trust			Diageo Finance BV
3.39%, 10/25/2026 (a)	719	493	3.88%, 3/30/2009 (a)(b)		1,585	1,585
First-Citizens Home Equity Loan LLC
4.77%, 9/15/2022 (a)(c)	783	612	Brewery (0.31%)
Ford Credit Floorplan Master Owner Trust			SABMiller PLC
5.01%, 6/15/2011 (a)(b)	500	476	4.18%, 7/ 1/2009 (a)(b)(c)		1,250	1,247
GMAC Mortgage Corp Loan Trust
3.47%, 11/25/2036 (a)	1,230	492	Building Products - Cement & Aggregate (0.67%)
Indymac Residential Asset Backed Trust			Martin Marietta Materials Inc
3.45%, 4/25/2037 (a)	4,300	3,672	3.62%, 4/30/2010 (a)(b)		2,850	2,752
JP Morgan Mortgage Acquisition Corp
3.39%, 11/25/2036 (a)	3,000	1,863	Building Products - Wood (0.61%)
3.41%, 3/25/2037 (a)	2,135	1,577	Masco Corp
3.42%, 5/ 1/2037 (a)	3,000	1,898	3.12%, 3/12/2010 (a)(b)		2,665	2,510
Long Beach Mortgage Loan Trust
3.79%, 6/25/2034 (a)	225	154	Cable TV (0.44%)
3.41%, 7/25/2036 (a)	3,000	1,605	Comcast Corp
			5.12%, 7/14/2009 (a)(b)		1,000	958
3.43%, 12/25/2036 (a)	2,200	947
Merrill Lynch Mortgage Investors Inc
3.49%, 2/25/2037 (a)	2,000	803

See accompanying notes

239

Schedule of Investments
Inflation Protection Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Cable TV (continued)				Electric - Integrated (0.90%)
DirecTV Holdings LLC/DirecTV Financing Co				Entergy Gulf States Inc
8.38%, 3/15/2013	$ 900 $		844	3.21%, 12/ 1/2009 (a)(b)	$ 200 $		199
			1,802	Ohio Power Co
				4.39%, 4/ 5/2010 (a)(b)		1,535	1,510
Cellular Telecommunications (0.39%)
				Pepco Holdings Inc
Vodafone Group PLC				3.44%, 6/ 1/2010 (a)		1,150	1,136
3.09%, 2/27/2012 (a)		2,000	1,601
				TECO Energy Inc
				4.80%, 5/ 1/2010 (a)(b)		850	814
Commercial Banks (1.09%)
							3,659
American Express Centurion Bank
4.63%, 11/16/2009 (a)(b)		2,000	1,916	Electronic Components - Miscellaneous (0.17%)
Colonial Bank/Montgomery AL				Jabil Circuit Inc
8.00%, 3/15/2009		400	377	5.88%, 7/15/2010		500	451
HSBC America Capital Trust I				Sanmina-SCI Corp
7.81%, 12/15/2026 (c)		100	88	5.57%, 6/15/2010 (a)(c)		291	262
ICICI Bank Ltd							713
5.29%, 1/12/2010 (a)(b)(c)		500	486
				Electronic Components - Semiconductors (0.20%)
M&I Marshall & Ilsley Bank
3.08%, 12/ 4/2012 (a)		2,000	1,561	National Semiconductor Corp
				3.07%, 6/15/2010 (a)		850	819
			4,428
Computers - Memory Devices (0.45%)				Finance - Auto Loans (0.50%)
Seagate Technology HDD Holdings				American Honda Finance Corp
4.72%, 10/ 1/2009 (a)(b)		2,000	1,845	4.60%, 4/20/2010 (a)(b)(c)		850	848
				Ford Motor Credit Co LLC
Credit Card Asset Backed Securities (1.32%)				7.57%, 1/13/2012 (a)		500	303
American Express Credit Account Master Trust				GMAC LLC
4.79%, 8/15/2011 (a)(b)(c)		1,950	1,927	4.05%, 5/15/2009 (a)		1,000	871
4.81%, 9/15/2011 (a)(b)		1,500	1,481				2,022
4.84%, 3/15/2012 (a)(b)		500	479
				Finance - Commercial (1.09%)
4.67%, 9/15/2014 (a)		1,000	768
				CIT Group Inc
GE Capital Credit Card Master Note Trust				3.76%, 4/27/2011 (a)		1,000	554
4.74%, 3/15/2015 (a)		1,000	734
				3.05%, 2/13/2012 (a)		1,500	797
			5,389
				Textron Financial Corp
Diversified Banking Institutions (0.90%)				2.94%, 2/25/2011 (a)		4,000	3,100
Citigroup Inc							4,451
2.96%, 5/18/2010 (a)		1,400	1,300
				Finance - Consumer Loans (1.62%)
Goldman Sachs Group Inc/The
				HSBC Finance Corp
3.01%, 8/ 5/2011 (a)		1,000	881
				3.81%, 4/24/2012 (a)		4,000	3,520
Morgan Stanley
				John Deere Capital Corp
4.57%, 1/ 9/2012 (a)		1,000	780
				4.93%, 10/16/2009 (a)(b)		2,350	2,357
4.62%, 1/ 9/2014 (a)		1,000	724
				SLM Corp
			3,685	3.02%, 3/15/2011 (a)		1,000	716
Diversified Financial Services (0.61%)							6,593
General Electric Capital Corp				Finance - Investment Banker & Broker (2.16%)
4.64%, 4/10/2012 (a)		3,000	2,488
				Bear Stearns Cos LLC/The
				4.91%, 7/16/2009 (a)(b)		1,500	1,502
Diversified Operations (0.20%)
				3.00%, 11/28/2011 (a)		1,500	1,315
Capmark Financial Group Inc
3.45%, 5/10/2010 (a)		2,000	802	Citigroup Funding Inc
				4.31%, 10/22/2009 (a)(b)		2,800	2,718
				Merrill Lynch & Co Inc
				3.00%, 11/ 1/2011 (a)		2,950	2,454

See accompanying notes

240

Schedule of Investments
Inflation Protection Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Finance - Investment Banker & Broker			Home Equity - Other (continued)
(continued)			Wells Fargo Home Equity Trust
Merrill Lynch & Co Inc (continued)			3.55%, 10/25/2035 (a)(c)	$ 187 $		163
3.04%, 6/ 5/2012 (a)	$ 1,000 $	814
						19,442
		8,803
			Home Equity - Sequential (0.45%)
Finance - Leasing Company (0.14%)			BNC Mortgage Loan Trust
International Lease Finance Corp			3.43%, 7/25/2037 (a)		2,271	1,404
3.03%, 5/24/2010 (a)	800	553
			Countrywide Asset-Backed Certificates
			5.51%, 8/25/2036		610	432
Finance - Mortgage Loan/Banker (0.74%)
						1,836
Countrywide Financial Corp
3.42%, 3/24/2009 (a)(b)	2,000	1,962	Investment Companies (0.24%)
3.24%, 5/ 7/2012 (a)	1,000	850	Xstrata Finance Dubai Ltd
Fannie Mae			3.15%, 11/13/2009 (a)(b)(c)		1,000	982
6.74%, 2/17/2009 (a)	200	200
		3,012	Life & Health Insurance (0.37%)
			Lincoln National Corp
Food - Miscellaneous/Diversified (0.34%)			4.32%, 4/ 6/2009 (a)(b)		1,500	1,491
General Mills Inc
4.19%, 1/22/2010 (a)(b)	1,000	989	Machinery - Farm (0.21%)
Kraft Foods Inc			Case New Holland Inc
3.30%, 8/11/2010 (a)	450	412	6.00%, 6/ 1/2009		900	860
		1,401
			Medical - Drugs (0.04%)
Home Equity - Other (4.77%)
			Elan Finance PLC/Elan Finance Corp
ACE Securities Corp
			6.94%, 12/ 1/2013 (a)		250	154
3.47%, 9/25/2035 (a)(b)	95	95
Asset Backed Securities Corp Home Equity			Medical - HMO (0.23%)
3.36%, 7/25/2036 (a)(b)	2,000	1,973
			UnitedHealth Group Inc
Bear Stearns Asset Backed Securities Trust			3.38%, 6/21/2010 (a)		1,000	924
3.42%, 8/25/2036 (a)	400	264
3.45%, 5/25/2037 (a)	4,000	3,083	Medical - Wholesale Drug Distribution (0.24%)
3.44%, 6/25/2047 (a)	2,400	1,890	Cardinal Health Inc
First NLC Trust			4.32%, 10/ 2/2009 (a)(b)		1,000	986
3.56%, 9/25/2035 (a)	1,077	1,032
GMAC Mortgage Corp Loan Trust			Medical Products (1.01%)
5.75%, 10/25/2036	500	402	Angiotech Pharmaceuticals Inc
6.05%, 12/25/2037 (a)	1,580	803	6.56%, 12/ 1/2013 (a)		400	244
GSAA Trust			Hospira Inc
3.40%, 4/25/2047 (a)	3,025	1,897	4.24%, 3/30/2010 (a)(b)		4,000	3,895
HSI Asset Securitization Corp Trust						4,139
3.40%, 1/25/2037 (a)	2,000	1,353
			Mortgage Backed Securities (14.38%)
New Century Home Equity Loan Trust
			Adjustable Rate Mortgage Trust
3.55%, 3/25/2035 (a)	55	42
			3.53%, 8/25/2036 (a)		954	281
Option One Mortgage Loan Trust
			Banc of America Alternative Loan Trust
4.26%, 2/25/2035 (a)	37	8
			3.66%, 6/25/2036 (a)		374	361
3.71%, 3/25/2037 (a)	2,000	289
			Banc of America Commercial Mortgage Inc
Residential Asset Securities Corp			6.85%, 4/15/2036		300	292
3.46%, 5/25/2035 (a)	2	2
			5.31%, 10/10/2045 (a)		1,000	893
3.41%, 9/25/2036 (a)	3,300	2,489
			Banc of America Funding Corp
Soundview Home Equity Loan Trust			4.56%, 7/20/2036 (a)		1,868	499
3.44%, 3/25/2036 (a)	761	686
			3.44%, 4/25/2037 (a)		4,000	1,791
WAMU Asset-Backed Certificates
			Bear Stearns Alt-A Trust
3.43%, 5/25/2037 (a)	2,000	1,462
			3.42%, 11/25/2036 (a)		525	253
3.43%, 7/25/2047 (a)	3,000	1,509

See accompanying notes

241

Schedule of Investments
Inflation Protection Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
BONDS (continued)			BONDS (continued)
Mortgage Backed Securities (continued)			Mortgage Backed Securities (continued)
Bear Stearns Alt-A Trust (continued)			Freddie Mac
3.43%, 4/25/2037 (a)	$ 1,389 $	661	4.89%, 5/15/2017 (a)	$ 413 $	408
Bear Stearns Asset Backed Securities Trust			4.89%, 2/15/2018 (a)	417	410
3.49%, 4/25/2036 (a)	150	102	4.89%, 6/15/2018 (a)	434	427
Bear Stearns Commercial Mortgage Securities			4.84%, 3/15/2023 (a)	258	252
7.00%, 5/20/2030	523	515	5.04%, 6/15/2023 (a)	110	107
Bella Vista Mortgage Trust			4.99%, 7/15/2023 (a)	3,658	3,498
4.05%, 1/22/2045 (a)	1,229	754
			4.94%, 7/15/2028 (a)	535	529
4.53%, 5/20/2045 (a)	953	630
			4.99%, 1/15/2030 (a)	629	609
Chase Mortgage Finance Corp
5.01%, 7/25/2037 (a)	469	429	4.94%, 2/15/2030 (a)	41	42
Citigroup/Deutsche Bank Commercial			4.79%, 4/15/2030 (a)	127	124
Mortgage Trust			4.94%, 5/15/2030 (a)	103	100
0.43%, 10/15/2048 (a)	36,702	626	4.99%, 9/15/2033 (a)	369	355
0.06%, 12/11/2049 (a)(c)	12,752	81	4.89%, 10/15/2034 (a)(b)	148	144
0.38%, 12/11/2049 (a)(c)	8,149	140	G-Force LLC
Commercial Mortgage Loan Trust			3.56%, 12/25/2039 (a)(c)	1,000	712
6.22%, 9/10/2017 (a)	600	461	Ginnie Mae
Countrywide Alternative Loan Trust			1.57%, 10/16/2012 (a)	2,993	99
3.68%, 12/25/2035 (a)	460	246	4.51%, 10/16/2028 (a)(b)	709	708
3.54%, 6/25/2036 (a)	1,077	271	4.63%, 10/20/2031 (a)	185	182
3.52%, 7/25/2046 (a)	2,100	640	0.82%, 3/16/2047 (a)	5,703	276
3.47%, 5/25/2047 (a)	4,024	1,618	Greenpoint Mortgage Funding Trust
Countrywide Asset-Backed Certificates			3.57%, 10/25/2045 (a)	1,001	736
3.53%, 1/25/2036 (a)	188	170	Greenwich Capital Commercial Funding Corp
Countrywide Home Loan Mortgage Pass			0.32%, 3/10/2039 (a)(c)	54,769	824
Through Trust			5.44%, 3/10/2039 (a)	2,000	1,491
3.46%, 4/25/2046 (a)	1,106	570	GSC Capital Corp Mortgage Trust
Credit Suisse Mortgage Capital Certificates			3.52%, 2/25/2036 (a)	635	398
6.00%, 9/15/2039 (a)	1,000	545	GSR Mortgage Loan Trust
CS First Boston Mortgage Securities Corp			3.52%, 8/25/2046 (a)	213	51
7.73%, 9/15/2041 (a)	1,025	1,029	Homebanc Mortgage Trust
Fannie Mae			3.60%, 1/25/2036 (a)	1,047	755
3.56%, 2/25/2018 (a)	76	76	Impac CMB Trust
3.56%, 3/25/2018 (a)	424	418	4.24%, 10/25/2034 (a)	50	33
3.56%, 10/25/2018 (a)	562	553	4.81%, 10/25/2034 (a)	111	51
3.51%, 11/25/2022 (a)	104	101	3.57%, 4/25/2035 (a)	289	121
3.46%, 1/25/2023 (a)	101	98	3.77%, 8/25/2035 (a)	64	23
3.66%, 6/25/2023 (a)	684	663	3.91%, 8/25/2035 (a)	56	15
3.66%, 2/25/2028 (a)(b)	203	199	3.51%, 4/25/2037 (a)	1,592	964
3.66%, 5/25/2030 (a)	494	478	Impac Secured Assets CMN Owner Trust
3.66%, 5/25/2031 (a)	690	681	3.43%, 9/25/2036 (a)	1,500	838
3.56%, 2/25/2032 (a)	97	96	3.42%, 3/25/2037 (a)	1,600	558
3.46%, 4/25/2034 (a)	638	638	Indymac Index Mortgage Loan Trust
3.51%, 3/25/2035 (a)	226	221	3.49%, 4/25/2035 (a)	134	76
Fannie Mae Grantor Trust			3.56%, 8/25/2035 (a)	334	192
3.61%, 5/25/2035 (a)	89	90	3.44%, 1/25/2037 (a)	1,460	428
Fannie Mae Whole Loan			3.50%, 6/25/2037 (a)	3,785	2,305
3.41%, 5/25/2035 (a)	98	97	JP Morgan Alternative Loan Trust
3.46%, 5/25/2035 (a)	105	99	3.41%, 3/25/2037 (a)	1,460	573
3.51%, 6/25/2044 (a)(b)	28	28
3.71%, 2/25/2047 (a)	83	83

See accompanying notes

242

Schedule of Investments
Inflation Protection Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Multimedia (continued)
JP Morgan Chase Commercial Mortgage				Viacom Inc
Securities Corp				3.17%, 6/16/2009 (a)(b)	$ 1,525 $	1,442
5.63%, 6/12/2041 (a)	$ 1,000 $		722			3,369
5.30%, 5/15/2047 (a)		1,000	884
				Office Automation & Equipment (0.09%)
JP Morgan Mortgage Trust
5.30%, 7/25/2035		720	619	Xerox Corp
				3.63%, 12/18/2009 (a)(b)	400	365
5.82%, 6/25/2036 (a)		300	189
5.80%, 1/25/2037 (a)		817	728
				Pipelines (0.30%)
LB-UBS Commercial Mortgage Trust				Rockies Express Pipeline LLC
5.59%, 6/15/2031		390	360	5.10%, 8/20/2009 (a)(c)	720	720
Lehman XS Trust				Williams Cos Inc
3.48%, 6/25/2047 (a)		3,733	2,115	5.88%, 10/ 1/2010 (a)(c)	500	492
Merrill Lynch Alternative Note Asset Trust						1,212
3.47%, 4/25/2037 (a)		5,000	1,892
Merrill Lynch/Countrywide Commercial				Regional Banks (1.32%)
Mortgage Trust				BAC Capital Trust XIII
0.11%, 7/12/2046 (a)(c)		16,957	191	3.22%, 3/15/2043 (a)	4,000	1,443
Morgan Stanley Capital I				Capital One Financial Corp
4.88%, 12/20/2046 (a)(c)		200	26	3.10%, 9/10/2009 (a)(b)	1,900	1,762
Residential Accredit Loans Inc				Fleet Capital Trust II
3.41%, 2/25/2037 (a)		3,111	1,534	7.92%, 12/11/2026	500	386
3.45%, 7/25/2037 (a)		957	581	PNC Funding Corp
3.41%, 2/25/2047 (a)		2,714	1,440	3.56%, 1/31/2012 (a)	500	405
Structured Adjustable Rate Mortgage Loan Trust				Wells Fargo & Co
3.96%, 8/25/2034 (a)		1,313	567	3.03%, 8/20/2010 (a)	1,400	1,392
Structured Asset Mortgage Investments Inc						5,388
3.49%, 5/25/2045 (a)		757	422
				REITS - Mortgage (0.31%)
Wachovia Bank Commercial Mortgage Trust				iStar Financial Inc
0.48%, 12/15/2043 (a)(c)		27,493	639	3.37%, 3/16/2009 (a)	725	413
4.52%, 5/15/2044		2,680	2,520	3.16%, 9/15/2009 (a)	500	283
WaMu Mortgage Pass Through Certificates				3.16%, 3/ 9/2010 (a)	1,000	560
3.90%, 12/25/2027 (a)		895	781
						1,256
5.93%, 9/25/2036 (a)		172	157
6.06%, 9/25/2036 (a)		195	175	REITS - Office Property (0.16%)
5.69%, 6/25/2037 (a)		1,764	1,229	HRPT Properties Trust
4.23%, 7/25/2044 (a)		86	80	3.42%, 3/16/2011 (a)	720	657
3.63%, 1/25/2045 (a)		187	82
				REITS - Warehouse & Industrial (0.12%)
3.64%, 11/25/2045 (a)(b)		731	681
				Prologis
3.48%, 8/25/2046 (a)		993	765	3.06%, 8/24/2009 (a)(b)	500	487
Washington Mutual Alternative Mortgage
Pass-Through Certificates				Rental - Auto & Equipment (0.67%)
3.54%, 6/25/2046 (a)		700	143
				Erac USA Finance Co
3.44%, 1/25/2047 (a)		3,411	1,240	3.71%, 4/30/2009 (a)(b)(c)	2,250	2,082
			58,653	3.06%, 8/28/2009 (a)(b)(c)	660	658
Multi-Line Insurance (0.30%)						2,740
Metropolitan Life Global Funding I				Retail - Drug Store (0.33%)
2.85%, 5/17/2010 (a)(b)(c)		1,400	1,240
				CVS/Caremark Corp
				3.11%, 6/ 1/2010 (a)	1,500	1,355
Multimedia (0.83%)
Time Warner Inc
3.03%, 11/13/2009 (a)(b)		2,050	1,927

See accompanying notes

243

Schedule of Investments
Inflation Protection Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				U.S. GOVERNMENT & GOVERNMENT AGENCY
Rubber - Tires (0.06%)				OBLIGATIONS (continued)
Goodyear Tire & Rubber Co/The				Federal National Mortgage Association (FNMA)
				(continued)
6.68%, 12/ 1/2009 (a)	$ 250 $		229
				5.87%, 3/ 1/2034 (a)	$ 337 $		346
				5.59%, 4/ 1/2034 (a)		489	500
Special Purpose Banks (0.25%)
Korea Development Bank				4.60%, 9/ 1/2034 (a)		311	314
4.90%, 10/20/2009 (a)(b)		380	379	4.30%, 5/ 1/2035 (a)		287	288
4.35%, 4/ 3/2010 (a)(b)		665	641	4.42%, 5/ 1/2035 (a)		737	740
			1,020	5.65%, 11/ 1/2035 (a)		517	519
							5,128
Special Purpose Entity (1.16%)
Genworth Global Funding Trusts				U.S. Treasury Inflation-Indexed Obligations (61.98%)
2.98%, 12/15/2010 (a)		935	699	4.25%, 1/15/2010 (h)		1,530	1,516
ING USA Global Funding Trust				3.50%, 1/15/2011		13,028	12,725
4.62%, 10/ 9/2009 (a)(b)		2,300	2,088	2.38%, 4/15/2011 (h)		7,837	7,430
Sirens BV				3.38%, 1/15/2012		7,150	7,010
6.77%, 4/13/2012 (a)(c)(d)(e)		2,000	1,456	2.00%, 4/15/2012 (h)		14,926	14,076
Williams Cos Inc Credit Linked Certificate				3.00%, 7/15/2012		17,644	17,207
Trust/The
6.05%, 5/ 1/2009 (a)(c)		500	497	0.63%, 4/15/2013 (h)		13,889	12,610
			4,740	1.88%, 7/15/2013 (h)		12,853	12,024
				2.00%, 1/15/2014 (h)		5,093	4,665
Telecommunication Services (0.07%)
				2.00%, 7/15/2014 (h)		21,026	19,225
Telcordia Technologies Inc
				1.63%, 1/15/2015 (h)		13,700	11,991
8.50%, 7/15/2012 (a)(c)		440	286
				1.88%, 7/15/2015 (h)		18,033	15,925
Telephone - Integrated (0.67%)				2.00%, 1/15/2016 (h)		17,601	15,531
Deutsche Telekom International Finance BV				2.50%, 7/15/2016 (h)		8,630	7,946
3.39%, 3/23/2009 (a)(b)		375	371	2.38%, 1/15/2017 (h)		1,396	1,273
Sprint Nextel Corp				2.63%, 7/15/2017 (h)		14,059	13,175
4.17%, 6/28/2010 (a)		400	317	1.63%, 1/15/2018 (h)		13,909	12,060
Telecom Italia Capital SA				1.38%, 7/15/2018		13,513	11,555
5.11%, 7/18/2011 (a)		800	633	2.38%, 1/15/2025		5,631	4,877
Telefonica Emisiones SAU				2.00%, 1/15/2026		17,683	14,516
3.50%, 6/19/2009 (a)(b)		700	674
				2.38%, 1/15/2027 (h)		14,509	12,555
3.12%, 2/ 4/2013 (a)(f)(g)		1,000	750
				1.75%, 1/15/2028 (h)		13,961	10,914
			2,745
				3.63%, 4/15/2028		3,454	3,564
Tobacco (0.65%)				3.88%, 4/15/2029 (h)		6,430	6,878
Reynolds American Inc				3.38%, 4/15/2032 (h)		1,524	1,556
3.52%, 6/15/2011 (a)		3,200	2,660				252,804
Tools - Hand Held (0.34%)				TOTAL U.S. GOVERNMENT & GOVERNMENT
Snap-On Inc				AGENCY OBLIGATIONS		$ 257,932
4.95%, 1/12/2010 (a)(b)		1,400	1,384	REPURCHASE AGREEMENTS (1.73%)
TOTAL BONDS		$ 227,988		Money Center Banks (1.73%)
U.S. GOVERNMENT & GOVERNMENT AGENCY				BNP Paribas Securities Corporation
OBLIGATIONS (63.24%)				Repurchase Agreement; 0.20% dated
Federal National Mortgage Association (FNMA) (1.26%)				10/31/08 maturing 11/03/08 (collateralized
				by U.S. Government Agency Issues;
5.32%, 7/ 1/2026 (a)		445	445	$2,705,000; 0.00% - 6.25%; dated
5.41%, 3/ 1/2033 (a)		592	592	12/23/08 - 07/13/37) (b)	$ 2,683$		2,683
5.25%, 4/ 1/2033 (a)		226	230
3.73%, 5/ 1/2033 (a)		555	548
4.54%, 7/ 1/2033 (a)		367	373
5.74%, 7/ 1/2033 (a)		231	233

See accompanying notes

244

Schedule of Investments
Inflation Protection Fund
October 31, 2008
					Portfolio Summary (unaudited)
		Principal
					Sector	Percent
			Amount	Value
			(000's)	(000's)	Government	62.03%
					Asset Backed Securities	16.53%
REPURCHASE AGREEMENTS (continued)					Mortgage Securities	15.69%
Money Center Banks (continued)					Financial	14.75%
Investment in Joint Trading Account; Bank					Consumer, Non-cyclical	3.88%
of America Repurchase Agreement;					Communications	2.40%
0.15%; dated 10/31/2008 maturing					Industrial	2.01%
11/03/2008 (collateralized by Sovereign					Consumer, Cyclical	1.44%
Agency Issues; $2,253,000; 2.75% -					Utilities	0.90%
5.38%; dated 11/28/08 - 02/13/17)		$ 2,188$		2,188	Technology	0.74%
					Energy	0.30%
Investment in Joint Trading Account;					Diversified	0.20%
Morgan Stanley Repurchase Agreement;					Liabilities in Excess of Other Assets, Net	(20.87%)
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign					TOTAL NET ASSETS	100.00%
Agency Issues; $2,253,000; 2.63% -					Other Assets Summary (unaudited)
4.63%; dated 09/09/09 - 06/12/15)			2,188	2,188
					Asset Type	Percent
				7,059
					Total Return Swaps	3.07%
TOTAL REPURCHASE AGREEMENTS			$ 7,059
Total Investments			$ 492,979
Liabilities in Excess of Other Assets, Net - (20.87)%				(85,120)
TOTAL NET ASSETS - 100.00%			$ 407,859
(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
(b)	Security was purchased with the cash proceeds from securities loans.
(c)	Security exempt from registration under Rule 144A of the Securities Act
	of 1933. These securities may be resold in transactions exempt from
	registration, normally to qualified institutional buyers. Unless otherwise
	indicated, these securities are not considered illiquid. At the end of the
	period, the value of these securities totaled $16,659 or 4.08% of net
	assets.
(d)	Market value is determined in accordance with procedures established in
	good faith by the Board of Directors. At the end of the period, the value
	of these securities totaled $1,492 or 0.37% of net assets.
(e)	Security is Illiquid
(f)	Non-Income Producing Security
(g)	Security purchased on a when-issued basis.
(h)	Security or a portion of the security was on loan at the end of the period.
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation			$ 134
Unrealized Depreciation				(109,760)
Net Unrealized Appreciation (Depreciation)				(109,626)
Cost for federal income tax purposes				602,605
All dollar amounts are shown in thousands (000's)

See accompanying notes

245

Schedule of Investments
Inflation Protection Fund
October 31, 2008
Total Return Swaps
					Unrealized
			Expiration	Notional	Appreciation/
Counterparty (Issuer)	Receive	Pay	Date	Amount	(Depreciation)
Barclays Bank PLC	Return equal to a 3.88% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 04/2029	LIBOR less 23bp	12/12/2008 $	11,000	$ (1,150)
Barclays Bank PLC	Return equal to a 3.00% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 07/2012	LIBOR less 26bp	01/30/2009	5,000	47
Barclays Bank PLC	Return equal to a 4.25% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 01/2010	LIBOR less 100bp	11/17/2008	19,500	(2,773)
Barclays Bank PLC	Return equal to a 3.38% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 04/2032	LIBOR less 26bp	11/05/2008	3,500	(720)
Barclays Bank PLC	Return equal to a 2.38% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 04/2011	LIBOR less 26bp	11/05/2008	10,000	(961)
Barclays Bank PLC	Return equal to a 3.63% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 04/2028	LIBOR less 26bp	11/05/2008	11,000	(2,333)
Barclays Bank PLC	Return equal to a 1.88% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 07/2013	LIBOR less 25bp	11/26/2008	8,000	(77)
Barclays Bank PLC	Return equal to a 2.50% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 07/2016	LIBOR less 23bp	12/12/2008	8,000	(449)
Barclays Bank PLC	Return equal to a 2.38% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 01/2017	LIBOR less 23bp	12/12/2008	13,000	(623)
Barclays Bank PLC	Return equal to a 0.88% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 04/2010	LIBOR less 23bp	12/12/2008	21,000	(787)
Barclays Bank PLC	Return equal to a 1.63% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 01/2015	LIBOR less 105bp	01/09/2009	6,000	(502)
Barclays Bank PLC	Return equal to a 4.25% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 01/2010	LIBOR less 100bp	11/17/2008	8,000	(18)
Morgan Stanley	Return equal to a 2.00% US Treasury Indexed	Monthly a floating rate based on 1 month
	Obligation; 01/2014	LIBOR less 25bp	11/26/2008	15,000	(2,064)
All dollar amounts are shown in thousands (000's)

See accompanying notes

246

Schedule of Investments
International Emerging Markets Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (88.16%)			COMMON STOCKS (continued)
Agricultural Operations (0.00%)			Cellular Telecommunications (10.40%)
Golden Agri-Resources Ltd	480 $	-	Advanced Info Service PCL (a)(b)	2,373,700 $	4,774
			America Movil SAB de CV ADR	376,892	11,661
Airlines (0.67%)			Cellcom Israel Ltd	178,214	5,250
Lan Airlines SA ADR	271,326	2,738	China Mobile Ltd	2,088,962	18,390
Tam SA ADR (a)	184,975	1,957	China Unicom Hong Kong Ltd	5,089,500	7,266
		4,695	Empresa Nacional de Telecomunicaciones SA	284,805	2,951
Airport Development & Maintenance (0.12%)			Mobile Telesystems OJSC ADR	111,406	4,362
Grupo Aeroportuario del Sureste SAB de CV			MTN Group Ltd	700,790	7,869
ADR	26,009	839	SK Telecom Co Ltd ADR	361,954	6,229
			Taiwan Mobile Co Ltd	3,240,000	4,480
Apparel Manufacturers (0.31%)
					73,232
Youngone Corp	539,560	2,165
			Coal (0.62%)
Applications Software (2.12%)			Banpu Public Co Ltd (a)(b)	302,700	1,449
Check Point Software Technologies Ltd (a)	213,398	4,315	Exxaro Resources Ltd	265,883	1,755
Infosys Technologies Ltd ADR	276,231	8,099	Tambang Batubara Bukit Asam Tbk PT	2,324,500	1,168
Satyam Computer Services Ltd ADR	157,810	2,482			4,372
		14,896
			Commercial Banks (12.56%)
Auto - Car & Light Trucks (0.37%)			Banco do Brasil SA	425,805	2,811
Denway Motors Ltd	10,556,000	2,633	Banco Santander Chile SA ADR	45,228	1,619
			BanColombia SA ADR	97,691	1,908
Auto - Medium & Heavy Duty Trucks (0.22%)			Bangkok Bank Public Co (a)(b)	1,795,200	3,627
Mahindra & Mahindra Ltd (b)	211,337	1,569	Bank of China Ltd	21,987,000	6,420
			Bank of India	1,039,532	5,155
Auto/Truck Parts & Equipment - Original (1.01%)
			Bank Rakyat Indonesia	5,775,500	1,767
Hyundai Mobis	121,331	7,126
			China Construction Bank Corp	22,349,000	11,087
Auto/Truck Parts & Equipment - Replacement (0.31%)			Commercial Bank of Qatar (a)(b)	673,620	2,021
Weichai Power Co Ltd	909,000	2,169	Commercial International Bank	475,302	2,390
			Credicorp Ltd	98,343	3,862
Beverages - Non-Alcoholic (0.46%)			Daegu Bank	402,540	2,047
Coca-Cola Femsa SAB de CV	1,016,500	3,221	Industrial and Commercial Bank of China Ltd	24,201,000	11,387
			Komercni Banka AS	18,006	2,742
Beverages - Wine & Spirits (0.35%)			Powszechna Kasa Oszczednosci Bank Polski
Central European Distribution Corp (a)	86,495	2,490	SA	278,590	3,147
			Sberank RF GDR (a)(b)	23,354	4,165
Brewery (1.05%)			Siam Commercial Bank Public (a)(b)	2,396,000	3,589
Cia Cervecerias Unidas SA	383,957	2,061	Standard Bank Group Ltd	435,731	3,460
Fomento Economico Mexicano SAB de CV	1,066,368	2,701	State Bank of India Ltd	59,455	2,741
Hite Brewery Co Ltd (a)	19,920	2,662	Turkiye Is Bankasi	1,877,765	5,338
		7,424	Turkiye Vakiflar Bankasi Tao	2,778,273	2,713
Building & Construction - Miscellaneous (1.18%)			Unibanco - Uniao de Bancos Brasileiros SA	71,132	4,487
GS Engineering & Construction Corp	59,620	2,832			88,483
Murray & Roberts Holdings Ltd	497,654	3,369
			Computers (1.98%)
Orascom Construction Industries	63,930	2,135	Acer Inc	4,583,036	5,911
		8,336	HTC Corp	239,000	2,833
Building Products - Cement & Aggregate (0.16%)			Quanta Computer Inc	4,919,000	5,178
Cemex SAB de CV (a)	1,481,762	1,112			13,922
			Diversified Financial Services (2.44%)
			First Financial Holding Co Ltd	352	-

See accompanying notes

247

Schedule of Investments
International Emerging Markets Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Diversified Financial Services (continued)			Finance - Mortgage Loan/Banker (0.51%)
Fubon Financial Holding Co Ltd	10,616,000 $	6,439	Housing Development Finance Corp	97,869 $	3,553
Hua Nan Financial Holdings Co Ltd	4,772,580	2,515
Intergroup Financial Services Corp (b)	117,824	1,296	Finance - Other Services (0.41%)
KB Financial Group Inc (a)	184,014	4,562	Grupo Financiero Banorte SAB de CV	1,575,600	2,886
SinoPac Financial Holdings Co Ltd	11,198,000	2,374
			Food - Confectionery (0.80%)
		17,186
			Lotte Confectionery Co Ltd	6,575	5,611
Diversified Minerals (0.20%)
African Rainbow Minerals Ltd	138,965	1,422	Food - Retail (1.52%)
			Cia Brasileira de Distribuicao Grupo Pao de
Diversified Operations (2.07%)			Acucar ADR	135,457	4,054
Beijing Enterprises Holdings Ltd	1,002,500	3,959	Shoprite Holdings Ltd	1,023,060	5,400
Grupo Carso SAB de CV	175,403	480	X 5 Retail Group NV (a)	125,640	1,281
GS Holdings Corp	164,600	3,285			10,735
LG Corp	92,545	3,704	Gas - Distribution (0.61%)
Shanghai Industrial Holdings Ltd	1,995,000	3,172	Korea Gas Corp	114,495	4,312
		14,600
			Import & Export (0.24%)
Electric - Generation (0.64%)
CEZ	102,329	4,475	Hyosung Corp	71,260	1,698
			Internet Application Software (1.39%)
Electric - Integrated (1.54%)
Cia Paranaense de Energia	509,400	5,601	Tencent Holdings Ltd	1,344,600	9,789
Tata Power Co Ltd	140,368	1,998
			Life & Health Insurance (1.74%)
Tenaga Nasional BHD	1,902,700	3,234
			China Life Insurance Co Ltd/Taiwan (a)	6,317,280	2,180
		10,833
			China Life Insurance Co Ltd	2,326,000	6,216
Electric - Transmission (0.43%)			Sanlam Ltd	2,344,611	3,848
Cia de Transmissao de Energia Eletrica					12,244
Paulista	164,600	3,017
			Machinery - Construction & Mining (0.19%)
Electric Products - Miscellaneous (0.85%)			United Tractors Tbk PT	4,628,750	1,349
LG Electronics Inc	80,090	5,980
			Machinery - General Industry (0.19%)
Electronic Components - Miscellaneous (0.39%)			STX Engine Co Ltd	121,750	1,336
Hon Hai Precision Industry Co Ltd	1,134,935	2,739
			Medical - Drugs (0.94%)
Electronic Components - Semiconductors (3.66%)			China Pharmaceutical Group Ltd	12,278,000	2,419
MediaTek Inc	1,021,000	9,143	Cipla Ltd/India	1,152,372	4,192
Samsung Electronics Co Ltd	39,432	16,625			6,611
		25,768	Medical - Generic Drugs (2.86%)
Electronic Measurement Instruments (0.17%)			Pharmstandard (a)	121,334	1,916
Chroma Ate Inc	1,368,138	1,220	Teva Pharmaceutical Industries Ltd ADR	425,043	18,226
					20,142
Feminine Health Care Products (0.43%)
			Metal - Copper (0.65%)
Hengan International Group Co Ltd	1,079,000	3,009
			Antofagasta PLC	739,622	4,582
Finance - Credit Card (0.50%)
			Metal Processors & Fabrication (0.39%)
Redecard SA	323,100	3,506
			Jiangxi Copper Co Ltd	2,784,000	1,369
Finance - Investment Banker & Broker (0.36%)			Sung Kwang Bend Co Ltd	146,678	1,388
Egyptian Financial Group-Hermes Holding	612,536	2,557			2,757

See accompanying notes

248

Schedule of Investments
International Emerging Markets Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Multi-Line Insurance (0.75%)			Semiconductor Component - Integrated Circuits (1.73%)
Ping An Insurance Group Co of China Ltd	1,241,500 $	5,310	Taiwan Semiconductor Manufacturing Co Ltd	8,360,341 $	12,165
Non-Ferrous Metals (0.23%)			Steel - Producers (1.82%)
Korea Zinc Co Ltd	32,946	1,651	Angang Steel Co Ltd	2,098,000	1,287
			Dongkuk Steel Mill Co Ltd	152,530	2,480
Oil Company - Exploration & Production (4.61%)			Evraz Group SA (b)	139,125	2,149
CNOOC Ltd	9,570,000	7,858	POSCO ADR	102,457	6,884
NovaTek OAO	76,834	3,019			12,800
Oao Gazprom (a)(b)(c)	23,609	1,207
			Steel Pipe & Tube (0.31%)
Oao Gazprom (a)	870,427	17,800
			Confab Industrial SA (a)	860,900	1,565
Oil & Natural Gas Corp Ltd	104,295	1,434
			OAO TMK	53,891	581
PTT Exploration & Production PCL	477,200	1,164
					2,146
		32,482
			Telecommunication Services (3.52%)
Oil Company - Integrated (7.34%)
			Bharti Airtel Ltd (a)	408,848	5,521
China Petroleum & Chemical Corp	5,636,000	3,701
			Chunghwa Telecom Co Ltd	4,498,780	7,443
LUKOIL ADR	279,616	10,849
			Digi.Com BHD	766,700	3,989
PetroChina Co Ltd	9,656,293	7,260
			Telefonica O2 Czech Republic AS	120,623	2,578
Petroleo Brasileiro SA ADR	793,860	21,347
			Telekomunikacja Polska SA	692,646	5,234
Sasol Ltd	289,853	8,556
					24,765
		51,713
			Telephone - Integrated (1.89%)
Oil Refining & Marketing (1.55%)
			Bezeq Israeli Telecommunication Corp Ltd	3,330,518	4,972
Reliance Industries Ltd	223,208	6,327
			Magyar Telekom Telecommunications PLC	405,634	1,284
Tupras-Turkiye Petrol Rafinerileri AS	364,969	4,609
			Tele Norte Leste Participacoes SA ADR	343,311	4,662
		10,936
			Telefonos de Mexico SAB de CV ADR	133,940	2,400
Pastoral&Agricultural (0.07%)					13,318
Great Wall Enterprise Co	785,000	482
			Television (0.08%)
Petrochemicals (0.11%)			Central European Media Enterprises Ltd (a)	22,292	551
PTT Chemical PLC (a)(b)	819,300	771
			Textile - Apparel (0.00%)
Platinum (0.33%)			Far Eastern Textile Co Ltd	140	-
Impala Platinum Holdings Ltd	223,657	2,334
			Tobacco (0.57%)
Property & Casualty Insurance (0.25%)			KT&G Corp	62,876	4,036
Dongbu Insurance Co Ltd	173,840	1,770
			Web Portals (1.71%)
Real Estate Operator & Developer (0.42%)			LG Dacom Corp	377,970	5,343
Cyrela Brazil Realty SA	424,800	2,024	Netease.com ADR (a)	123,734	2,784
Quality Houses Public Company Ltd (a)(b)	34,909,628	914	NHN Corp (a)	36,802	3,917
		2,938			12,044
Retail - Automobile (0.22%)			TOTAL COMMON STOCKS	$ 620,874
PT Astra International Tbk	1,848,500	1,539	PREFERRED STOCKS (5.71%)
			Commercial Banks (1.00%)
Retail - Convenience Store (0.35%)
			Banco Itau Holding Financeira SA	651,045	7,032
President Chain Store Corp	1,058,000	2,456
			Diversified Minerals (2.94%)
Rubber & Vinyl (0.29%)
			Cia Vale do Rio Doce	1,785,130	20,707
TSRC Corp	2,954,000	2,066

See accompanying notes

249

Schedule of Investments
International Emerging Markets Fund
October 31, 2008
					Unrealized Appreciation (Depreciation)
					The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			Shares	Value	of investments held by the fund as of the period end were as follows:
			Held	(000's)
PREFERRED STOCKS (continued)					Unrealized Appreciation	$ 5,725
Electric - Distribution (0.48%)					Unrealized Depreciation		(462,618)
Eletropaulo Metropolitana Eletricidade de					Net Unrealized Appreciation (Depreciation)		(456,893)
Sao Paulo SA			272,044 $	3,340	Cost for federal income tax purposes		1,160,155
					All dollar amounts are shown in thousands (000's)
Food - Meat Products (0.12%)
Sadia SA			432,954	863	Portfolio Summary (unaudited)
					Country		Percent
Investment Companies (0.00%)
Lereko Mobility Pty Ltd			4,384	14	Korea, Republic Of		13.86%
					Brazil		13.52%
					Taiwan, Province Of China		9.89%
Steel - Producers (1.17%)					China		9.77%
Gerdau SA			355,400	2,260	Hong Kong		6.92%
Usinas Siderurgicas de Minas Gerais SA			467,286	5,975	Russian Federation		6.41%
					United States		6.34%
				8,235	India		6.12%
TOTAL PREFERRED STOCKS			$ 40,191		South Africa		5.40%
					Israel		4.65%
			Principal		Mexico		3.59%
			Amount	Value	Thailand		2.31%
			(000's)	(000's)	Turkey		1.80%
					Czech Republic		1.39%
SHORT TERM INVESTMENTS (4.40%)					Chile		1.33%
Commercial Paper (4.40%)					Poland		1.19%
Investment in Joint Trading Account; HSBC					Malaysia		1.03%
Funding					Egypt		1.01%
0.25%, 11/ 3/2008		$ 15,510 $		15,510	Indonesia		0.83%
					United Kingdom		0.65%
Investment in Joint Trading Account;					Bermuda		0.63%
Prudential Funding					Luxembourg		0.30%
0.30%, 11/ 3/2008			15,510	15,510	Qatar		0.29%
				31,020	Colombia		0.27%
					Peru		0.18%
TOTAL SHORT TERM INVESTMENTS			$ 31,020		Hungary		0.18%
					Singapore		0.00%
REPURCHASE AGREEMENTS (1.59%)					Other Assets in Excess of Liabilities, Net		0.14%
Money Center Banks (1.59%)					TOTAL NET ASSETS		100.00%
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $11,512,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)		$ 11,177$		11,177
TOTAL REPURCHASE AGREEMENTS			$ 11,177
Total Investments			$ 703,262
Other Assets in Excess of Liabilities, Net - 0.14%				979
TOTAL NET ASSETS - 100.00%			$ 704,241
(a)	Non-Income Producing Security
(b)	Market value is determined in accordance with procedures established in
	good faith by the Board of Directors. At the end of the period, the value
	of these securities totaled $27,531 or 3.91% of net assets.
(c)	Security exempt from registration under Rule 144A of the Securities Act
	of 1933. These securities may be resold in transactions exempt from
	registration, normally to qualified institutional buyers. Unless otherwise
	indicated, these securities are not considered illiquid. At the end of the
	period, the value of these securities totaled $1,207 or 0.17% of net
	assets.

See accompanying notes

250

Schedule of Investments
International Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (94.79%)			COMMON STOCKS (continued)
Advertising Sales (0.26%)			Chemicals - Specialty (continued)
Teleperformance	159,919 $	3,451	SGL Carbon AG (a)	139,123 $	2,731
					7,864
Aerospace & Defense (0.76%)
			Commercial Banks (3.40%)
BAE Systems PLC	1,783,860	10,013
			Alpha Bank AE	450,380	6,575
Aerospace & Defense Equipment (0.44%)			Bank of Kyoto Ltd/The	402,000	4,229
Cobham PLC	1,901,840	5,771	BOC Hong Kong Holdings Ltd	2,386,000	2,732
			DnB NOR ASA	100	1
Agricultural Chemicals (1.24%)			Hang Seng Bank Ltd	342,500	4,274
Agruim Inc (a)	106,200	4,068	Nordea Bank AB	286,600	2,297
Potash Corp of Saskatchewan (a)	106,400	9,057	Seven Bank Ltd	1,708	4,919
Yara International ASA	155,900	3,257	Standard Chartered PLC	724,527	11,962
		16,382	Suruga Bank Ltd	409,000	3,850
Apparel Manufacturers (0.77%)			Torinto Dominion Bank (a)	87,100	4,113
Gildan Activewear (a)	128,536	2,997			44,952
Hermes International	55,823	7,205	Commercial Services (0.57%)
		10,202	Aggreko PLC	594,294	4,178
Audio & Video Products (1.20%)			Intertek Group PLC	284,275	3,371
Matsushita Electric Industrial Co Ltd	843,000	13,575			7,549
Sony Corp	97,700	2,316	Computer Data Security (0.29%)
		15,891	Gemalto NV (a)	138,287	3,874
Auto - Car & Light Trucks (0.72%)
			Computer Services (0.32%)
Daihatsu Motor Co Ltd	413,000	3,058
			CGI Group Inc (a)	523,216	4,176
Honda Motor Co Ltd	258,500	6,428
		9,486	Computers - Integrated Systems (0.15%)
Bicycle Manufacturing (0.27%)			Ingenico	123,655	1,931
Shimano Inc	125,900	3,601
			Cosmetics & Toiletries (0.21%)
Brewery (0.53%)			Oriflame Cosmetics SA	91,100	2,846
Asahi Breweries Ltd	421,100	6,951
			Diversified Banking Institutions (1.04%)
Building - Maintenance & Service (0.30%)			Mitsubishi UFJ Financial Group Inc	2,198,600	13,816
Babcock International Group	626,023	3,917
			Diversified Manufacturing Operations (0.70%)
Building & Construction - Miscellaneous (0.53%)			Siemens AG	155,108	9,318
Koninklijke Boskalis Westminster NV	100,499	3,318
Leighton Holdings Ltd	223,928	3,723	Diversified Minerals (4.39%)
		7,041	Anglo American PLC	520,555	13,070
			BHP Billiton Ltd	1,197,808	23,011
Cellular Telecommunications (0.28%)			BHP Billiton PLC	618,997	10,521
Mobistar SA (a)	56,174	3,728
			Tek Cominco Limited (a)	278,200	2,770
			Xstrata PLC	508,529	8,698
Chemicals - Diversified (2.07%)
					58,070
Bayer AG	145,808	8,155
Koninklijke DSM NV	94,724	2,638	Diversified Operations (1.66%)
Shin-Etsu Chemical Co Ltd	243,900	12,965	GEA Group AG	257,005	3,704
Wacker Chemie AG	32,886	3,578	Groupe Bruxelles Lambert SA	44,203	3,247
		27,336	Hutchison Whampoa Ltd	1,310,000	7,079
			Inmarsat PLC	546,429	3,728
Chemicals - Specialty (0.59%)
			Noble Group Ltd	3,348,000	2,437
Lonza Group AG	61,853	5,133

See accompanying notes

251

Schedule of Investments
International Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Diversified Operations (continued)			Finance - Investment Banker & Broker (0.23%)
Wharf Holdings Ltd	909,000 $	1,814	Tullett Prebon PLC	809,711 $	3,100
		22,009
			Finance - Other Services (0.25%)
E-Commerce - Services (0.41%)
			IG Group Holdings PLC	715,242	3,345
Rakuten Inc	10,941	5,424
			Food - Catering (0.50%)
Electric - Integrated (5.01%)
			Compass Group PLC	1,431,117	6,661
E.ON AG	707,832	27,089
Enel SpA	933,478	6,245	Food - Meat Products (0.29%)
Fortum Oyj	256,257	6,298	Nippon Meat Packers Inc	278,000	3,813
Iberdrola SA	618,574	4,477
International Power PLC	1,587,599	5,680	Food - Miscellaneous/Diversified (5.37%)
RWE AG	69,424	5,773	Nestle SA	1,307,272	50,836
Suez SA	246,038	10,665	Unilever NV	368,428	8,879
		66,227	Unilever PLC	506,310	11,383
					71,098
Electric - Transmission (0.33%)
Terna Rete Elettrica Nazionale SpA	1,358,621	4,382	Food - Retail (2.50%)
			Colruyt SA	23,354	5,249
Electric Products - Miscellaneous (1.45%)			Jeronimo Martins SGPS SA	713,104	3,639
Hitachi Ltd	2,234,000	10,489	Koninklijke Ahold NV	859,389	9,226
Mitsubishi Electric Corp	1,393,000	8,635	Tesco PLC	1,272,725	6,971
		19,124	WM Morrison Supermarkets PLC	1,890,876	8,059
Electronic Components - Miscellaneous (0.49%)					33,144
Chemring Group PLC	119,256	3,061	Forestry (0.34%)
Hosiden Corp	328,000	3,445	Sino-Forest Corp (a)	483,000	4,520
		6,506
			Gambling (Non-Hotel) (0.39%)
E-Marketing & Information (0.27%)
			OPAP SA	238,463	5,207
CyberAgent Inc	3,930	3,509
			Gas - Distribution (1.01%)
Energy (0.23%)
			GDF Suez	298,955	13,308
Centennial Coal Company Ltd	1,278,851	3,007
			Import & Export (2.15%)
Energy - Alternate Sources (0.43%)
			ITOCHU Corp	1,000,000	5,285
Verbund - Oesterreichische
Elektrizitaetswirtschafts AG	119,326	5,645	Marubeni Corp	1,633,000	6,344
			Mitsubishi Corp	673,300	11,286
Engineering - Research & Development Services (0.33%)			Mitsui & Co Ltd	566,000	5,484
ABB Ltd (a)	332,807	4,367			28,399
			Instruments - Controls (0.21%)
Enterprise Software & Services (1.80%)
Autonomy Corp PLC (a)	369,375	5,874	Rotork PLC	227,914	2,729
Aveva Group PLC	203,748	2,601
			Life & Health Insurance (0.81%)
SAP AG	380,511	13,431
			Prudential PLC	1,427,386	7,159
Temenos Group AG (a)	156,447	1,959
			T&D Holdings Inc	91,750	3,505
		23,865
					10,664
Entertainment Software (0.79%)
			Lottery Services (0.33%)
Konami Corp	170,200	3,079
			Lottomatica SpA	186,624	4,357
Square Enix Co Ltd	123,400	3,109
UBISOFT Entertainment (a)	80,457	4,253
		10,441

See accompanying notes

252

Schedule of Investments
International Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Machinery - Construction & Mining (0.40%)			Oil Company - Exploration & Production (2.31%)
Atlas Copco AB	636,000 $	5,334	Canadian Oil Sands Trust	156,600 $	4,202
			EnCana Corp (a)	347,300	17,643
Machinery - General Industry (0.60%)			Origin Energy Ltd	828,874	8,692
Alstom SA	161,248	7,992			30,537
Medical - Biomedical/Gene (0.73%)			Oil Company - Integrated (2.51%)
CSL Ltd/Australia	398,069	9,681	BG Group PLC	1,309,268	19,220
			OMV AG	108,981	3,489
Medical - Drugs (10.16%)			StatoilHydro ASA	434,700	8,743
Actelion Ltd (a)	147,357	7,785	Suncor Energy Inc (a)	75,900	1,823
Astellas Pharma Inc	126,100	5,079			33,275
GlaxoSmithKline PLC	1,728,384	33,240
			Photo Equipment & Supplies (0.40%)
Grifols SA	189,820	3,778
			Nikon Corp	374,000	5,271
Hisamitsu Pharmaceutical Co Inc	137,100	5,714
Novartis AG	817,712	41,505	Power Converter & Supply Equipment (0.42%)
Novo Nordisk A/S	263,625	14,131	Vestas Wind Systems A/S (a)	136,000	5,571
Roche Holding AG	151,825	23,218
		134,450	Property & Casualty Insurance (1.09%)
			Millea Holdings Inc	352,100	10,861
Medical Products (0.87%)
			Mitsui Sumitomo Insurance Group Holdings
Sonova Holding AG	94,399	3,923
			Inc	126,000	3,501
Synthes Inc	59,091	7,625			14,362
		11,548
			Publishing - Books (0.65%)
Metal - Diversified (1.55%)			Reed Elsevier NV	641,628	8,576
Rio Tinto Ltd	196,318	10,156
Rio Tinto PLC	220,629	10,310	Real Estate Operator & Developer (1.67%)
		20,466	Brookfield Asset Management Inc (a)	387,000	6,775
Metal - Iron (0.03%)			Cheung Kong Holdings Ltd	459,000	4,407
Mount Gibson Iron Ltd (a)(b)	1,546,787	416	Mitsui Fudosan Co Ltd	629,000	10,972
					22,154
MRI - Medical Diagnostic Imaging (0.25%)			REITS - Diversified (0.48%)
Sonic Healthcare Ltd	361,619	3,305	Unibail-Rodamco	42,227	6,333
Multi-Line Insurance (0.71%)
			Retail - Apparel & Shoe (0.72%)
Mapfre SA	1,078,594	3,433	Fast Retailing Co Ltd	89,696	9,562
Zurich Financial Services AG	29,495	5,984
		9,417	Retail - Computer Equipment (0.22%)
Multimedia (0.52%)			Game Group PLC	1,388,706	2,907
Vivendi	263,834	6,896
			Retail - Convenience Store (1.09%)
Office Automation & Equipment (0.46%)			Alimentation Couche Tard Inc	322,500	4,348
Canon Inc	172,930	6,051	FamilyMart Co Ltd	118,500	4,695
			Lawson Inc	109,600	5,357
Oil - Field Services (0.74%)					14,400
Fugro NV	105,333	3,764
			Retail - Drug Store (0.60%)
John Wood Group PLC	735,467	2,845	Shoppers Drug Mart Corp	206,500	7,950
Petrofac Ltd	465,703	3,211
		9,820	Retail - Music Store (0.18%)
Oil & Gas Drilling (0.15%)			HMV Group PLC	1,523,750	2,428
Precision Drilling Trust (a)	189,200	2,041

See accompanying notes

253

Schedule of Investments
International Growth Fund
October 31, 2008
	Shares	Value				Shares	Value
	Held	(000's)				Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Pubs (0.16%)			Transport - Rail (1.08%)
Enterprise Inns Plc	1,318,851 $	2,072	East Japan Railway Co			2,004 $	14,260
Rubber - Tires (0.25%)			Transport - Services (1.06%)
Yokohama Rubber Co Ltd/The	683,000	3,351	Firstgroup Plc			716,442	4,716
			Koninklijke Vopak NV			80,586	2,613
Satellite Telecommunications (0.27%)			Stagecoach Group PLC			1,510,760	4,519
Eutelsat Communications	168,763	3,622	Viterra Inc (a)			347,400	2,205
							14,053
Security Services (0.44%)
G4S PLC	1,942,340	5,886	Water Treatment Systems (0.28%)
			Kurita Water Industries Ltd			163,600	3,733
Soap & Cleaning Products (1.18%)
Reckitt Benckiser Group PLC	368,757	15,556	Wireless Equipment (0.91%)
			Nokia OYJ			786,792	12,052
Steel - Producers (0.61%)			TOTAL COMMON STOCKS			$ 1,254,087
ArcelorMittal	204,201	5,301
						Principal
OneSteel Ltd	1,185,937	2,725
						Amount	Value
		8,026				(000's)	(000's)
Steel - Specialty (0.22%)			SHORT TERM INVESTMENTS (3.76%)
Hitachi Metals Ltd	381,000	2,865	Commercial Paper (3.76%)
			Investment in Joint Trading Account; HSBC
Steel Pipe & Tube (0.24%)			Funding
Vallourec SA	27,853	3,116	0.25%, 11/ 3/2008		$ 24,906 $		24,906
			Investment in Joint Trading Account;
Telecommunication Equipment (0.27%)			Prudential Funding
Tandberg ASA	286,900	3,550	0.30%, 11/ 3/2008			24,906	24,906
							49,812
Telecommunication Services (0.41%)			TOTAL SHORT TERM INVESTMENTS			$ 49,812
Cable & Wireless PLC	2,759,852	5,474
			Total Investments			$ 1,303,899
Telephone - Integrated (3.82%)			Other Assets in Excess of Liabilities, Net - 1.45%				19,186
KDDI Corp	1,342	8,041	TOTAL NET ASSETS - 100.00%			$ 1,323,085
Koninklijke (Royal) KPN NV	930,293	13,101
Telefonica SA	1,586,305	29,370
			(a)	Non-Income Producing Security
		50,512
			(b)	Market value is determined in accordance with procedures established in
Television (0.18%)				good faith by the Board of Directors. At the end of the period, the value
Modern Times Group AB	110,450	2,370		of these securities totaled $416 or 0.03% of net assets.
Tobacco (3.47%)			Unrealized Appreciation (Depreciation)
British American Tobacco PLC	703,609	19,311	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			of investments held by the fund as of the period end were as follows:
Imperial Tobacco Group PLC	563,279	15,106
Japan Tobacco Inc	3,222	11,430	Unrealized Appreciation			$ 21,077
		45,847	Unrealized Depreciation				(630,045)
Toys (1.10%)			Net Unrealized Appreciation (Depreciation)				(608,968)
Nintendo Co Ltd	45,100	14,491	Cost for federal income tax purposes				1,912,867
			All dollar amounts are shown in thousands (000's)
Transport - Marine (0.72%)
Mitsui OSK Lines Ltd	948,000	4,950
Nippon Yusen KK	939,000	4,541
		9,491

See accompanying notes

254

	Schedule of Investments
	International Growth Fund
	October 31, 2008
Portfolio Summary (unaudited)
Country	Percent
Japan	21.45%
United Kingdom	21.16%
Switzerland	12.17%
Canada	5.95%
Germany	5.58%
France	5.49%
Australia	4.89%
Netherlands	3.94%
United States	3.76%
Spain	3.10%
Hong Kong	1.72%
Denmark	1.49%
Finland	1.39%
Norway	1.18%
Italy	1.13%
Belgium	0.92%
Greece	0.89%
Sweden	0.76%
Austria	0.69%
Luxembourg	0.62%
Portugal	0.27%
Other Assets in Excess of Liabilities, Net	1.45%
TOTAL NET ASSETS	100.00%
Other Assets Summary (unaudited)
Asset Type	Percent
Futures	3.37%
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
eMini MSCI EAFE; December 2008	Buy	700	$ 45,814	$ 44,619	$ (1,195)
All dollar amounts are shown in thousands (000's)

See accompanying notes

255

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (96.83%)			COMMON STOCKS (continued)
Aerospace & Defense (1.92%)			Cable TV (0.81%)
Boeing Co	25,755 $	1,346	Comcast Corp - Class A	70,724 $	1,115
General Dynamics Corp	100,124	6,039	Comcast Corp - Special Class A	11,446	176
Lockheed Martin Corp	42,213	3,590	DIRECTV Group Inc/The (a)	193,724	4,241
Northrop Grumman Corp	46,469	2,179	DISH Network Corp (a)	3,965	62
Raytheon Co	3,690	189			5,594
		13,343
			Chemicals - Diversified (0.56%)
Aerospace & Defense Equipment (0.22%)			Dow Chemical Co/The	131,477	3,506
United Technologies Corp	27,587	1,516	FMC Corp	9,500	414
					3,920
Agricultural Chemicals (0.96%)
			Chemicals - Specialty (0.18%)
CF Industries Holdings Inc	6,841	439
			Ashland Inc	14,157	320
Monsanto Co	70,040	6,232
			Minerals Technologies Inc	11,378	646
		6,671
			Terra Industries Inc	14,399	316
Agricultural Operations (0.62%)					1,282
Archer-Daniels-Midland Co	102,098	2,117
			Coal (0.26%)
Bunge Ltd	56,632	2,175
			Alpha Natural Resources Inc (a)	33,864	1,211
		4,292
			Arch Coal Inc	3,717	80
Apparel Manufacturers (0.17%)			Peabody Energy Corp	14,691	507
Coach Inc (a)	53,985	1,112			1,798
Polo Ralph Lauren Corp	1,792	85
			Commercial Banks (0.52%)
		1,197
			Marshall & Ilsley Corp	136,209	2,456
Applications Software (1.74%)			Regions Financial Corp	99,286	1,101
Microsoft Corp	522,145	11,659	Synovus Financial Corp	4,600	47
Salesforce.com Inc (a)	13,239	410			3,604
		12,069
			Commercial Services - Finance (0.41%)
Audio & Video Products (0.01%)			Moody's Corp	63,420	1,623
Harman International Industries Inc	5,336	98	Western Union Co/The	80,318	1,226
					2,849
Auto/Truck Parts & Equipment - Original (0.01%)
Johnson Controls Inc	4,991	89	Computer Aided Design (0.08%)
			Autodesk Inc (a)	26,047	555
Beverages - Non-Alcoholic (1.32%)
Coca-Cola Co/The	34,258	1,509	Computer Services (0.59%)
Coca-Cola Enterprises Inc	51,332	516	Accenture Ltd	122,644	4,054
Dr Pepper Snapple Group Inc (a)	16,680	382	SRA International Inc (a)	2,509	46
Hansen Natural Corp (a)	24,243	614			4,100
Pepsi Bottling Group Inc	3,536	82	Computers (3.43%)
PepsiCo Inc	106,716	6,084	Apple Inc (a)	72,716	7,823
		9,187	Dell Inc (a)	208,768	2,537
Brewery (0.44%)			Hewlett-Packard Co	209,376	8,015
Anheuser-Busch Cos Inc	48,985	3,039	IBM Corp	55,506	5,160
			Sun Microsystems Inc (a)	65,119	300
Building - Residential & Commercial (0.02%)					23,835
Centex Corp	10,582	130
			Computers - Integrated Systems (0.12%)
			Brocade Communications Systems Inc (a)	102,556	387
Building & Construction Products -
Miscellaneous (0.01%)			Teradata Corp (a)	28,111	432
Armstrong World Industries Inc	2,998	59			819

See accompanying notes

256

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Computers - Memory Devices (0.89%)			Diversified Manufacturing Operations (2.78%)
EMC Corp/Massachusetts (a)	243,761 $	2,872	3M Co	34,927 $	2,246
NetApp Inc (a)	118,948	1,609	General Electric Co	636,163	12,412
Seagate Technology	168,701	1,142	Honeywell International Inc	88,193	2,685
Western Digital Corp (a)	33,782	557	Illinois Tool Works Inc	2,184	73
		6,180	Parker Hannifin Corp	3	-
			SPX Corp	8,125	315
Containers - Metal & Glass (0.01%)
Greif Inc	1,400	57	Tyco International Ltd	61,205	1,547
					19,278
Containers - Paper & Plastic (0.02%)			Diversified Operations (0.03%)
Sonoco Products Co	5,849	147	Leucadia National Corp	7,436	200
Cosmetics & Toiletries (2.89%)			E-Commerce - Products (0.19%)
Avon Products Inc	81,947	2,035	Amazon.com Inc (a)	23,300	1,334
Bare Escentuals Inc (a)	8,903	37
Colgate-Palmolive Co	30,850	1,936	E-Commerce - Services (0.32%)
Procter & Gamble Co	248,301	16,025	eBay Inc (a)	104,115	1,590
		20,033	NetFlix Inc (a)	24,568	608
					2,198
Data Processing & Management (0.16%)
Acxiom Corp	2,012	16	Electric - Integrated (2.66%)
Broadridge Financial Solutions Inc	27,191	329	Constellation Energy Group Inc	12,760	309
Fidelity National Information Services Inc	12,228	184	Dominion Resources Inc/VA	38,788	1,407
SEI Investments Co	31,509	557	Duke Energy Corp	407,976	6,683
		1,086	Entergy Corp	7,422	579
			Exelon Corp	70,401	3,819
Dental Supplies & Equipment (0.03%)
Dentsply International Inc	7,526	229	FirstEnergy Corp	63,801	3,328
			FPL Group Inc	4,800	227
Diagnostic Equipment (0.00%)			Integrys Energy Group Inc	1,776	84
Gen-Probe Inc (a)	632	30	Northeast Utilities	10	-
			OGE Energy Corp	3,840	105
Diagnostic Kits (0.00%)			PPL Corp	55,699	1,828
Idexx Laboratories Inc (a)	952	34	Public Service Enterprise Group Inc	3,410	96
					18,465
Disposable Medical Products (0.05%)
CR Bard Inc	3,875	342	Electric Products - Miscellaneous (0.69%)
			Emerson Electric Co	147,183	4,817
Distribution & Wholesale (0.21%)
Ingram Micro Inc (a)	79,926	1,066	Electronic Components - Miscellaneous (0.00%)
Tech Data Corp (a)	17,167	368	Jabil Circuit Inc	1	-
		1,434
			Electronic Components - Semiconductors (2.12%)
Diversified Banking Institutions (4.33%)			Broadcom Corp (a)	67,529	1,153
Bank of America Corp	428,410	10,354	Intel Corp	597,422	9,559
Citigroup Inc	394,055	5,379	LSI Corp (a)	128,333	494
JP Morgan Chase & Co	293,571	12,110	Texas Instruments Inc	181,497	3,550
Morgan Stanley	127,125	2,221			14,756
		30,064
			Electronic Design Automation (0.01%)
Diversified Financial Services (0.04%)			Cadence Design Systems Inc (a)	15,364	63
IntercontinentalExchange Inc (a)	2,967	254	Mentor Graphics Corp (a)	4,529	33
					96

See accompanying notes

257

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Electronic Forms (0.50%)			Hospital Beds & Equipment (0.04%)
Adobe Systems Inc (a)	129,169 $	3,441	Hill-Rom Holdings Inc	12,720 $	290
Engineering - Research & Development Services (0.11%)			Human Resources (0.15%)
Fluor Corp	18,964	757	Manpower Inc	32,713	1,018
			MPS Group Inc (a)	1,679	13
Enterprise Software & Services (0.67%)					1,031
Advent Software Inc (a)	4,933	93
			Independent Power Producer (0.21%)
Oracle Corp (a)	247,638	4,529
			Mirant Corp (a)	24,755	434
Sybase Inc (a)	500	13
			NRG Energy Inc (a)	44,365	1,031
		4,635
					1,465
Fiduciary Banks (0.87%)
			Industrial Gases (0.12%)
Bank of New York Mellon Corp/The	132,143	4,308
			Air Products & Chemicals Inc	13,957	811
Northern Trust Corp	568	32
State Street Corp	38,783	1,681
			Instruments - Scientific (0.10%)
		6,021	Thermo Fisher Scientific Inc (a)	17,678	718
Finance - Credit Card (0.27%)
American Express Co	61,600	1,694	Internet Security (0.33%)
Discover Financial Services	13,993	171	Symantec Corp (a)	96,604	1,215
		1,865	VeriSign Inc (a)	51,600	1,094
					2,309
Finance - Investment Banker & Broker (0.18%)
Merrill Lynch & Co Inc	65,585	1,219	Investment Management & Advisory Services (1.46%)
			Ameriprise Financial Inc	74,174	1,602
Finance - Other Services (0.49%)			BlackRock Inc	14,219	1,867
CME Group Inc	11,247	3,173	Eaton Vance Corp	110,305	2,427
NYSE Euronext	7,485	226	Federated Investors Inc	15,500	375
		3,399	Franklin Resources Inc	4,525	308
			Invesco Ltd	39,607	591
Food - Confectionery (0.03%)
Hershey Co/The	5,658	211	Legg Mason Inc	28,668	636
			T Rowe Price Group Inc	58,350	2,307
Food - Meat Products (0.53%)					10,113
Hormel Foods Corp	27,985	791	Life & Health Insurance (0.27%)
Smithfield Foods Inc (a)	16,570	174	Lincoln National Corp	14,406	248
Tyson Foods Inc	308,200	2,694	Prudential Financial Inc	55,269	1,658
		3,659			1,906
Food - Miscellaneous/Diversified (0.07%)			Machinery - Construction & Mining (0.79%)
Corn Products International Inc	19,938	485	Bucyrus International Inc	18,881	456
			Caterpillar Inc	103,012	3,932
Food - Retail (0.74%)
			Joy Global Inc	33,507	971
Kroger Co/The	165,347	4,540
			Terex Corp (a)	6,883	115
Safeway Inc	15,396	328
					5,474
SUPERVALU Inc	10,013	143
Whole Foods Market Inc	11,383	122	Machinery - Farm (0.47%)
		5,133	AGCO Corp (a)(b)	46,617	1,469
			Deere & Co	46,484	1,793
Garden Products (0.01%)
					3,262
Toro Co	2,664	90
			Machinery - Pumps (0.02%)
Health Care Cost Containment (0.08%)			Flowserve Corp	2,741	156
McKesson Corp	16,029	590

See accompanying notes

258

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Machinery Tools & Related Products (0.00%)			Metal - Aluminum (0.06%)
Lincoln Electric Holdings Inc	677 $	29	Alcoa Inc	38,571 $	444
Medical - Biomedical/Gene (2.70%)			Miscellaneous Manufacturers (0.03%)
Amgen Inc (a)	89,232	5,344	Aptargroup Inc	7,900	240
Biogen Idec Inc (a)	66,357	2,824
Celgene Corp (a)	19,549	1,256	Multi-Line Insurance (0.95%)
Gilead Sciences Inc (a)	183,333	8,406	Allstate Corp/The	27,305	721
PDL BioPharma Inc	97,016	946	CNA Financial Corp	4,722	73
		18,776	Hartford Financial Services Group Inc	12,202	126
			Loews Corp	22,643	752
Medical - Drugs (6.15%)
			MetLife Inc	139,959	4,649
Abbott Laboratories	58,544	3,229
			Old Republic International Corp	33,825	312
Allergan Inc/United States	19,044	756
					6,633
Bristol-Myers Squibb Co	62,220	1,279
Eli Lilly & Co	204,829	6,927	Multimedia (1.70%)
King Pharmaceuticals Inc (a)	20,474	180	News Corp	8,794	93
Merck & Co Inc/NJ	287,291	8,892	Time Warner Inc	765,584	7,725
Pfizer Inc	939,823	16,644	Walt Disney Co/The	153,973	3,988
Schering-Plough Corp	88,141	1,277			11,806
Wyeth	108,836	3,502	Networking Products (1.35%)
		42,686	Cisco Systems Inc (a)	527,057	9,366
Medical - HMO (0.25%)			Juniper Networks Inc (a)	762	14
UnitedHealth Group Inc	64,622	1,533			9,380
WellPoint Inc (a)	5,839	227	Office Furnishings - Original (0.01%)
		1,760	Herman Miller Inc	2,300	51
Medical - Nursing Homes (0.01%)
			Oil - Field Services (1.78%)
Kindred Healthcare Inc (a)	3,439	50
			Baker Hughes Inc	53,910	1,884
Medical - Wholesale Drug Distribution (0.37%)			BJ Services Co	13,582	175
AmerisourceBergen Corp	65,965	2,063	Exterran Holdings Inc (a)	8,311	186
Cardinal Health Inc	12,790	488	Halliburton Co	273,436	5,411
		2,551	Schlumberger Ltd	84,319	4,355
			SEACOR Holdings Inc (a)	331	22
Medical Information Systems (0.03%)
			Smith International Inc	6,806	235
Cerner Corp (a)	5,282	197
			Weatherford International Ltd (a)	5,329	90
					12,358
Medical Instruments (0.90%)
Boston Scientific Corp (a)	238,493	2,154	Oil Company - Exploration & Production (3.47%)
Intuitive Surgical Inc (a)	441	76	Anadarko Petroleum Corp	18,891	667
Medtronic Inc	76,900	3,101	Apache Corp	61,776	5,086
St Jude Medical Inc (a)	24,085	916	Cabot Oil & Gas Corp	22,221	624
		6,247	Cimarex Energy Co	4,527	183
			Continental Resources Inc/OK (a)	392	13
Medical Products (2.59%)
Baxter International Inc	11,677	706	Devon Energy Corp	75,639	6,116
Becton Dickinson & Co	20,093	1,395	EOG Resources Inc	32,042	2,593
Covidien Ltd	111,407	4,934	Mariner Energy Inc (a)	4,816	69
Johnson & Johnson	157,066	9,634	Noble Energy Inc	17,100	886
Varian Medical Systems Inc (a)	27,523	1,253	Occidental Petroleum Corp	100,135	5,561
Zimmer Holdings Inc (a)	2,023	94	Pioneer Natural Resources Co	21,941	611
		18,016	St Mary Land & Exploration Co	9,495	236
			Ultra Petroleum Corp (a)	19,561	911

See accompanying notes

259

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Oil Company - Exploration & Production			Regional Banks (continued)
(continued)			PNC Financial Services Group Inc	21,296 $	1,420
W&T Offshore Inc	26,851 $	515
			SunTrust Banks Inc	48,629	1,952
		24,071
			US Bancorp	95,106	2,835
Oil Company - Integrated (7.08%)			Wells Fargo & Co	332,032	11,306
Chevron Corp	125,714	9,378			19,726
ConocoPhillips	94,162	4,898
			Reinsurance (0.09%)
Exxon Mobil Corp	394,467	29,238
			Reinsurance Group of America Inc	17,110	639
Hess Corp	42,400	2,553
Marathon Oil Corp	32,149	936	REITS - Apartments (0.32%)
Murphy Oil Corp	42,900	2,172	AvalonBay Communities Inc	26,568	1,887
		49,175	Essex Property Trust Inc	3,261	317
Oil Field Machinery & Equipment (0.32%)					2,204
Cameron International Corp (a)	19,467	473	REITS - Healthcare (0.21%)
FMC Technologies Inc (a)	44,332	1,551	Nationwide Health Properties Inc	49,446	1,475
National Oilwell Varco Inc (a)	6,192	185
		2,209	REITS - Office Property (0.04%)
			Boston Properties Inc	2,725	193
Oil Refining & Marketing (0.76%)
			Kilroy Realty Corp	3,200	103
Sunoco Inc	24,630	751
					296
Tesoro Corp	98,539	953
Valero Energy Corp	172,229	3,545	REITS - Regional Malls (0.47%)
		5,249	Macerich Co/The	42,467	1,249
			Simon Property Group Inc	30,463	2,042
Optical Supplies (0.02%)
					3,291
Advanced Medical Optics Inc (a)	18,553	114
			REITS - Shopping Centers (0.10%)
Paper & Related Products (0.12%)			Developers Diversified Realty Corp	24,456	322
International Paper Co	49,113	846	Kimco Realty Corp	10,081	228
			Regency Centers Corp	3,714	146
Pharmacy Services (0.77%)					696
Express Scripts Inc (a)	26,419	1,601
Medco Health Solutions Inc (a)	98,105	3,723	REITS - Warehouse & Industrial (0.10%)
		5,324	AMB Property Corp	28,314	680
Property & Casualty Insurance (0.90%)			Rental - Auto & Equipment (0.01%)
Chubb Corp	38,302	1,985	Avis Budget Group Inc (a)	26,099	43
Fidelity National Financial Inc	30,008	270
First American Corp	13,223	270	Retail - Apparel & Shoe (0.77%)
Progressive Corp/The	6,184	88	Aeropostale Inc (a)	114,621	2,775
Travelers Cos Inc/The	84,745	3,606	Ross Stores Inc	61,963	2,025
		6,219	Urban Outfitters Inc (a)	23,772	517
					5,317
Publishing - Newspapers (0.06%)
Gannett Co Inc	39,301	432	Retail - Computer Equipment (0.14%)
			GameStop Corp (a)	35,418	970
Real Estate Management & Services (0.10%)
Jones Lang LaSalle Inc	20,852	686	Retail - Consumer Electronics (0.28%)
			Best Buy Co Inc	73,667	1,975
Regional Banks (2.84%)
Capital One Financial Corp	42,175	1,650	Retail - Discount (3.54%)
Fifth Third Bancorp	12,131	131	Big Lots Inc (a)	37,215	909
Huntington Bancshares Inc/OH	36,724	347	BJ's Wholesale Club Inc (a)	88,629	3,120
Keycorp	6,968	85	Costco Wholesale Corp	119,021	6,785

See accompanying notes

260

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Discount (continued)			Tobacco (continued)
Dollar Tree Inc (a)	53,513 $	2,035	Universal Corp/Richmond VA	4,560 $	181
Family Dollar Stores Inc	26,106	702	UST Inc	16,836	1,138
Target Corp	30,330	1,217			22,770
Wal-Mart Stores Inc	175,594	9,800
			Transport - Rail (0.96%)
		24,568	Burlington Northern Santa Fe Corp	15,809	1,408
Retail - Drug Store (0.26%)			CSX Corp	15,542	711
CVS/Caremark Corp	58,729	1,800	Norfolk Southern Corp	26,266	1,574
			Union Pacific Corp	44,243	2,954
Retail - Major Department Store (0.20%)					6,647
TJX Cos Inc	51,987	1,391
			Transport - Services (0.83%)
Retail - Restaurants (2.06%)			CH Robinson Worldwide Inc	10,642	551
McDonald's Corp	213,400	12,362	Expeditors International of Washington Inc	30,537	997
Panera Bread Co (a)	2,200	100	FedEx Corp	20,451	1,337
Starbucks Corp (a)	11,185	147	United Parcel Service Inc	54,162	2,859
Yum! Brands Inc	59,571	1,728			5,744
		14,337	Transport - Truck (0.82%)
Savings & Loans - Thrifts (0.27%)			JB Hunt Transport Services Inc	121,277	3,448
Hudson City Bancorp Inc	98,897	1,860	Landstar System Inc	22,766	879
			Werner Enterprises Inc	61,310	1,203
Schools (0.09%)			YRC Worldwide Inc (a)	38,744	177
Apollo Group Inc (a)	8,745	608			5,707
Software Tools (0.07%)			Vitamins & Nutrition Products (0.18%)
VMware Inc (a)	16,045	497	Herbalife Ltd	46,916	1,146
			NBTY Inc (a)	3,300	77
Steel - Producers (0.06%)					1,223
Schnitzer Steel Industries Inc	2,687	72	Web Portals (1.27%)
United States Steel Corp	9,422	348	Google Inc (a)	22,007	7,908
		420	Yahoo! Inc (a)	73,752	946
Telecommunication Equipment (0.03%)					8,854
Adtran Inc	113	2	Wireless Equipment (0.70%)
Tellabs Inc (a)	47,490	201	Motorola Inc	127,766	686
		203	Qualcomm Inc	108,330	4,145
Telecommunication Services (0.02%)					4,831
Virgin Media Inc	22,857	132
			TOTAL COMMON STOCKS	$ 672,331
Telephone - Integrated (3.61%)				Principal
AT&T Inc (b)	547,062	14,645		Amount	Value
Sprint Nextel Corp	379,893	1,189		(000's)	(000's)
Verizon Communications Inc	310,165	9,203	REPURCHASE AGREEMENTS (2.78%)
		25,037	Money Center Banks (2.78%)
			Investment in Joint Trading Account; Bank
Television (0.39%)			of America Repurchase Agreement;
CBS Corp	280,190	2,721	0.15%; dated 10/31/2008 maturing
			11/03/2008 (collateralized by Sovereign
Tobacco (3.28%)			Agency Issues; $9,920,000; 2.75% -
Altria Group Inc	312,367	5,994	5.38%; dated 11/28/08 - 02/13/17)	$ 9,631$	9,630
Lorillard Inc	85,015	5,599
Philip Morris International Inc	226,779	9,858

See accompanying notes

261

Schedule of Investments
LargeCap Blend Fund I
October 31, 2008

			Principal
			Amount	Value
			(000's)	(000's)
REPURCHASE AGREEMENTS (continued)
Money Center Banks (continued)
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $9,920,000; 2.63% -
4.63%; dated 09/09/09 - 06/12/15)		$ 9,631$		9,631
				19,261
TOTAL REPURCHASE AGREEMENTS			$ 19,261
Total Investments			$ 691,592
Other Assets in Excess of Liabilities, Net - 0.39%				2,722
TOTAL NET ASSETS - 100.00%			$ 694,314
(a)	Non-Income Producing Security
(b)	Security or a portion of the security was pledged to cover margin
	requirements for futures contracts. At the end of the period, the value of
	these securities totaled $3,630 or 0.52% of net assets.
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation			$ 8,636
Unrealized Depreciation				(238,337)
Net Unrealized Appreciation (Depreciation)				(229,701)
Cost for federal income tax purposes				921,293
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector				Percent
Consumer, Non-cyclical				24.69%
Financial				17.59%
Energy				13.66%
Communications				10.78%
Technology				10.41%
Industrial				9.79%
Consumer, Cyclical				7.72%
Utilities				2.87%
Basic Materials				2.07%
Diversified				0.03%
Other Assets in Excess of Liabilities, Net				0.39%
TOTAL NET ASSETS				100.00%
Other Assets Summary (unaudited)
Asset Type				Percent
Futures				2.18%

See accompanying notes

262

	Schedule of Investments
	LargeCap Blend Fund I
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500 eMini; December 2008	Buy	313	$ 17,199	$ 15,138	$ (2,061)
All dollar amounts are shown in thousands (000's)

See accompanying notes

263

Schedule of Investments
LargeCap Blend Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (98.74%)			COMMON STOCKS (continued)
Advertising Agencies (0.28%)			Beverages - Non-Alcoholic (continued)
Omnicom Group Inc	62,300 $	1,840	Dr Pepper Snapple Group Inc (a)	40,100 $	918
			PepsiCo Inc	141,200	8,050
Advertising Sales (0.05%)					18,715
Lamar Advertising Co (a)	21,200	322
			Brewery (0.50%)
Aerospace & Defense (1.69%)			Anheuser-Busch Cos Inc	52,700	3,269
Boeing Co	44,700	2,336
			Broadcasting Services & Programming (0.12%)
General Dynamics Corp	39,740	2,397
			Discovery Communications Inc - A Shares (a)	26,850	366
Lockheed Martin Corp	30,200	2,569
			Discovery Communications Inc - C Shares (a)	32,550	434
Northrop Grumman Corp	28,700	1,346
					800
Raytheon Co	22,600	1,155
Rockwell Collins Inc	31,800	1,184	Building - Residential & Commercial (0.16%)
		10,987	Lennar Corp	131,100	1,015
Aerospace & Defense Equipment (0.76%)			Building Products - Wood (0.14%)
United Technologies Corp	89,900	4,941	Masco Corp	88,900	902
Agricultural Chemicals (0.82%)			Cable TV (0.53%)
CF Industries Holdings Inc	4,400	282	Cablevision Systems Corp	32,100	569
Monsanto Co	50,600	4,502	Scripps Networks Interactive	6,700	190
Potash Corp of Saskatchewan	6,200	529	Shaw Communications Inc	15,000	267
		5,313	Time Warner Cable Inc (a)	125,000	2,448
Agricultural Operations (0.10%)					3,474
Archer-Daniels-Midland Co	29,800	618
			Casino Hotels (0.34%)
			Las Vegas Sands Corp (a)	21,300	302
Airlines (0.10%)
			Melco Crown Entertainment Ltd ADR (a)	122,600	503
Southwest Airlines Co	55,000	648
			MGM Mirage (a)	40,736	670
Apparel Manufacturers (0.15%)			Wynn Resorts Ltd	12,200	737
Coach Inc (a)	48,900	1,007			2,212
			Casino Services (0.22%)
Applications Software (2.66%)
			International Game Technology	102,400	1,434
Microsoft Corp	644,600	14,394
Red Hat Inc (a)	143,500	1,910	Cellular Telecommunications (0.29%)
Salesforce.com Inc (a)	33,900	1,049	MetroPCS Communications Inc (a)	118,500	1,628
		17,353	NII Holdings Inc (a)	10,100	260
Athletic Footwear (0.18%)					1,888
Nike Inc	20,300	1,170	Chemicals - Diversified (0.64%)
			Dow Chemical Co/The	32,200	859
Audio & Video Products (0.02%)
			EI Du Pont de Nemours & Co	103,500	3,312
Harman International Industries Inc	7,700	141
					4,171
Auto - Car & Light Trucks (0.09%)			Chemicals - Specialty (0.12%)
General Motors Corp	105,600	610	International Flavors & Fragrances Inc	10,100	322
			Sigma-Aldrich Corp	10,800	474
Auto/Truck Parts & Equipment - Original (0.08%)					796
Johnson Controls Inc	30,900	548
			Coal (0.36%)
Beverages - Non-Alcoholic (2.87%)			Arch Coal Inc	9,800	210
Coca-Cola Co/The	195,700	8,622	Consol Energy Inc	35,800	1,124
Coca-Cola Enterprises Inc	111,900	1,125

See accompanying notes

264

Schedule of Investments
LargeCap Blend Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Coal (continued)			Data Processing & Management (0.09%)
Peabody Energy Corp	29,800 $	1,028	Fiserv Inc (a)	17,000 $	567
		2,362
			Dialysis Centers (0.08%)
Coatings & Paint (0.06%)
			DaVita Inc (a)	8,800	499
Sherwin-Williams Co/The	6,400	364
			Disposable Medical Products (0.10%)
Commercial Banks (0.42%)
			CR Bard Inc	7,600	671
BB&T Corp	7,000	251
First Horizon National Corp	112,538	1,341	Diversified Banking Institutions (5.34%)
Marshall & Ilsley Corp	63,298	1,141	Bank of America Corp	405,970	9,812
		2,733	Citigroup Inc	448,400	6,121
Commercial Services (0.02%)			Goldman Sachs Group Inc/The	40,400	3,737
Quanta Services Inc (a)	7,200	142	JP Morgan Chase & Co	304,128	12,545
			Morgan Stanley	146,500	2,560
Commercial Services - Finance (1.02%)					34,775
Automatic Data Processing Inc	51,900	1,814
			Diversified Financial Services (0.09%)
H&R Block Inc	122,000	2,406
			IntercontinentalExchange Inc (a)	6,500	556
Mastercard Inc	4,500	665
Moody's Corp	7,500	192	Diversified Manufacturing Operations (4.37%)
Paychex Inc	24,300	693	3M Co	61,700	3,967
Western Union Co/The	59,100	902	Danaher Corp	76,000	4,502
		6,672	General Electric Co	687,800	13,419
Computer Aided Design (0.52%)			Honeywell International Inc	45,200	1,376
Autodesk Inc (a)	157,700	3,361	Illinois Tool Works Inc	55,600	1,857
			ITT Corp	20,500	912
Computer Services (0.42%)			Leggett & Platt Inc	13,800	240
Accenture Ltd	69,000	2,280	Tyco International Ltd	86,525	2,188
Computer Sciences Corp (a)	15,500	468			28,461
		2,748
			E-Commerce - Products (0.55%)
Computers (4.15%)			Amazon.com Inc (a)	62,100	3,555
Apple Inc (a)	73,500	7,908
Dell Inc (a)	225,000	2,734	E-Commerce - Services (0.11%)
Hewlett-Packard Co	181,700	6,955	Expedia Inc (a)	75,600	719
IBM Corp	101,300	9,418
			Electric - Generation (0.07%)
		27,015
			AES Corp/The (a)	55,000	438
Computers - Memory Devices (0.30%)
EMC Corp/Massachusetts (a)	164,500	1,938	Electric - Integrated (2.74%)
			Constellation Energy Group Inc	23,300	564
Consumer Products - Miscellaneous (0.88%)			Duke Energy Corp	23,300	382
Clorox Co	23,000	1,399	Entergy Corp	42,200	3,294
Fortune Brands Inc	34,200	1,304	Exelon Corp	28,400	1,540
Kimberly-Clark Corp	49,400	3,028	FirstEnergy Corp	55,000	2,869
		5,731	FPL Group Inc	14,800	699
Cosmetics & Toiletries (2.67%)			PG&E Corp	19,000	697
Avon Products Inc	63,200	1,569	PPL Corp	86,300	2,832
Colgate-Palmolive Co	15,600	979	Progress Energy Inc	23,600	929
Procter & Gamble Co	229,857	14,835	Public Service Enterprise Group Inc	85,600	2,410
		17,383	TECO Energy Inc	72,800	840

See accompanying notes

265

Schedule of Investments
LargeCap Blend Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Electric - Integrated (continued)			Food - Retail (0.23%)
Xcel Energy Inc	46,800 $	815	Kroger Co/The	34,400 $	945
		17,871	SUPERVALU Inc	32,700	466
			Whole Foods Market Inc	10,100	108
Electronic Components - Miscellaneous (0.47%)
Tyco Electronics Ltd	156,625	3,045			1,519
			Food - Wholesale & Distribution (0.24%)
Electronic Components - Semiconductors (1.62%)			Sysco Corp	59,900	1,569
Broadcom Corp (a)	80,500	1,375
Intel Corp	302,600	4,842	Forestry (0.11%)
MEMC Electronic Materials Inc (a)	19,200	353	Weyerhaeuser Co	18,300	699
National Semiconductor Corp	49,900	657
Texas Instruments Inc	140,400	2,746	Gas - Distribution (0.53%)
Xilinx Inc	31,900	587	Centerpoint Energy Inc	37,900	437
		10,560	NiSource Inc	21,800	282
			Sempra Energy	64,400	2,743
Electronic Forms (0.06%)
					3,462
Adobe Systems Inc (a)	14,700	392
			Gold Mining (0.08%)
Electronic Measurement Instruments (0.12%)			Agnico-Eagle Mines Ltd	18,600	514
Agilent Technologies Inc (a)	35,200	781
			Health Care Cost Containment (0.22%)
Engineering - Research & Development Services (0.12%)			McKesson Corp	39,600	1,457
Fluor Corp	17,000	679
McDermott International Inc (a)	7,200	123	Hotels & Motels (0.32%)
		802	Marriott International Inc/DE	100,700	2,102
Enterprise Software & Services (0.33%)			Human Resources (0.10%)
Oracle Corp (a)	119,000	2,177	Monster Worldwide Inc (a)	10,300	147
			Robert Half International Inc	26,200	494
Entertainment Software (0.12%)
					641
Electronic Arts Inc (a)	34,100	777
			Independent Power Producer (0.35%)
Fiduciary Banks (0.65%)			Dynegy Inc (a)	197,600	719
Bank of New York Mellon Corp/The	50,700	1,653	NRG Energy Inc (a)	68,400	1,591
Northern Trust Corp	11,300	636			2,310
State Street Corp	44,300	1,921
			Industrial Gases (0.45%)
		4,210	Praxair Inc	45,400	2,958
Finance - Credit Card (0.25%)
American Express Co	59,200	1,628	Instruments - Scientific (0.11%)
			Waters Corp (a)	16,800	736
Finance - Investment Banker & Broker (0.40%)
Charles Schwab Corp/The	9,300	178	Insurance Brokers (0.43%)
Merrill Lynch & Co Inc	129,800	2,413	Aon Corp	57,100	2,415
		2,591	Marsh & McLennan Cos Inc	12,400	364
					2,779
Finance - Other Services (0.18%)
CME Group Inc	4,070	1,148	Internet Security (0.17%)
			VeriSign Inc (a)	52,200	1,107
Food - Miscellaneous/Diversified (0.83%)
Kraft Foods Inc	141,042	4,110	Investment Management & Advisory Services (0.67%)
Sara Lee Corp	115,500	1,291	Ameriprise Financial Inc	69,700	1,506
		5,401	Franklin Resources Inc	10,800	734
			Invesco Ltd	130,700	1,949

See accompanying notes

266

Schedule of Investments
LargeCap Blend Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Investment Management & Advisory Services			Medical Instruments (continued)
(continued)			St Jude Medical Inc (a)	33,000 $	1,255
Janus Capital Group Inc	17,300 $	203
					7,757
		4,392
			Medical Products (3.36%)
Life & Health Insurance (0.25%)			Baxter International Inc	59,100	3,575
Aflac Inc	22,800	1,010
			Becton Dickinson & Co	20,000	1,388
Prudential Financial Inc	20,700	621
			Covidien Ltd	52,725	2,335
		1,631
			Hospira Inc (a)	11,500	320
Machinery - Construction & Mining (0.10%)			Johnson & Johnson	211,300	12,961
Terex Corp (a)	40,200	671	Stryker Corp	24,600	1,315
					21,894
Machinery - Farm (0.40%)
Deere & Co	66,900	2,580	Metal - Aluminum (0.12%)
			Alcoa Inc	68,400	787
Medical - Biomedical/Gene (2.40%)
Amgen Inc (a)	80,500	4,821	Metal - Diversified (0.15%)
			Freeport-McMoRan Copper & Gold Inc	32,810	955
Biogen Idec Inc (a)	23,800	1,013
Celgene Corp (a)	46,400	2,982
			Metal - Iron (0.06%)
Genentech Inc (a)	6,400	531
			Cliffs Natural Resources Inc	14,300	386
Genzyme Corp (a)	7,500	546
Gilead Sciences Inc (a)	125,700	5,763	Metal Processors & Fabrication (0.06%)
		15,656	Precision Castparts Corp	6,500	421
Medical - Drugs (4.34%)
			Motion Pictures & Services (0.01%)
Abbott Laboratories	106,300	5,862
			Ascent Media Corp (a)	2,685	68
Allergan Inc/United States	38,400	1,523
Bristol-Myers Squibb Co	154,200	3,169	Motorcycle/Motor Scooter (0.19%)
Cephalon Inc (a)	8,800	631	Harley-Davidson Inc	50,600	1,239
Eli Lilly & Co	68,300	2,310
Merck & Co Inc/NJ	196,500	6,082	Multi-Line Insurance (0.61%)
Pfizer Inc	141,700	2,510	ACE Ltd	18,500	1,061
Schering-Plough Corp	139,300	2,019	Assurant Inc	8,700	222
Wyeth	130,000	4,183	Loews Corp	35,400	1,175
		28,289	MetLife Inc	45,900	1,525
					3,983
Medical - HMO (0.97%)
Aetna Inc	28,300	704	Multimedia (1.28%)
Cigna Corp	34,800	567	Liberty Media Corp - Entertainment (a)	11,000	177
Humana Inc (a)	47,300	1,399	McGraw-Hill Cos Inc/The	14,100	379
UnitedHealth Group Inc	49,500	1,175	News Corp	80,000	851
WellPoint Inc (a)	64,000	2,488	Time Warner Inc	387,100	3,906
		6,333	Viacom Inc (a)	24,700	499
			Walt Disney Co/The	98,200	2,543
Medical - Wholesale Drug Distribution (0.21%)
AmerisourceBergen Corp	35,100	1,097			8,355
Cardinal Health Inc	6,200	237	Networking Products (1.06%)
		1,334	Cisco Systems Inc (a)	214,900	3,819
			Juniper Networks Inc (a)	163,200	3,058
Medical Instruments (1.19%)
Boston Scientific Corp (a)	119,800	1,082			6,877
Intuitive Surgical Inc (a)	4,900	847	Non-Hazardous Waste Disposal (0.40%)
Medtronic Inc	113,400	4,573	Allied Waste Industries Inc (a)	206,000	2,146

See accompanying notes

267

Schedule of Investments
LargeCap Blend Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Non-Hazardous Waste Disposal (continued)			Pipelines (continued)
Republic Services Inc	18,100 $	429	Williams Cos Inc	36,700 $	769
		2,575			2,623
Oil - Field Services (1.74%)			Property & Casualty Insurance (0.71%)
Baker Hughes Inc	58,400	2,041	Chubb Corp	36,300	1,881
BJ Services Co	68,000	874	Travelers Cos Inc/The	64,471	2,743
Schlumberger Ltd	152,300	7,866			4,624
Smith International Inc	17,000	586
			Radio (0.02%)
		11,367	Sirius XM Radio Inc (a)	367,140	124
Oil & Gas Drilling (0.49%)
Nabors Industries Ltd (a)	37,100	534	Regional Banks (3.25%)
Transocean Inc	32,650	2,688	Capital One Financial Corp	16,400	641
		3,222	Fifth Third Bancorp	136,000	1,476
			Keycorp	71,200	871
Oil Company - Exploration & Production (1.73%)
			National City Corp (a)(b)(c)(d)	84,353	228
Devon Energy Corp	27,800	2,248
			National City Corp	265,800	718
EOG Resources Inc	28,600	2,314
			PNC Financial Services Group Inc	38,100	2,540
Newfield Exploration Co (a)	24,200	556
			SunTrust Banks Inc	16,600	666
Noble Energy Inc	5,800	301
			US Bancorp	159,000	4,740
Occidental Petroleum Corp	47,200	2,622
			Wachovia Corp	162,800	1,043
Range Resources Corp	13,700	578
			Wells Fargo & Co	242,200	8,247
XTO Energy Inc	73,357	2,637
					21,170
		11,256
			Reinsurance (0.15%)
Oil Company - Integrated (7.97%)
			Axis Capital Holdings Ltd	33,500	954
Chevron Corp	181,000	13,503
ConocoPhillips	68,400	3,558	REITS - Apartments (0.25%)
Exxon Mobil Corp	434,300	32,190	Equity Residential	46,700	1,631
Murphy Oil Corp	52,800	2,674
		51,925	REITS - Office Property (0.24%)
			Boston Properties Inc	22,400	1,588
Oil Field Machinery & Equipment (0.37%)
FMC Technologies Inc (a)	46,700	1,634
			REITS - Regional Malls (0.36%)
National Oilwell Varco Inc (a)	24,947	746	Simon Property Group Inc	34,500	2,313
		2,380
Oil Refining & Marketing (0.37%)			REITS - Warehouse & Industrial (0.05%)
Sunoco Inc	43,300	1,320	Prologis	24,400	342
Valero Energy Corp	52,900	1,089
			Retail - Apparel & Shoe (0.06%)
		2,409
			American Eagle Outfitters Inc	37,500	417
Paper & Related Products (0.23%)
International Paper Co	64,600	1,112	Retail - Bedding (0.52%)
MeadWestvaco Corp	25,500	358	Bed Bath & Beyond Inc (a)	131,400	3,386
		1,470
			Retail - Building Products (1.07%)
Pharmacy Services (0.48%)			Home Depot Inc	141,900	3,347
Express Scripts Inc (a)	9,500	576	Lowe's Cos Inc	167,000	3,624
Medco Health Solutions Inc (a)	67,500	2,561			6,971
		3,137
			Retail - Computer Equipment (0.03%)
Pipelines (0.40%)			GameStop Corp (a)	6,300	173
Spectra Energy Corp	95,900	1,854

See accompanying notes

268

Schedule of Investments
LargeCap Blend Fund II
October 31, 2008
	Shares	Value			Shares	Value
	Held	(000's)			Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Discount (1.95%)			Tobacco (continued)
Costco Wholesale Corp	38,500 $	2,195	Lorillard Inc		20,600 $	1,357
Target Corp	10,600	425	Philip Morris International Inc		182,400	7,929
Wal-Mart Stores Inc	180,200	10,057				11,247
		12,677
			Tools - Hand Held (0.05%)
Retail - Drug Store (0.79%)			Stanley Works/The		10,500	344
CVS/Caremark Corp	130,294	3,993
Walgreen Co	45,400	1,156	Toys (0.10%)
		5,149	Mattel Inc		44,000	661
Retail - Regional Department Store (0.52%)			Transport - Rail (1.21%)
Kohl's Corp (a)	97,100	3,411	Burlington Northern Santa Fe Corp		18,900	1,683
			Canadian National Railway Co		19,500	843
Retail - Restaurants (1.19%)
			CSX Corp		27,400	1,253
McDonald's Corp	78,300	4,536
			Norfolk Southern Corp		6,900	414
Starbucks Corp (a)	55,800	733
			Union Pacific Corp		55,400	3,699
Yum! Brands Inc	84,500	2,451
						7,892
		7,720
			Transport - Services (0.68%)
Schools (0.17%)
			Expeditors International of Washington Inc		66,200	2,161
Apollo Group Inc (a)	15,800	1,098
			United Parcel Service Inc		43,400	2,291
						4,452
Semiconductor Component - Integrated Circuits (0.34%)
Analog Devices Inc	34,600	739	Web Portals (1.13%)
Marvell Technology Group Ltd (a)	216,100	1,504	Google Inc (a)		20,500	7,367
		2,243
			Wireless Equipment (1.52%)
Semiconductor Equipment (0.30%)
			American Tower Corp (a)		48,792	1,577
Applied Materials Inc	119,300	1,540
			Crown Castle International Corp (a)		51,600	1,092
Kla-Tencor Corp	18,200	423
			Motorola Inc		238,000	1,278
		1,963
			Qualcomm Inc		155,300	5,942
Steel - Producers (0.19%)						9,889
Nucor Corp	30,300	1,227
			TOTAL COMMON STOCKS		$ 643,316
Telecommunication Equipment (0.16%)					Principal
Alcatel-Lucent ADR	355,712	914			Amount	Value
Tellabs Inc (a)	36,300	154			(000's)	(000's)
		1,068	COMMERCIAL PAPER (0.05%)
			U.S. Treasury Bill (0.05%)
Telecommunication Equipment - Fiber Optics (0.21%)
			1.40%, 4/23/2009 (e)	$ 300		299
Corning Inc	26,572	288
JDS Uniphase Corp (a)	200,900	1,097	TOTAL COMMERCIAL PAPER		$ 299
		1,385	SHORT TERM INVESTMENTS (0.09%)
			Commercial Paper (0.09%)
Telephone - Integrated (2.35%)
AT&T Inc	490,810	13,139	United States Treasury Bill
			1.80%, 11/13/2008 (e)	$ 600 $		600
Sprint Nextel Corp	563,300	1,763
			TOTAL SHORT TERM INVESTMENTS		$ 600
Verizon Communications Inc	14,600	433
		15,335	Total Investments		$ 644,215
			Other Assets in Excess of Liabilities, Net - 1.12%			7,314
Therapeutics (0.07%)
Warner Chilcott Ltd (a)	30,500	423	TOTAL NET ASSETS - 100.00%		$ 651,529
Tobacco (1.73%)
Altria Group Inc	102,200	1,961

See accompanying notes

269

			Schedule of Investments
			LargeCap Blend Fund II
			October 31, 2008
(a)	Non-Income Producing Security
(b)	Restricted Security. At the end of the period, the value of this security
	totaled $228 or 0.03% of net assets. The security was purchased on April
	28, 2008 at a cost of $422 ($5.00 per share).
(c)	Security is Illiquid
(d)	Market value is determined in accordance with procedures established in
	good faith by the Board of Directors. At the end of the period, the value
	of these securities totaled $228 or 0.03% of net assets.
(e)	Security or a portion of the security was pledged to cover margin
	requirements for futures contracts. At the end of the period, the value of
	these securities totaled $899 or 0.14% of net assets.
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation		$ 34,923
Unrealized Depreciation			(235,747)
Net Unrealized Appreciation (Depreciation)			(200,824)
Cost for federal income tax purposes			845,039
All dollar amounts are shown in thousands (000's)
	Portfolio Summary (unaudited)
Sector			Percent
Consumer, Non-cyclical			24.71%
Financial			14.28%
Energy			13.44%
Technology			10.91%
Industrial			10.68%
Communications			9.84%
Consumer, Cyclical			8.17%
Utilities			3.70%
Basic Materials			3.01%
Government			0.14%
Other Assets in Excess of Liabilities, Net			1.12%
TOTAL NET ASSETS			100.00%
	Other Assets Summary (unaudited)
Asset Type			Percent
Futures			0.96%
			Futures Contracts
						Current	Unrealized
					Original	Market	Appreciation/
Type			Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500 eMini; December 2008			Buy	130	$ 5,803	$ 6,286	$ 483
All dollar amounts are shown in thousands (000's)

See accompanying notes

270

Schedule of Investments
LargeCap Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (93.70%)			COMMON STOCKS (continued)
Aerospace & Defense Equipment (1.89%)			Food - Miscellaneous/Diversified (3.24%)
United Technologies Corp	722,200 $	39,692	General Mills Inc	1,004,400 $	68,038
Agricultural Chemicals (1.23%)			Forestry (1.16%)
Monsanto Co	291,056	25,898	Weyerhaeuser Co	635,100	24,274
Airlines (1.95%)			Instruments - Scientific (1.48%)
Delta Air Lines Inc (a)	3,739,290	41,057	Thermo Fisher Scientific Inc (a)	766,700	31,128
Athletic Footwear (2.32%)			Internet Security (1.20%)
Nike Inc	844,542	48,671	Symantec Corp (a)	2,008,600	25,268
Beverages - Non-Alcoholic (2.65%)			Medical - Biomedical/Gene (4.89%)
Coca-Cola Co/The	1,265,803	55,771	Amgen Inc (a)	816,900	48,924
			Gilead Sciences Inc (a)	1,174,700	53,860
Commercial Services - Finance (5.62%)					102,784
Mastercard Inc	282,481	41,756
			Medical - Drugs (2.36%)
Visa Inc	851,532	47,132
			Abbott Laboratories	897,748	49,511
Western Union Co/The	1,916,300	29,243
		118,131
			Medical - Generic Drugs (1.05%)
Computers (6.57%)			Teva Pharmaceutical Industries Ltd ADR	515,700	22,113
Apple Inc (a)	536,319	57,703
Hewlett-Packard Co	1,595,699	61,083	Medical Instruments (1.48%)
Research In Motion Ltd (a)	383,691	19,349	Intuitive Surgical Inc (a)	180,271	31,149
		138,135
			Medical Products (5.61%)
Diversified Banking Institutions (7.15%)			Baxter International Inc	1,104,800	66,829
Goldman Sachs Group Inc/The	431,328	39,898	Covidien Ltd	1,153,700	51,098
JP Morgan Chase & Co	2,678,205	110,476			117,927
		150,374
			Networking Products (2.52%)
E-Commerce - Products (1.60%)			Cisco Systems Inc (a)	2,985,480	53,052
Amazon.com Inc (a)	587,600	33,634
			Oil & Gas Drilling (1.63%)
Electric Products - Miscellaneous (1.80%)			Transocean Inc	415,300	34,192
Emerson Electric Co	1,152,700	37,728
			Oil Company - Exploration & Production (4.36%)
Energy - Alternate Sources (1.53%)			Chesapeake Energy Corp	1,433,500	31,494
First Solar Inc (a)	223,400	32,103	Devon Energy Corp	744,600	60,208
					91,702
Entertainment Software (1.48%)
Activision Blizzard Inc (a)	2,496,400	31,105	Optical Supplies (0.69%)
			Alcon Inc	164,055	14,457
Fiduciary Banks (1.74%)
State Street Corp	842,683	36,530	Paper & Related Products (1.02%)
			International Paper Co	1,250,600	21,535
Finance - Investment Banker & Broker (1.21%)
Merrill Lynch & Co Inc	1,370,500	25,478	Pharmacy Services (2.42%)
			Express Scripts Inc (a)	837,900	50,785
Finance - Other Services (1.21%)
CME Group Inc	90,000	25,394	Regional Banks (1.32%)
			Wells Fargo & Co	817,000	27,819

See accompanying notes

271

Schedule of Investments
LargeCap Growth Fund
October 31, 2008
					Unrealized Appreciation (Depreciation)
					The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			Shares	Value	of investments held by the fund as of the period end were as follows:
			Held	(000's)
COMMON STOCKS (continued)					Unrealized Appreciation	$ 77,630
Retail - Apparel & Shoe (1.09%)					Unrealized Depreciation		(509,853)
Guess ? Inc			1,049,322 $	22,844	Net Unrealized Appreciation (Depreciation)		(432,223)
					Cost for federal income tax purposes		2,482,347
Retail - Discount (4.82%)					All dollar amounts are shown in thousands (000's)
Wal-Mart Stores Inc			1,813,600	101,217
					Portfolio Summary (unaudited)
Retail - Restaurants (2.96%)					Sector		Percent
McDonald's Corp			1,075,500	62,304
					Consumer, Non-cyclical		30.01%
					Financial		16.48%
Semiconductor Equipment (1.03%)					Consumer, Cyclical		13.14%
Applied Materials Inc			1,675,300	21,628	Communications		10.94%
					Technology		9.08%
Transport - Rail (1.80%)					Energy		7.52%
					Industrial		6.97%
Union Pacific Corp			566,900	37,852	Basic Materials		3.41%
					Other Assets in Excess of Liabilities, Net		2.45%
Web Portals (1.96%)
					TOTAL NET ASSETS		100.00%
Google Inc (a)			114,390	41,107
Wireless Equipment (3.66%)
American Tower Corp (a)			705,200	22,785
Qualcomm Inc			1,413,300	54,073
				76,858
TOTAL COMMON STOCKS			$ 1,969,245
			Principal
			Amount	Value
			(000's)	(000's)
REPURCHASE AGREEMENTS (3.85%)
Money Center Banks (3.85%)
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $41,653,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)		$ 40,440$		40,439
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $41,653,000; 2.63% -
4.63%; dated 09/09/09 - 06/12/15)			40,440	40,440
				80,879
TOTAL REPURCHASE AGREEMENTS			$ 80,879
Total Investments			$ 2,050,124
Other Assets in Excess of Liabilities, Net - 2.45%				51,568
TOTAL NET ASSETS - 100.00%			$ 2,101,692
(a)	Non-Income Producing Security

See accompanying notes

272

Schedule of Investments
LargeCap Growth Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (99.78%)			COMMON STOCKS (continued)
Agricultural Chemicals (1.61%)			Fiduciary Banks (2.04%)
Monsanto Co	151,300 $	13,463	State Street Corp	563,183 $	24,414
Potash Corp of Saskatchewan	68,100	5,806
		19,269	Finance - Investment Banker & Broker (0.66%)
			Charles Schwab Corp/The	410,737	7,853
Applications Software (3.81%)
Microsoft Corp	1,507,800	33,669	Health Care Cost Containment (1.03%)
Salesforce.com Inc (a)	382,100	11,830	McKesson Corp	335,900	12,358
		45,499
			Hotels & Motels (1.79%)
Casino Hotels (0.73%)
			Marriott International Inc/DE	1,026,700	21,427
Las Vegas Sands Corp (a)	289,100	4,102
MGM Mirage (a)	279,074	4,594
			Independent Power Producer (1.30%)
		8,696	NRG Energy Inc (a)	669,600	15,568
Casino Services (0.76%)
International Game Technology	648,200	9,075	Industrial Gases (2.15%)
			Praxair Inc	395,000	25,734
Cellular Telecommunications (1.31%)
MetroPCS Communications Inc (a)	1,141,570	15,685	Internet Security (0.57%)
			VeriSign Inc (a)	320,600	6,797
Computer Aided Design (0.80%)
Autodesk Inc (a)	450,700	9,604	Investment Management & Advisory Services (1.11%)
			Franklin Resources Inc	194,800	13,246
Computer Services (2.86%)
Accenture Ltd	1,033,700	34,164	Medical - Biomedical/Gene (9.31%)
			Amgen Inc (a)	112,400	6,732
Computers (4.87%)			Celgene Corp (a)	320,893	20,620
Apple Inc (a)	457,000	49,168	Genentech Inc (a)	396,400	32,877
Research In Motion Ltd (a)	178,600	9,007	Gilead Sciences Inc (a)	1,110,200	50,903
		58,175			111,132
Diversified Banking Institutions (2.60%)			Medical - Drugs (3.24%)
Goldman Sachs Group Inc/The	199,700	18,472	Allergan Inc/United States	560,800	22,247
Morgan Stanley	717,200	12,530	Wyeth	509,800	16,405
		31,002			38,652
Diversified Manufacturing Operations (4.35%)			Medical - HMO (1.21%)
Danaher Corp	877,300	51,971	Humana Inc (a)	489,300	14,478
E-Commerce - Products (4.91%)			Medical Instruments (1.83%)
Amazon.com Inc (a)	1,023,600	58,591	Medtronic Inc	541,900	21,855
E-Commerce - Services (0.72%)			Medical Products (2.62%)
Expedia Inc (a)	902,300	8,581	Baxter International Inc	197,100	11,923
			Stryker Corp	363,300	19,422
Electronic Components - Semiconductors (3.28%)					31,345
Broadcom Corp (a)	1,047,700	17,895
			Networking Products (4.01%)
Xilinx Inc	1,155,378	21,282
			Juniper Networks Inc (a)	2,553,120	47,846
		39,177
Entertainment Software (1.51%)			Oil - Field Services (3.05%)
Electronic Arts Inc (a)	792,800	18,060	Schlumberger Ltd	704,900	36,408

See accompanying notes

273

Schedule of Investments
LargeCap Growth Fund I
October 31, 2008
				Unrealized Appreciation (Depreciation)
				The net federal income tax unrealized appreciation (depreciation) and federal tax cost
		Shares	Value	of investments held by the fund as of the period end were as follows:
		Held	(000's)
COMMON STOCKS (continued)				Unrealized Appreciation	$ 47,120
Oil Company - Exploration & Production (1.17%)				Unrealized Depreciation		(475,830)
EOG Resources Inc		172,400 $	13,951	Net Unrealized Appreciation (Depreciation)		(428,710)
				Cost for federal income tax purposes		1,620,334
Oil Company - Integrated (0.84%)				All dollar amounts are shown in thousands (000's)
Suncor Energy Inc		419,900	10,044
				Portfolio Summary (unaudited)
Pharmacy Services (2.17%)				Sector		Percent
Medco Health Solutions Inc (a)		682,100	25,886
				Communications		25.21%
				Consumer, Non-cyclical		21.41%
Power Converter & Supply Equipment (0.44%)				Technology		20.37%
Sunpower Corp - Class B (a)		177,000	5,241	Consumer, Cyclical		10.01%
				Financial		6.41%
Retail - Bedding (1.29%)				Industrial		6.24%
				Energy		5.06%
Bed Bath & Beyond Inc (a)		597,000	15,385	Basic Materials		3.77%
				Utilities		1.30%
Retail - Discount (2.27%)				Other Assets in Excess of Liabilities, Net		0.22%
Wal-Mart Stores Inc		485,700	27,107	TOTAL NET ASSETS		100.00%
Retail - Regional Department Store (1.13%)
Kohl's Corp (a)		385,400	13,539
Retail - Restaurants (1.25%)
Yum! Brands Inc		512,600	14,871
Semiconductor Component - Integrated Circuits (1.74%)
Marvell Technology Group Ltd (a)		2,988,500	20,800
Semiconductor Equipment (1.50%)
ASML Holding NV		1,018,200	17,869
Toys (0.79%)
Nintendo Co Ltd ADR		241,200	9,407
Transport - Services (1.45%)
Expeditors International of Washington Inc		529,200	17,278
Web Portals (5.27%)
Google Inc (a)		175,000	62,888
Wireless Equipment (8.43%)
American Tower Corp (a)		1,477,700	47,745
Crown Castle International Corp (a)		643,800	13,629
Qualcomm Inc		1,027,759	39,322
			100,696
TOTAL COMMON STOCKS		$ 1,191,624
Total Investments		$ 1,191,624
Other Assets in Excess of Liabilities, Net - 0.22%			2,633
TOTAL NET ASSETS - 100.00%		$ 1,194,257
(a)	Non-Income Producing Security

See accompanying notes

274

Schedule of Investments
LargeCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.46%)			COMMON STOCKS (continued)
Aerospace & Defense (2.22%)			Disposable Medical Products (1.04%)
Raytheon Co	602,960 $	30,817	CR Bard Inc	163,606 $	14,438
Agricultural Chemicals (2.08%)			Diversified Banking Institutions (0.52%)
Monsanto Co	325,070	28,925	Bank of America Corp	170,300	4,116
			Citigroup Inc	229,900	3,138
Applications Software (2.27%)					7,254
Microsoft Corp	1,145,819	25,586
			Diversified Financial Services (0.94%)
Salesforce.com Inc (a)	191,163	5,919
			IntercontinentalExchange Inc (a)	153,300	13,116
		31,505
Auto/Truck Parts & Equipment - Original (0.68%)			Diversified Manufacturing Operations (2.67%)
BorgWarner Inc	422,228	9,487	Cooper Industries Ltd	581,782	18,006
			Honeywell International Inc	626,497	19,077
Beverages - Non-Alcoholic (4.17%)					37,083
Coca-Cola Co/The	843,515	37,165
			E-Commerce - Products (0.35%)
PepsiCo Inc	362,937	20,691
			Amazon.com Inc (a)	85,000	4,865
		57,856
Building - Residential & Commercial (0.70%)			Electric - Integrated (1.75%)
KB Home	578,676	9,658	FPL Group Inc	353,266	16,688
			Public Service Enterprise Group Inc	269,800	7,595
Cable TV (2.58%)					24,283
DIRECTV Group Inc/The (a)	1,004,900	21,997
			Electric Products - Miscellaneous (1.71%)
Scripps Networks Interactive	489,300	13,896
			Emerson Electric Co	726,505	23,779
		35,893
Coal (0.38%)			Electronic Components - Semiconductors (3.55%)
Alpha Natural Resources Inc (a)	148,700	5,319	Altera Corp	912,900	15,839
			Intel Corp	664,161	10,626
Commercial Services - Finance (1.78%)			Texas Instruments Inc	614,300	12,016
Global Payments Inc	353,000	14,300	Xilinx Inc	586,000	10,794
Western Union Co/The	682,800	10,420			49,275
		24,720
			Electronic Forms (0.70%)
Computers (3.23%)			Adobe Systems Inc (a)	365,400	9,734
Apple Inc (a)	417,229	44,890
			Energy - Alternate Sources (0.49%)
Computers - Memory Devices (1.13%)			First Solar Inc (a)	47,342	6,803
EMC Corp/Massachusetts (a)	1,331,200	15,682
			Enterprise Software & Services (2.24%)
Cosmetics & Toiletries (3.65%)			Oracle Corp (a)	1,697,768	31,052
Estee Lauder Cos Inc/The	291,600	10,509
Procter & Gamble Co	623,341	40,231	Entertainment Software (0.70%)
		50,740	Activision Blizzard Inc (a)	783,258	9,759
Dental Supplies & Equipment (0.67%)
			Fiduciary Banks (1.11%)
Dentsply International Inc	304,648	9,255
			Northern Trust Corp	273,546	15,403
Diagnostic Equipment (0.36%)
			Food - Miscellaneous/Diversified (2.02%)
Gen-Probe Inc (a)	107,089	5,040
			Kellogg Co	149,700	7,548
			Nestle SA ADR	533,472	20,512
Diagnostic Kits (0.25%)
Qiagen NV (a)	241,600	3,445			28,060

See accompanying notes

275

Schedule of Investments
LargeCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Gold Mining (0.23%)			Oil Company - Exploration & Production
Newmont Mining Corp	122,100 $	3,216	(continued)
			Occidental Petroleum Corp	322,600 $	17,917
Instruments - Controls (0.43%)					63,338
Mettler Toledo International Inc (a)	78,800	6,031	Oil Field Machinery & Equipment (0.47%)
			National Oilwell Varco Inc (a)	216,400	6,468
Instruments - Scientific (1.28%)
Thermo Fisher Scientific Inc (a)	438,351	17,797	Optical Supplies (0.46%)
			Alcon Inc	71,800	6,327
Internet Security (0.58%)
Symantec Corp (a)	642,200	8,079	Pharmacy Services (1.11%)
			Express Scripts Inc (a)	253,400	15,359
Investment Management & Advisory Services (0.26%)
Waddell & Reed Financial Inc	246,399	3,578	Power Converter & Supply Equipment (0.39%)
			Energy Conversion Devices Inc (a)	157,000	5,360
Medical - Biomedical/Gene (2.98%)
Alexion Pharmaceuticals Inc (a)	166,700	6,793	Property & Casualty Insurance (1.08%)
Genentech Inc (a)	173,200	14,365	Chubb Corp	289,397	14,997
Gilead Sciences Inc (a)	440,600	20,202
		41,360	REITS - Diversified (0.61%)
			Digital Realty Trust Inc	253,900	8,501
Medical - Drugs (2.59%)
Allergan Inc/United States	264,870	10,507
			Retail - Apparel & Shoe (0.15%)
Novo Nordisk A/S ADR	384,037	20,550
			AnnTaylor Stores Corp (a)	170,800	2,147
Wyeth	154,900	4,985
		36,042	Retail - Auto Parts (1.22%)
Medical - HMO (0.22%)			Advance Auto Parts Inc	224,648	7,009
UnitedHealth Group Inc	126,600	3,004	O'Reilly Automotive Inc (a)	369,200	10,009
					17,018
Medical Instruments (1.58%)
			Retail - Building Products (1.40%)
Intuitive Surgical Inc (a)	55,090	9,519
			Lowe's Cos Inc	894,533	19,411
Medtronic Inc	309,940	12,500
		22,019	Retail - Discount (4.30%)
Medical Products (3.82%)			Family Dollar Stores Inc	680,931	18,324
Baxter International Inc	319,005	19,297	Wal-Mart Stores Inc	742,225	41,423
Becton Dickinson & Co	413,457	28,694			59,747
Johnson & Johnson	82,200	5,042	Retail - Regional Department Store (1.53%)
		53,033	Kohl's Corp (a)	606,200	21,296
Networking Products (2.87%)
			Semiconductor Component - Integrated Circuits (1.59%)
Cisco Systems Inc (a)	2,242,314	39,846
			Linear Technology Corp	544,509	12,350
Oil - Field Services (0.60%)			Marvell Technology Group Ltd (a)	1,389,700	9,672
Schlumberger Ltd	160,183	8,273			22,022
			Steel Pipe & Tube (0.60%)
Oil & Gas Drilling (1.45%)			Valmont Industries Inc	151,354	8,291
Transocean Inc	244,833	20,157
			Textile - Home Furnishings (0.60%)
Oil Company - Exploration & Production (4.56%)			Mohawk Industries Inc (a)	171,468	8,296
Apache Corp	93,644	7,710
Devon Energy Corp	280,739	22,700	Transport - Rail (2.12%)
EOG Resources Inc	185,500	15,011	Union Pacific Corp	440,970	29,444

See accompanying notes

276

Schedule of Investments
LargeCap Growth Fund II
October 31, 2008
					Portfolio Summary (unaudited)
					Sector	Percent
			Shares	Value
			Held	(000's)	Consumer, Non-cyclical	26.90%
					Technology	15.40%
COMMON STOCKS (continued)					Communications	13.43%
Transport - Services (1.18%)					Industrial	12.60%
United Parcel Service Inc			311,200 $	16,425	Consumer, Cyclical	10.59%
					Energy	7.95%
					Financial	7.92%
Veterinary Diagnostics (0.21%)					Basic Materials	2.31%
VCA Antech Inc (a)			160,279	2,901	Utilities	1.75%
					Other Assets in Excess of Liabilities, Net	1.15%
Web Portals (2.26%)					TOTAL NET ASSETS	100.00%
Google Inc (a)			87,207	31,339
					Other Assets Summary (unaudited)
Wireless Equipment (4.79%)					Asset Type	Percent
American Tower Corp (a)			908,323	29,348	Currency Contracts	3.01%
Qualcomm Inc			972,101	37,192	Futures	2.39%
				66,540
TOTAL COMMON STOCKS			$ 1,325,798
			Principal
			Amount	Value
			(000's)	(000's)
SHORT TERM INVESTMENTS (3.39%)
Commercial Paper (3.39%)
Investment in Joint Trading Account; HSBC
Funding
0.25%, 11/ 3/2008		$ 23,551 $		23,551
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008			23,550	23,550
				47,101
TOTAL SHORT TERM INVESTMENTS			$ 47,101
Total Investments			$ 1,372,899
Other Assets in Excess of Liabilities, Net - 1.15%				15,978
TOTAL NET ASSETS - 100.00%			$ 1,388,877
(a)	Non-Income Producing Security
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation			$ 22,778
Unrealized Depreciation				(416,643)
Net Unrealized Appreciation (Depreciation)				(393,865)
Cost for federal income tax purposes				1,766,764
All dollar amounts are shown in thousands (000's)

See accompanying notes

277

		Schedule of Investments
		LargeCap Growth Fund II
			October 31, 2008
		Foreign Currency Contracts
						Net Unrealized
Foreign Currency	Delivery	Contracts				Appreciation
Sale Contracts	Date	to Deliver	In Exchange For		Value	(Depreciation)
Danish Kroner	11/28/2008	100,137,766		$17,307	$17,112	$195
Swiss Franc	11/28/2008	28,572,648		25,178	24,660	518
All dollar amounts are shown in thousands (000's)
			Futures Contracts
						Current	Unrealized
					Original	Market	Appreciation/
Type			Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500; December 2008			Buy	137	$ 31,348	$ 33,130	$ 1,782
All dollar amounts are shown in thousands (000's)

See accompanying notes

278

Schedule of Investments
LargeCap S&P 500 Index Fund

October 31, 2008

	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (96.28%)			COMMON STOCKS (continued)
Advertising Agencies (0.13%)			Auto - Car & Light Trucks (0.09%)
Interpublic Group of Cos Inc (a)	42,717 $	222	Ford Motor Co (a)	202,736 $	444
Omnicom Group Inc	28,581	844	General Motors Corp	50,758	293
		1,066			737
Aerospace & Defense (1.52%)			Auto - Medium & Heavy Duty Trucks (0.12%)
Boeing Co	66,365	3,469	Paccar Inc	32,575	952
General Dynamics Corp	35,615	2,148
Lockheed Martin Corp	29,849	2,539	Auto/Truck Parts & Equipment - Original (0.12%)
Northrop Grumman Corp	30,261	1,419	Johnson Controls Inc	53,233	944
Raytheon Co	37,376	1,910
			Beverages - Non-Alcoholic (2.14%)
Rockwell Collins Inc	14,292	532
			Coca-Cola Co/The	178,219	7,852
		12,017
			Coca-Cola Enterprises Inc	28,428	286
Aerospace & Defense Equipment (0.65%)			Dr Pepper Snapple Group Inc (a)	22,744	521
Goodrich Corp	11,216	410	Pepsi Bottling Group Inc	12,244	283
United Technologies Corp	86,457	4,752	PepsiCo Inc	140,353	8,001
		5,162			16,943
Agricultural Chemicals (0.60%)			Beverages - Wine & Spirits (0.08%)
CF Industries Holdings Inc	5,065	325	Brown-Forman Corp	8,793	399
Monsanto Co	49,309	4,388	Constellation Brands Inc (a)	17,378	218
		4,713			617
Agricultural Operations (0.15%)			Brewery (0.57%)
Archer-Daniels-Midland Co	57,760	1,197	Anheuser-Busch Cos Inc	64,464	3,999
			Molson Coors Brewing Co	13,505	504
Airlines (0.10%)
					4,503
Southwest Airlines Co	65,799	775
			Building - Residential & Commercial (0.09%)
Apparel Manufacturers (0.17%)			Centex Corp	11,079	136
Coach Inc (a)	30,203	622	DR Horton Inc	24,695	182
Jones Apparel Group Inc	7,480	83	KB Home	6,748	113
Polo Ralph Lauren Corp	5,097	241	Lennar Corp	12,673	98
VF Corp	7,811	430	Pulte Homes Inc	19,154	213
		1,376			742
Appliances (0.04%)			Building Products - Wood (0.04%)
Whirlpool Corp	6,674	311	Masco Corp	32,275	328
Applications Software (2.19%)			Cable TV (0.69%)
Citrix Systems Inc (a)	16,351	422	Comcast Corp - Class A	261,622	4,123
Compuware Corp (a)	22,852	146	DIRECTV Group Inc/The (a)	51,751	1,133
Intuit Inc (a)	28,779	721	Scripps Networks Interactive	8,058	229
Microsoft Corp	703,957	15,719			5,485
Salesforce.com Inc (a)	9,329	289
			Casino Services (0.05%)
		17,297	International Game Technology	27,756	389
Athletic Footwear (0.26%)
Nike Inc	35,173	2,027	Chemicals - Diversified (0.80%)
			Dow Chemical Co/The	82,926	2,212
Audio & Video Products (0.01%)			EI Du Pont de Nemours & Co	80,881	2,588
Harman International Industries Inc	5,247	96	PPG Industries Inc	14,714	729
			Rohm & Haas Co	11,103	781
					6,310

See accompanying notes

279

Schedule of Investments
LargeCap S&P 500 Index Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Chemicals - Specialty (0.24%)			Computers (continued)
Ashland Inc	5,084 $	115	Hewlett-Packard Co	219,569 $	8,405
Eastman Chemical Co	6,849	277	IBM Corp	121,465	11,293
Ecolab Inc	15,739	586	Sun Microsystems Inc (a)	67,504	310
Hercules Inc	10,105	170			30,452
International Flavors & Fragrances Inc	7,043	225
			Computers - Integrated Systems (0.03%)
Sigma-Aldrich Corp	11,293	495	Teradata Corp (a)	16,003	246
		1,868
Coal (0.19%)			Computers - Memory Devices (0.35%)
Consol Energy Inc	16,423	516	EMC Corp/Massachusetts (a)	185,628	2,187
Massey Energy Co	7,582	175	NetApp Inc (a)	29,352	397
Peabody Energy Corp	24,380	841	SanDisk Corp (a)	20,173	179
		1,532			2,763
Coatings & Paint (0.06%)			Computers - Peripheral Equipment (0.03%)
Sherwin-Williams Co/The	8,846	503	Lexmark International Inc (a)	7,887	204
Commercial Banks (0.51%)			Consumer Products - Miscellaneous (0.45%)
BB&T Corp	49,263	1,766	Clorox Co	12,380	753
First Horizon National Corp	18,087	215	Fortune Brands Inc	13,441	513
M&T Bank Corp	6,916	561	Kimberly-Clark Corp	37,225	2,281
Marshall & Ilsley Corp	23,259	419			3,547
Regions Financial Corp	62,291	691	Containers - Metal & Glass (0.04%)
Zions Bancorporation	10,281	392	Ball Corp	8,668	296
		4,044
			Containers - Paper & Plastic (0.09%)
Commercial Services (0.01%)
			Bemis Co Inc	8,934	222
Convergys Corp (a)	10,922	84
			Pactiv Corp (a)	11,737	276
Commercial Services - Finance (0.75%)			Sealed Air Corp	14,173	240
Automatic Data Processing Inc	45,621	1,594			738
Equifax Inc	11,498	300	Cosmetics & Toiletries (2.75%)
H&R Block Inc	29,414	580	Avon Products Inc	38,165	948
Mastercard Inc	6,485	959	Colgate-Palmolive Co	45,340	2,845
Moody's Corp	17,697	453	Estee Lauder Cos Inc/The	10,294	371
Paychex Inc	28,765	821	Procter & Gamble Co	272,034	17,557
Total System Services Inc	17,722	243			21,721
Western Union Co/The	65,369	998
			Cruise Lines (0.13%)
		5,948
			Carnival Corp	39,174	995
Computer Aided Design (0.05%)
Autodesk Inc (a)	20,168	430	Data Processing & Management (0.09%)
			Fidelity National Information Services Inc	17,009	257
Computer Services (0.17%)			Fiserv Inc (a)	14,706	490
Affiliated Computer Services Inc (a)	8,720	358			747
Cognizant Technology Solutions Corp (a)	26,145	502
			Dental Supplies & Equipment (0.03%)
Computer Sciences Corp (a)	13,568	409
			Patterson Cos Inc (a)	8,166	207
Unisys Corp (a)	32,236	49
		1,318	Dialysis Centers (0.07%)
Computers (3.85%)			DaVita Inc (a)	9,360	531
Apple Inc (a)	79,421	8,545
Dell Inc (a)	156,259	1,899

See accompanying notes

280

Schedule of Investments
LargeCap S&P 500 Index Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Disposable Medical Products (0.10%)			Electric - Integrated (continued)
CR Bard Inc	8,906 $	786	American Electric Power Co Inc	36,064 $	1,177
			CMS Energy Corp	20,197	207
Distribution & Wholesale (0.19%)			Consolidated Edison Inc	24,492	1,061
Fastenal Co	11,585	466	Constellation Energy Group Inc	15,988	387
Genuine Parts Co	14,506	571	Dominion Resources Inc/VA	51,993	1,886
WW Grainger Inc	5,809	457	DTE Energy Co	14,622	516
		1,494	Duke Energy Corp	113,401	1,857
Diversified Banking Institutions (4.62%)			Edison International	29,210	1,040
Bank of America Corp	449,618	10,867	Entergy Corp	17,175	1,340
Citigroup Inc	488,194	6,664	Exelon Corp	58,932	3,196
Goldman Sachs Group Inc/The	38,950	3,603	FirstEnergy Corp	27,329	1,425
JP Morgan Chase & Co	330,276	13,624	FPL Group Inc	36,622	1,730
Morgan Stanley	99,426	1,737	Integrys Energy Group Inc	6,852	326
		36,495	Pepco Holdings Inc	18,088	374
			PG&E Corp	32,145	1,179
Diversified Financial Services (0.07%)
			Pinnacle West Capital Corp	9,031	286
IntercontinentalExchange Inc (a)	6,758	578
			PPL Corp	33,574	1,102
Diversified Manufacturing Operations (4.08%)			Progress Energy Inc	23,488	925
3M Co	62,666	4,029	Public Service Enterprise Group Inc	45,587	1,283
Cooper Industries Ltd	15,599	483	Southern Co	69,049	2,371
Danaher Corp	22,875	1,355	TECO Energy Inc	19,073	220
Dover Corp	16,841	535	Wisconsin Energy Corp	10,475	456
Eaton Corp	14,900	665	Xcel Energy Inc	39,985	697
General Electric Co (b)	940,980	18,359			26,109
Honeywell International Inc	66,741	2,032	Electric Products - Miscellaneous (0.31%)
Illinois Tool Works Inc	35,853	1,197	Emerson Electric Co	69,565	2,277
Ingersoll-Rand Co Ltd	28,557	527	Molex Inc	12,790	184
ITT Corp	16,294	725			2,461
Leggett & Platt Inc	14,411	250
			Electronic Components - Miscellaneous (0.12%)
Parker Hannifin Corp	15,028	583
			Jabil Circuit Inc	18,830	159
Textron Inc	22,282	394
			Tyco Electronics Ltd	42,344	823
Tyco International Ltd	42,569	1,076
					982
		32,210
			Electronic Components - Semiconductors (1.81%)
Diversified Operations (0.05%)
			Advanced Micro Devices Inc (a)	54,436	191
Leucadia National Corp	15,865	426
			Altera Corp	26,969	468
E-Commerce - Products (0.21%)			Broadcom Corp (a)	39,568	676
Amazon.com Inc (a)	28,639	1,639	Intel Corp	504,027	8,064
			LSI Corp (a)	57,702	222
E-Commerce - Services (0.21%)			MEMC Electronic Materials Inc (a)	20,252	372
eBay Inc (a)	97,943	1,496	Microchip Technology Inc	16,507	407
Expedia Inc (a)	18,760	178	Micron Technology Inc (a)	68,229	321
		1,674	National Semiconductor Corp	17,479	230
Electric - Generation (0.06%)			Nvidia Corp (a)	49,899	437
AES Corp/The (a)	60,314	481	QLogic Corp (a)	11,761	142
			Texas Instruments Inc	117,524	2,299
Electric - Integrated (3.30%)			Xilinx Inc	24,784	457
Allegheny Energy Inc	15,139	456			14,286
Ameren Corp	18,846	612

See accompanying notes

281

Schedule of Investments
LargeCap S&P 500 Index Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Electronic Connectors (0.06%)			Finance - Other Services (0.36%)
Amphenol Corp	15,851 $	454	CME Group Inc	6,015 $	1,697
			Nasdaq OMX Group, Inc (a)	12,188	395
Electronic Forms (0.16%)			NYSE Euronext	23,848	720
Adobe Systems Inc (a)	47,557	1,267			2,812
Electronic Measurement Instruments (0.09%)			Financial Guarantee Insurance (0.02%)
Agilent Technologies Inc (a)	32,054	711	MBIA Inc	17,528	172
Electronics - Military (0.11%)			Food - Confectionery (0.07%)
L-3 Communications Holdings Inc	10,886	884	Hershey Co/The	14,858	553
Engineering - Research & Development Services (0.13%)			Food - Dairy Products (0.04%)
Fluor Corp	16,048	641	Dean Foods Co (a)	13,659	299
Jacobs Engineering Group Inc (a)	10,975	400
			Food - Meat Products (0.03%)
		1,041
			Tyson Foods Inc	26,899	235
Engines - Internal Combustion (0.06%)
Cummins Inc	18,173	470	Food - Miscellaneous/Diversified (1.38%)
			Campbell Soup Co	18,985	720
Enterprise Software & Services (0.97%)			ConAgra Foods Inc	40,614	708
BMC Software Inc (a)	17,037	440	General Mills Inc	30,141	2,042
CA Inc	35,312	629	HJ Heinz Co	27,999	1,227
Novell Inc (a)	30,953	144	Kellogg Co	22,450	1,132
Oracle Corp (a)	351,298	6,425	Kraft Foods Inc	136,103	3,966
		7,638	McCormick & Co Inc/MD	11,561	389
Entertainment Software (0.08%)			Sara Lee Corp	63,329	708
Electronic Arts Inc (a)	28,583	651			10,892
			Food - Retail (0.36%)
Fiduciary Banks (0.78%)
			Kroger Co/The	58,714	1,613
Bank of New York Mellon Corp/The	102,748	3,349
			Safeway Inc	39,035	830
Northern Trust Corp	19,817	1,116
			SUPERVALU Inc	19,042	271
State Street Corp	38,707	1,678
			Whole Foods Market Inc	12,577	135
		6,143
					2,849
Filtration & Separation Products (0.04%)
			Food - Wholesale & Distribution (0.18%)
Pall Corp	10,747	284
			Sysco Corp	53,970	1,414
Finance - Commercial (0.01%)
			Forestry (0.16%)
CIT Group Inc	25,583	106
			Plum Creek Timber Co Inc	15,342	572
Finance - Consumer Loans (0.06%)			Weyerhaeuser Co	18,942	724
SLM Corp (a)	41,894	447			1,296
			Gas - Distribution (0.23%)
Finance - Credit Card (0.43%)			Centerpoint Energy Inc	30,645	353
American Express Co	103,942	2,858
			Nicor Inc	4,048	187
Discover Financial Services	42,975	527
			NiSource Inc	24,585	318
		3,385	Sempra Energy	22,088	941
Finance - Investment Banker & Broker (0.54%)					1,799
Charles Schwab Corp/The	83,636	1,599
			Gold Mining (0.14%)
E*Trade Financial Corp (a)	48,164	88
			Newmont Mining Corp	40,942	1,078
Merrill Lynch & Co Inc	137,300	2,552
		4,239

See accompanying notes

282

Schedule of Investments
LargeCap S&P 500 Index Fund

October 31, 2008

	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Health Care Cost Containment (0.12%)			Investment Management & Advisory Services
McKesson Corp	24,736 $	910	(continued)
			Janus Capital Group Inc	14,327 $	168
Home Decoration Products (0.04%)			Legg Mason Inc	12,708	282
Newell Rubbermaid Inc	24,843	342	T Rowe Price Group Inc	23,197	917
					3,423
Hotels & Motels (0.13%)
			Life & Health Insurance (0.54%)
Marriott International Inc/DE	26,493	553
			Aflac Inc	42,694	1,890
Starwood Hotels & Resorts Worldwide Inc	16,739	377
			Lincoln National Corp	23,025	397
Wyndham Worldwide Corp	15,911	131
			Prudential Financial Inc	38,282	1,148
		1,061
			Torchmark Corp	7,820	327
Human Resources (0.05%)			Unum Group	30,975	488
Monster Worldwide Inc (a)	11,115	158			4,250
Robert Half International Inc	13,978	264
			Linen Supply & Related Items (0.04%)
		422
			Cintas Corp	11,850	281
Independent Power Producer (0.02%)
Dynegy Inc (a)	45,324	165	Machinery - Construction & Mining (0.28%)
			Caterpillar Inc	54,573	2,083
Industrial Automation & Robots (0.05%)			Terex Corp (a)	8,714	145
Rockwell Automation Inc/DE	13,053	361			2,228
Industrial Gases (0.37%)			Machinery - Farm (0.19%)
Air Products & Chemicals Inc	18,992	1,104	Deere & Co	38,282	1,476
Praxair Inc	28,239	1,840
			Machinery - General Industry (0.01%)
		2,944
			Manitowoc Co Inc/The	11,680	115
Instruments - Scientific (0.33%)
Applied Biosystems Inc	15,197	469	Machinery - Pumps (0.04%)
PerkinElmer Inc	10,714	192	Flowserve Corp	5,144	293
Thermo Fisher Scientific Inc (a)	37,566	1,525
Waters Corp (a)	8,874	389	Medical - Biomedical/Gene (1.92%)
			Amgen Inc (a)	94,856	5,681
		2,575
			Biogen Idec Inc (a)	26,022	1,107
Insurance Brokers (0.30%)			Celgene Corp (a)	40,782	2,621
Aon Corp	24,894	1,053	Genzyme Corp (a)	24,085	1,755
Marsh & McLennan Cos Inc	45,983	1,348	Gilead Sciences Inc (a)	82,473	3,781
		2,401	Millipore Corp (a)	4,948	257
Internet Infrastructure Software (0.03%)					15,202
Akamai Technologies Inc (a)	15,162	218
			Medical - Drugs (4.91%)
			Abbott Laboratories	138,204	7,622
Internet Security (0.17%)
			Allergan Inc/United States	27,569	1,094
Symantec Corp (a)	75,227	947
			Bristol-Myers Squibb Co	177,478	3,647
VeriSign Inc (a)	17,322	367
			Eli Lilly & Co	89,699	3,033
		1,314
			Forest Laboratories Inc (a)	27,332	635
Investment Companies (0.03%)			King Pharmaceuticals Inc (a)	22,098	194
American Capital Ltd	18,559	261	Merck & Co Inc/NJ	192,078	5,945
			Pfizer Inc	604,348	10,703
Investment Management & Advisory Services (0.43%)
			Schering-Plough Corp	145,739	2,112
Ameriprise Financial Inc	19,449	420
			Wyeth	119,546	3,847
Federated Investors Inc	7,878	191
					38,832
Franklin Resources Inc	13,651	928
Invesco Ltd	34,674	517

See accompanying notes

283

Schedule of Investments
LargeCap S&P 500 Index Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Medical - Generic Drugs (0.14%)			Metal Processors & Fabrication (0.10%)
Barr Pharmaceuticals Inc (a)	9,757 $	627	Precision Castparts Corp	12,493 $	810
Mylan Inc/PA (a)	27,298	234
Watson Pharmaceuticals Inc (a)	9,366	245	Motorcycle/Motor Scooter (0.07%)
		1,106	Harley-Davidson Inc	21,097	516
Medical - HMO (0.82%)			Multi-Line Insurance (0.82%)
Aetna Inc	42,280	1,052	Allstate Corp/The	48,548	1,281
Cigna Corp	24,642	402	American International Group Inc	241,061	461
Coventry Health Care Inc (a)	13,279	175	Assurant Inc	10,632	271
Humana Inc (a)	15,142	448	Cincinnati Financial Corp	14,558	378
UnitedHealth Group Inc	109,165	2,590	Genworth Financial Inc	38,826	188
WellPoint Inc (a)	45,842	1,782	Hartford Financial Services Group Inc	27,012	279
		6,449	Loews Corp	32,463	1,078
Medical - Hospitals (0.02%)			MetLife Inc	68,287	2,269
Tenet Healthcare Corp (a)	37,190	163	XL Capital Ltd	27,977	271
					6,476
Medical - Wholesale Drug Distribution (0.21%)
			Multimedia (1.49%)
AmerisourceBergen Corp	14,206	444
			McGraw-Hill Cos Inc/The	28,474	764
Cardinal Health Inc	32,199	1,230
			Meredith Corp	3,245	63
		1,674
			News Corp	205,839	2,190
Medical Information Systems (0.03%)			Time Warner Inc	321,209	3,241
IMS Health Inc	16,305	234	Viacom Inc (a)	55,667	1,126
			Walt Disney Co/The	168,226	4,357
Medical Instruments (0.89%)					11,741
Boston Scientific Corp (a)	134,536	1,215
Intuitive Surgical Inc (a)	3,482	602	Networking Products (1.31%)
Medtronic Inc	101,155	4,079	Cisco Systems Inc (a)	529,590	9,411
St Jude Medical Inc (a)	30,643	1,165	Juniper Networks Inc (a)	48,730	913
		7,061			10,324
Medical Laboratory & Testing Service (0.16%)			Non-Ferrous Metals (0.01%)
Laboratory Corp of America Holdings (a)	9,969	613	Titanium Metals Corp	7,629	71
Quest Diagnostics Inc	14,170	663
			Non-Hazardous Waste Disposal (0.21%)
		1,276
			Allied Waste Industries Inc (a)	30,381	317
Medical Products (3.20%)			Waste Management Inc	43,971	1,373
Baxter International Inc	56,271	3,404			1,690
Becton Dickinson & Co	21,837	1,515
			Office Automation & Equipment (0.14%)
Covidien Ltd	44,988	1,992
			Pitney Bowes Inc	18,628	462
Hospira Inc (a)	14,295	398
			Xerox Corp	78,198	627
Johnson & Johnson	250,534	15,368
					1,089
Stryker Corp	22,179	1,186
Varian Medical Systems Inc (a)	11,193	509	Office Supplies & Forms (0.04%)
Zimmer Holdings Inc (a)	20,193	938	Avery Dennison Corp	9,547	334
		25,310
			Oil - Field Services (1.28%)
Metal - Aluminum (0.11%)			Baker Hughes Inc	27,634	966
Alcoa Inc	72,923	839	BJ Services Co	26,371	339
			Halliburton Co	78,614	1,556
Metal - Diversified (0.13%)
			Schlumberger Ltd	107,547	5,555
Freeport-McMoRan Copper & Gold Inc	34,423	1,002
			Smith International Inc	19,364	667

See accompanying notes

284

Schedule of Investments
LargeCap S&P 500 Index Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Oil - Field Services (continued)			Pharmacy Services (continued)
Weatherford International Ltd (a)	61,022 $	1,030	Medco Health Solutions Inc (a)	45,337 $	1,721
		10,113			3,061
Oil & Gas Drilling (0.53%)			Photo Equipment & Supplies (0.03%)
ENSCO International Inc	12,848	488	Eastman Kodak Co	25,837	237
Nabors Industries Ltd (a)	25,117	361
Noble Corp	24,128	777	Pipelines (0.35%)
Rowan Cos Inc	10,131	184	El Paso Corp	62,865	610
Transocean Inc	28,602	2,355	Spectra Energy Corp	55,122	1,066
		4,165	Williams Cos Inc	51,664	1,083
					2,759
Oil Company - Exploration & Production (2.46%)
Anadarko Petroleum Corp	42,000	1,483	Printing - Commercial (0.04%)
Apache Corp	29,984	2,469	RR Donnelley & Sons Co	18,827	312
Cabot Oil & Gas Corp	9,266	260
			Property & Casualty Insurance (0.61%)
Chesapeake Energy Corp	46,731	1,027
			Chubb Corp	32,325	1,675
Devon Energy Corp	39,609	3,203
			Progressive Corp/The	60,565	864
EOG Resources Inc	22,306	1,805
			Travelers Cos Inc/The	52,967	2,254
Noble Energy Inc	15,483	802
					4,793
Occidental Petroleum Corp	73,253	4,068
Pioneer Natural Resources Co	10,728	298	Publicly Traded Investment Fund (0.05%)
Questar Corp	15,544	536	iShares S&P 500 Index Fund/US	4,061	395
Range Resources Corp	13,905	587
			Publishing - Newspapers (0.07%)
Southwestern Energy Co (a)	30,767	1,096
			Gannett Co Inc	20,451	225
XTO Energy Inc	49,248	1,770
			New York Times Co/The	10,441	105
		19,404
			Washington Post Co/The	537	229
Oil Company - Integrated (7.54%)					559
Chevron Corp	184,189	13,740
			Quarrying (0.07%)
ConocoPhillips	136,254	7,088
			Vulcan Materials Co	9,847	534
Exxon Mobil Corp	465,656	34,514
Hess Corp	25,375	1,528	Real Estate Management & Services (0.01%)
Marathon Oil Corp	63,254	1,841	CB Richard Ellis Group Inc (a)	15,420	108
Murphy Oil Corp	17,073	865
		59,576	Regional Banks (2.90%)
			Capital One Financial Corp	33,686	1,318
Oil Field Machinery & Equipment (0.20%)
Cameron International Corp (a)	19,516	474	Comerica Inc	13,488	372
National Oilwell Varco Inc (a)	37,419	1,118	Fifth Third Bancorp	51,777	562
		1,592	Huntington Bancshares Inc/OH	32,826	310
			Keycorp	44,347	542
Oil Refining & Marketing (0.18%)			National City Corp	187,639	506
Sunoco Inc	10,477	319
			PNC Financial Services Group Inc	31,064	2,071
Tesoro Corp	12,363	120
			SunTrust Banks Inc	31,709	1,273
Valero Energy Corp	46,903	965
			US Bancorp	156,180	4,656
		1,404
			Wachovia Corp	193,547	1,241
Paper & Related Products (0.11%)			Wells Fargo & Co	296,657	10,101
International Paper Co	38,331	660			22,952
MeadWestvaco Corp	15,314	215
			REITS - Apartments (0.18%)
		875
			Apartment Investment & Management Co	7,676	112
Pharmacy Services (0.39%)			AvalonBay Communities Inc	6,907	491
Express Scripts Inc (a)	22,111	1,340

See accompanying notes

285

Schedule of Investments
LargeCap S&P 500 Index Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
REITS - Apartments (continued)			Retail - Computer Equipment (0.05%)
Equity Residential	24,289 $	848	GameStop Corp (a)	14,645 $	401
		1,451
			Retail - Consumer Electronics (0.12%)
REITS - Diversified (0.11%)
			Best Buy Co Inc	30,283	812
Vornado Realty Trust	12,279	866
			RadioShack Corp	11,757	149
					961
REITS - Healthcare (0.09%)
HCP Inc	22,560	675	Retail - Discount (2.11%)
			Big Lots Inc (a)	7,354	180
REITS - Hotels (0.06%)			Costco Wholesale Corp	38,979	2,222
Host Hotels & Resorts Inc	46,572	482	Family Dollar Stores Inc	12,524	337
			Target Corp	67,657	2,714
REITS - Office Property (0.10%)
			Wal-Mart Stores Inc	201,034	11,220
Boston Properties Inc	10,741	761
					16,673
REITS - Regional Malls (0.18%)			Retail - Drug Store (0.79%)
General Growth Properties Inc	20,400	85	CVS/Caremark Corp	128,668	3,944
Simon Property Group Inc	20,176	1,352	Walgreen Co	88,746	2,259
		1,437			6,203
REITS - Shopping Centers (0.08%)			Retail - Jewelry (0.04%)
Developers Diversified Realty Corp	10,783	142	Tiffany & Co	11,118	305
Kimco Realty Corp	20,358	460
		602	Retail - Major Department Store (0.22%)
			JC Penney Co Inc	19,910	476
REITS - Storage (0.12%)
			Sears Holdings Corp (a)	5,100	295
Public Storage	11,227	915
			TJX Cos Inc	37,601	1,006
REITS - Warehouse & Industrial (0.04%)					1,777
Prologis	23,531	329	Retail - Office Supplies (0.17%)
			Office Depot Inc (a)	24,654	89
Retail - Apparel & Shoe (0.18%)			Staples Inc	63,747	1,238
Abercrombie & Fitch Co	7,803	226
					1,327
Gap Inc/The	42,095	545
Liz Claiborne Inc	8,497	69	Retail - Regional Department Store (0.18%)
Ltd Brands Inc	25,585	306	Kohl's Corp (a)	27,304	959
Nordstrom Inc	14,298	259	Macy's Inc	37,703	464
		1,405			1,423
Retail - Auto Parts (0.06%)			Retail - Restaurants (1.04%)
Autozone Inc (a)	3,745	477	Darden Restaurants Inc	12,591	279
			McDonald's Corp	100,830	5,841
Retail - Automobile (0.01%)			Starbucks Corp (a)	65,500	860
AutoNation Inc (a)	9,661	66	Yum! Brands Inc	42,022	1,219
					8,199
Retail - Bedding (0.08%)
			Rubber - Tires (0.02%)
Bed Bath & Beyond Inc (a)	23,347	602
			Goodyear Tire & Rubber Co/The (a)	21,619	193
Retail - Building Products (0.82%)
			Savings & Loans - Thrifts (0.13%)
Home Depot Inc	152,272	3,592
			Hudson City Bancorp Inc	46,590	877
Lowe's Cos Inc	131,402	2,852
			Sovereign Bancorp Inc	48,722	141
		6,444
					1,018

See accompanying notes

286

Schedule of Investments
LargeCap S&P 500 Index Fund

October 31, 2008

	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Schools (0.08%)			Tobacco (continued)
Apollo Group Inc (a)	9,521 $	662	Reynolds American Inc	15,240 $	746
			UST Inc	13,228	894
Semiconductor Component - Integrated Circuits (0.13%)					14,244
Analog Devices Inc	26,039	556
			Tools - Hand Held (0.09%)
Linear Technology Corp	19,860	451
			Black & Decker Corp	5,376	272
		1,007
			Snap-On Inc	5,149	190
Semiconductor Equipment (0.27%)			Stanley Works/The	7,045	231
Applied Materials Inc	120,283	1,553			693
Kla-Tencor Corp	15,530	361
			Toys (0.10%)
Novellus Systems Inc (a)	8,889	141
			Hasbro Inc	11,257	327
Teradyne Inc (a)	15,139	77
			Mattel Inc	32,322	486
		2,132
					813
Steel - Producers (0.21%)
			Transport - Rail (1.14%)
AK Steel Holding Corp	10,059	140
			Burlington Northern Santa Fe Corp	25,319	2,255
Nucor Corp	28,382	1,150
			CSX Corp	36,546	1,671
United States Steel Corp	10,533	388
			Norfolk Southern Corp	33,638	2,016
		1,678
			Union Pacific Corp	45,648	3,048
Steel - Specialty (0.03%)					8,990
Allegheny Technologies Inc	8,991	239
			Transport - Services (1.04%)
Telecommunication Equipment (0.07%)			CH Robinson Worldwide Inc	15,242	789
Harris Corp	12,031	433	Expeditors International of Washington Inc	19,101	624
Tellabs Inc (a)	35,643	151	FedEx Corp	27,899	1,824
		584	Ryder System Inc	5,061	201
			United Parcel Service Inc	90,384	4,770
Telecommunication Equipment - Fiber Optics (0.22%)
					8,208
Ciena Corp (a)	8,097	78
Corning Inc	141,464	1,532	Web Portals (1.18%)
JDS Uniphase Corp (a)	19,220	105	Google Inc (a)	21,425	7,699
		1,715	Yahoo! Inc (a)	124,240	1,593
					9,292
Telecommunication Services (0.05%)
Embarq Corp	12,776	383	Wireless Equipment (0.99%)
			American Tower Corp (a)	35,318	1,141
Telephone - Integrated (2.99%)			Motorola Inc	203,097	1,090
AT&T Inc	528,323	14,143	Qualcomm Inc	147,116	5,629
CenturyTel Inc	9,176	230			7,860
Frontier Communications Corp	28,326	216
			TOTAL COMMON STOCKS	$ 760,705
Qwest Communications International Inc	133,072	381
Sprint Nextel Corp	255,886	801		Principal
Verizon Communications Inc	255,307	7,575		Amount	Value
				(000's)	(000's)
Windstream Corp	39,412	296
		23,642	REPURCHASE AGREEMENTS (3.58%)
			Money Center Banks (3.58%)
Television (0.07%)			Investment in Joint Trading Account; Bank
CBS Corp	60,957	592	of America Repurchase Agreement;
			0.15%; dated 10/31/2008 maturing
Tobacco (1.80%)			11/03/2008 (collateralized by Sovereign
Altria Group Inc	184,660	3,544	Agency Issues; $14,563,000; 2.75% -
			5.38%; dated 11/28/08 - 02/13/17)	$ 14,138$	14,139
Lorillard Inc	15,593	1,027
Philip Morris International Inc	184,793	8,033

See accompanying notes

287

Schedule of Investments
LargeCap S&P 500 Index Fund

October 31, 2008

		Principal
		Amount	Value
		(000's)	(000's)
REPURCHASE AGREEMENTS (continued)
Money Center Banks (continued)
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $14,563,000; 2.63% -
4.63%; dated 09/09/09 - 06/12/15)	$ 14,138$		14,138
			28,277
TOTAL REPURCHASE AGREEMENTS		$ 28,277
Total Investments		$ 788,982
Other Assets in Excess of Liabilities, Net - 0.14%			1,111
TOTAL NET ASSETS - 100.00%		$ 790,093

(a)	Non-Income Producing Security
(b)	Security or a portion of the security was pledged to cover margin requirements for futures contracts. At the end of the period, the value of these securities totaled $5,073 or 0.64% of net assets.

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 93,431
Unrealized Depreciation		(267,927)
Net Unrealized Appreciation (Depreciation)		(174,496)
Cost for federal income tax purposes		963,478
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Consumer, Non-cyclical		23.93%
Financial		17.71%
Energy		12.73%
Industrial		10.85%
Technology		10.35%
Communications		9.88%
Consumer, Cyclical		7.67%
Utilities		3.61%
Basic Materials		3.03%
Diversified		0.05%
Exchange Traded Funds		0.05%
Other Assets in Excess of Liabilities, Net		0.14%
TOTAL NET ASSETS		100.00%
Other Assets Summary (unaudited)
Asset Type		Percent
Futures		3.52%

See accompanying notes

288

	Schedule of Investments
	LargeCap S&P 500 Index Fund
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500; December 2008	Buy	115	$ 27,048	$ 27,810	$ 762
All dollar amounts are shown in thousands (000's)

See accompanying notes

289

Schedule of Investments
LargeCap Value Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (96.09%)			COMMON STOCKS (continued)
Aerospace & Defense (1.62%)			Cosmetics & Toiletries (2.11%)
General Dynamics Corp	98,766 $	5,958	Procter & Gamble Co	203,620 $	13,142
Raytheon Co	80,106	4,094
		10,052	Diversified Banking Institutions (7.31%)
			Bank of America Corp	542,715	13,117
Aerospace & Defense Equipment (0.88%)
			Citigroup Inc	532,634	7,270
United Technologies Corp	99,944	5,493
			Goldman Sachs Group Inc/The	42,580	3,939
			JP Morgan Chase & Co	512,764	21,152
Agricultural Chemicals (0.32%)
Intrepid Potash Inc (a)	92,074	2,002			45,478
			Diversified Manufacturing Operations (3.63%)
Apparel Manufacturers (0.31%)			General Electric Co	1,158,107	22,595
VF Corp	34,876	1,922
			Electric - Integrated (4.80%)
Beverages - Non-Alcoholic (1.47%)			American Electric Power Co Inc	156,844	5,118
Coca-Cola Co/The	138,210	6,090	FPL Group Inc	101,555	4,797
Pepsi Bottling Group Inc	132,675	3,067	Hawaiian Electric Industries Inc	106,406	2,833
		9,157	OGE Energy Corp	111,653	3,048
Cable TV (0.44%)			Progress Energy Inc	113,215	4,457
Comcast Corp - Class A	174,726	2,754	SCANA Corp	88,003	2,896
			Southern Co	195,724	6,721
Chemicals - Diversified (0.63%)					29,870
EI Du Pont de Nemours & Co	27,653	885
			Electronic Components - Semiconductors (0.23%)
FMC Corp	69,738	3,036
			QLogic Corp (a)	116,908	1,405
		3,921
Chemicals - Specialty (0.26%)			Engineering - Research & Development Services (0.22%)
Lubrizol Corp	42,896	1,612	Jacobs Engineering Group Inc (a)	37,821	1,378
Commercial Banks (2.28%)			Enterprise Software & Services (0.52%)
Bancorpsouth Inc	119,644	2,904	CA Inc	180,669	3,216
Bank of Hawaii Corp	43,703	2,216
Commerce Bancshares Inc	71,630	3,387	Fiduciary Banks (2.31%)
Cullen/Frost Bankers Inc	53,558	2,997	Bank of New York Mellon Corp/The	236,801	7,720
Valley National Bancorp	140,582	2,671	Northern Trust Corp	42,620	2,400
		14,175	State Street Corp	97,767	4,238
					14,358
Computers (0.77%)
Hewlett-Packard Co	66,704	2,553	Finance - Other Services (0.47%)
IBM Corp	23,994	2,231	Nasdaq OMX Group, Inc (a)	90,777	2,947
		4,784
			Food - Confectionery (0.48%)
Computers - Integrated Systems (0.30%)			JM Smucker Co/The	67,021	2,986
Brocade Communications Systems Inc (a)	492,068	1,855
			Food - Miscellaneous/Diversified (2.01%)
Consumer Products - Miscellaneous (0.76%)			Corn Products International Inc	98,875	2,405
Kimberly-Clark Corp	77,479	4,749	HJ Heinz Co	91,103	3,992
			Kraft Foods Inc	71,938	2,096
Containers - Metal & Glass (0.48%)			Sara Lee Corp	360,939	4,035
Crown Holdings Inc (a)	147,600	2,979
					12,528
Containers - Paper & Plastic (0.37%)			Gas - Distribution (1.54%)
Sonoco Products Co	92,018	2,317	Atmos Energy Corp	97,350	2,363
			Sempra Energy	96,057	4,091

See accompanying notes

290

Schedule of Investments
LargeCap Value Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Gas - Distribution (continued)			Medical Products (continued)
UGI Corp	132,004 $	3,151	Johnson & Johnson	325,065 $	19,940
		9,605			25,794
Health Care Cost Containment (0.42%)			Motion Pictures & Services (0.47%)
McKesson Corp	70,309	2,587	DreamWorks Animation SKG Inc (a)	103,411	2,906
Human Resources (0.37%)			Multi-Line Insurance (0.71%)
Hewitt Associates Inc (a)	83,559	2,330	American Financial Group Inc/OH	106,112	2,412
			Assurant Inc	77,991	1,987
Instruments - Scientific (0.65%)					4,399
Thermo Fisher Scientific Inc (a)	99,508	4,040
			Multimedia (1.79%)
Internet Security (0.60%)			Time Warner Inc	231,403	2,335
Symantec Corp (a)	296,191	3,726	Walt Disney Co/The	340,671	8,823
					11,158
Investment Management & Advisory Services (0.40%)
			Oil & Gas Drilling (0.45%)
Ameriprise Financial Inc	115,411	2,493
			Helmerich & Payne Inc	81,603	2,800
Life & Health Insurance (1.00%)
			Oil Company - Exploration & Production (2.57%)
Prudential Financial Inc	7,292	219
			Apache Corp	79,438	6,540
Torchmark Corp	70,329	2,937
			Devon Energy Corp	81,864	6,620
Unum Group	193,325	3,045
			Occidental Petroleum Corp	51,151	2,841
		6,201
					16,001
Machinery - Construction & Mining (0.27%)
			Oil Company - Integrated (12.03%)
Bucyrus International Inc	69,525	1,678
			Chevron Corp	296,160	22,094
			ConocoPhillips	146,218	7,606
Machinery - Farm (0.40%)
AGCO Corp (a)	79,444	2,504	Exxon Mobil Corp (b)	602,455	44,654
			Marathon Oil Corp	18,665	543
Machinery - Pumps (0.41%)					74,897
Flowserve Corp	44,692	2,544	Oil Field Machinery & Equipment (0.37%)
			National Oilwell Varco Inc (a)	76,489	2,286
Medical - Biomedical/Gene (2.76%)
Amgen Inc (a)	201,716	12,081	Paper & Related Products (0.86%)
Biogen Idec Inc (a)	54,376	2,314	Domtar Corp (a)	857,432	2,126
Invitrogen Corp (a)	97,225	2,799	International Paper Co	185,638	3,197
		17,194			5,323
Medical - Drugs (3.43%)			Property & Casualty Insurance (1.79%)
Eli Lilly & Co	99,633	3,369	Arch Capital Group Ltd (a)	5,439	380
Merck & Co Inc/NJ	77,996	2,414	Chubb Corp	110,884	5,746
Pfizer Inc (b)	713,891	12,643	Travelers Cos Inc/The	117,235	4,988
Wyeth	90,792	2,922			11,114
		21,348
			Radio (0.00%)
Medical - HMO (0.88%)			Citadel Broadcasting Corp (a)	3	-
Aetna Inc	103,048	2,563
Cigna Corp	141,604	2,308	Regional Banks (4.43%)
WellPoint Inc (a)	16,087	625	PNC Financial Services Group Inc	89,160	5,944
		5,496	US Bancorp	157,849	4,705
			Wells Fargo & Co	497,784	16,950
Medical Products (4.14%)
Covidien Ltd	132,179	5,854			27,599

See accompanying notes

291

Schedule of Investments
LargeCap Value Fund
October 31, 2008
	Shares	Value				Shares	Value
	Held	(000's)				Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Reinsurance (1.32%)			Telephone - Integrated (continued)
PartnerRe Ltd	52,805 $	3,574	CenturyTel Inc			118,164 $	2,967
Reinsurance Group of America Inc	55,478	2,072	Verizon Communications Inc			255,106	7,569
Transatlantic Holdings Inc	59,692	2,558	Windstream Corp			267,464	2,009
		8,204					30,661
REITS - Apartments (0.32%)			Tobacco (1.49%)
AvalonBay Communities Inc	28,301	2,010	Altria Group Inc			282,578	5,423
			Reynolds American Inc			79,078	3,871
REITS - Healthcare (0.82%)							9,294
Nationwide Health Properties Inc	77,482	2,312
			Tools - Hand Held (0.46%)
Ventas Inc	77,829	2,807
			Snap-On Inc			77,068	2,848
		5,119
REITS - Mortgage (0.59%)			Toys (0.55%)
Annaly Capital Management Inc	263,761	3,666	Hasbro Inc			116,929	3,399
REITS - Office Property (0.94%)			Transport - Rail (0.66%)
Alexandria Real Estate Equities Inc	35,826	2,490	Norfolk Southern Corp			68,969	4,134
Boston Properties Inc	47,258	3,350
		5,840	Vitamins & Nutrition Products (0.29%)
			NBTY Inc (a)			77,850	1,819
REITS - Warehouse & Industrial (0.34%)
			TOTAL COMMON STOCKS			$ 598,008
AMB Property Corp	86,955	2,089
						Principal
Retail - Apparel & Shoe (0.77%)						Amount	Value
Gap Inc/The	229,082	2,964				(000's)	(000's)
Ltd Brands Inc	150,476	1,803	SHORT TERM INVESTMENTS (3.72%)
		4,767	Commercial Paper (3.72%)
			Investment in Joint Trading Account; HSBC
Retail - Building Products (0.38%)			Funding
Home Depot Inc	100,616	2,373	0.25%, 11/ 3/2008		$ 11,568 $		11,568
			Investment in Joint Trading Account;
Retail - Discount (1.87%)			Prudential Funding
BJ's Wholesale Club Inc (a)	70,700	2,489	0.30%, 11/ 3/2008			11,567	11,567
Dollar Tree Inc (a)	97,673	3,713					23,135
Wal-Mart Stores Inc	97,437	5,438
			TOTAL SHORT TERM INVESTMENTS			$ 23,135
		11,640
			Total Investments			$ 621,143
Retail - Major Department Store (0.43%)			Other Assets in Excess of Liabilities, Net - 0.19%				1,190
TJX Cos Inc	99,783	2,670
			TOTAL NET ASSETS - 100.00%			$ 622,333
Retail - Restaurants (0.81%)
McDonald's Corp	86,496	5,011
			(a)	Non-Income Producing Security
			(b)	Security or a portion of the security was pledged to cover margin
Savings & Loans - Thrifts (0.72%)
				requirements for futures contracts. At the end of the period, the value of
Hudson City Bancorp Inc	239,750	4,510		these securities totaled $4,367 or 0.70% of net assets.
Steel - Producers (0.20%)
United States Steel Corp	34,412	1,269
Telecommunication Services (0.48%)
Embarq Corp	99,585	2,987
Telephone - Integrated (4.93%)
AT&T Inc	676,730	18,116

See accompanying notes

292

		Schedule of Investments
		LargeCap Value Fund
		October 31, 2008
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation	$ 19,702
Unrealized Depreciation		(157,286)
Net Unrealized Appreciation (Depreciation)		(137,584)
Cost for federal income tax purposes		758,727
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Financial		29.46%
Consumer, Non-cyclical		20.64%
Energy		15.42%
Industrial		10.05%
Communications		8.24%
Utilities		6.34%
Consumer, Cyclical		5.58%
Basic Materials		2.27%
Technology		1.81%
Other Assets in Excess of Liabilities, Net		0.19%
TOTAL NET ASSETS		100.00%
Other Assets Summary (unaudited)
Asset Type		Percent
Futures		3.23%
		Futures Contracts
					Current	Unrealized
				Original	Market	Appreciation/
Type		Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500; December 2008		Buy	83	$ 22,231	$ 20,072	$ (2,159)
All dollar amounts are shown in thousands (000's)

See accompanying notes

293

Schedule of Investments
LargeCap Value Fund III
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.36%)			COMMON STOCKS (continued)
Aerospace & Defense (0.60%)			Computers - Memory Devices (1.22%)
Lockheed Martin Corp	106,200 $	9,032	EMC Corp/Massachusetts (a)	1,702,000 $	20,050
Northrop Grumman Corp	47,800	2,242	Western Digital Corp (a)	166,800	2,752
		11,274			22,802
Aerospace & Defense Equipment (1.11%)			Computers - Peripheral Equipment (0.23%)
United Technologies Corp	376,600	20,698	Lexmark International Inc (a)	167,800	4,334
Apparel Manufacturers (0.28%)			Containers - Metal & Glass (0.72%)
Jones Apparel Group Inc	474,200	5,268	Ball Corp	201,000	6,874
			Owens-Illinois Inc (a)	286,700	6,560
Applications Software (0.52%)					13,434
Microsoft Corp	433,200	9,673
			Containers - Paper & Plastic (0.03%)
Athletic Footwear (1.06%)			Smurfit-Stone Container Corp (a)	361,000	487
Nike Inc	341,700	19,692
			Cosmetics & Toiletries (2.93%)
Auto/Truck Parts & Equipment - Original (0.41%)			Colgate-Palmolive Co	288,900	18,132
Autoliv Inc	170,800	3,648	Procter & Gamble Co	565,900	36,523
Magna International Inc	115,400	3,902			54,655
		7,550	Distribution & Wholesale (0.32%)
Beverages - Non-Alcoholic (0.72%)			Ingram Micro Inc (a)	284,600	3,794
Coca-Cola Co/The	63,900	2,815	Tech Data Corp (a)	102,800	2,205
Coca-Cola Enterprises Inc	490,200	4,927			5,999
Pepsi Bottling Group Inc	247,000	5,711	Diversified Banking Institutions (9.63%)
		13,453	Bank of America Corp	2,235,900	54,042
Brewery (0.34%)			Citigroup Inc	2,471,400	33,735
Molson Coors Brewing Co	167,000	6,239	Deutsche Bank AG	73,400	2,788
			Goldman Sachs Group Inc/The	121,500	11,239
Building - Residential & Commercial (0.29%)			JP Morgan Chase & Co	1,683,600	69,448
Centex Corp	187,300	2,294	Morgan Stanley	473,400	8,270
KB Home	190,500	3,180			179,522
		5,474
			Diversified Manufacturing Operations (3.30%)
Chemicals - Diversified (1.09%)			3M Co	69,400	4,462
Dow Chemical Co/The	306,900	8,185	General Electric Co	2,060,000	40,191
EI Du Pont de Nemours & Co	378,700	12,118	ITT Corp	285,300	12,696
		20,303	Tyco International Ltd	166,050	4,198
Chemicals - Specialty (0.56%)					61,547
Ashland Inc	136,100	3,075	Electric - Integrated (3.29%)
Eastman Chemical Co	132,900	5,368	Dominion Resources Inc/VA (b)	645,700	23,426
Lubrizol Corp	53,200	1,999	Exelon Corp	338,000	18,333
		10,442	PG&E Corp	529,200	19,406
Commercial Services - Finance (0.97%)			Wisconsin Energy Corp	4,800	209
Automatic Data Processing Inc	519,500	18,156			61,374
			Electric Products - Miscellaneous (0.49%)
Computer Services (1.05%)			Emerson Electric Co	277,200	9,073
Accenture Ltd	591,900	19,562
			Electronic Components - Miscellaneous (0.19%)
Computers (0.99%)			Flextronics International Ltd (a)	690,269	2,885
IBM Corp	199,300	18,529
			Sanmina-SCI Corp (a)	813,200	610

See accompanying notes

294

Schedule of Investments
LargeCap Value Fund III
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Electronic Components - Miscellaneous			Machinery - Construction & Mining (0.11%)
(continued)			Caterpillar Inc	52,100 $	1,989
Vishay Intertechnology Inc (a)	22,100 $	95
		3,590	Medical - Biomedical/Gene (0.18%)
Electronic Components - Semiconductors (0.25%)			Amgen Inc (a)	56,400	3,378
Nvidia Corp (a)	539,500	4,726
			Medical - Drugs (4.63%)
Electronic Parts Distribution (0.38%)			Merck & Co Inc/NJ	563,600	17,443
Arrow Electronics Inc (a)	226,700	3,956	Pfizer Inc	2,209,600	39,132
Avnet Inc (a)	182,200	3,050	Sanofi-Aventis SA ADR	215,100	6,802
		7,006	Wyeth	713,200	22,951
					86,328
Enterprise Software & Services (1.04%)
Oracle Corp (a)	1,062,600	19,435	Medical - Wholesale Drug Distribution (0.40%)
			AmerisourceBergen Corp	65,700	2,054
Fiduciary Banks (0.96%)			Cardinal Health Inc	142,400	5,440
State Street Corp	414,800	17,982			7,494
			Medical Products (3.68%)
Finance - Credit Card (0.50%)
			Covidien Ltd	417,400	18,487
Discover Financial Services	758,800	9,295
			Johnson & Johnson	675,100	41,410
Food - Canned (0.10%)			Zimmer Holdings Inc (a)	188,300	8,743
Del Monte Foods Co	294,200	1,856			68,640
			Metal - Aluminum (0.26%)
Food - Meat Products (0.21%)
			Alcoa Inc	426,100	4,904
Tyson Foods Inc	456,300	3,988
			Metal - Diversified (0.47%)
Food - Miscellaneous/Diversified (1.58%)
			Freeport-McMoRan Copper & Gold Inc	298,195	8,677
ConAgra Foods Inc	409,800	7,139
General Mills Inc	274,200	18,574	Multi-Line Insurance (4.68%)
Kraft Foods Inc	130,100	3,791	ACE Ltd	578,600	33,189
		29,504	Allstate Corp/The	349,400	9,221
Food - Retail (1.29%)			American International Group Inc	878,000	1,677
Kroger Co/The	437,600	12,017	Genworth Financial Inc	475,800	2,303
Safeway Inc	326,300	6,940	Hartford Financial Services Group Inc	200,100	2,065
SUPERVALU Inc	357,100	5,085	MetLife Inc	985,800	32,748
		24,042	Old Republic International Corp	478,200	4,404
			XL Capital Ltd	169,300	1,642
Health Care Cost Containment (0.38%)
					87,249
McKesson Corp	190,800	7,020
			Multimedia (1.89%)
Independent Power Producer (0.14%)			Time Warner Inc	1,174,600	11,852
Reliant Energy Inc (a)	511,570	2,686	Viacom Inc (a)	122,300	2,473
			Walt Disney Co/The	805,200	20,854
Investment Management & Advisory Services (0.48%)
					35,179
Franklin Resources Inc	132,400	9,003
			Networking Products (0.92%)
Leisure & Recreation Products (0.04%)			Cisco Systems Inc (a)	969,000	17,219
Brunswick Corp/DE	214,600	745
			Non-Hazardous Waste Disposal (0.40%)
Life & Health Insurance (0.42%)			Allied Waste Industries Inc (a)	710,800	7,407
Unum Group	496,300	7,817

See accompanying notes

295

Schedule of Investments
LargeCap Value Fund III
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Oil & Gas Drilling (0.54%)			Retail - Building Products (0.62%)
Transocean Inc	122,900 $	10,118	Home Depot Inc	489,700 $	11,552
Oil Company - Exploration & Production (4.64%)			Retail - Discount (1.15%)
Anadarko Petroleum Corp	274,800	9,701	Family Dollar Stores Inc	255,600	6,878
Apache Corp	278,600	22,937	Wal-Mart Stores Inc	260,800	14,555
Devon Energy Corp	337,600	27,298			21,433
Occidental Petroleum Corp	479,800	26,648
			Retail - Drug Store (1.09%)
		86,584	CVS/Caremark Corp	663,000	20,321
Oil Company - Integrated (11.59%)
BP PLC ADR	284,300	14,130	Retail - Regional Department Store (0.29%)
Chevron Corp	638,500	47,632	Macy's Inc	442,900	5,443
ConocoPhillips	867,600	45,133
			Retail - Restaurants (0.49%)
Exxon Mobil Corp	1,158,500	85,868
			McDonald's Corp	157,900	9,147
Murphy Oil Corp	183,400	9,287
Royal Dutch Shell PLC ADR	117,600	6,563	Steel - Producers (0.20%)
Total SA ADR	134,500	7,457	ArcelorMittal	142,500	3,741
		216,070
			Taiwan, Province Of China (0.21%)
Oil Refining & Marketing (0.37%)
			AU Optronics Corp ADR	562,600	3,882
Sunoco Inc	80,900	2,468
Valero Energy Corp	219,100	4,509
			Telecommunication Equipment (0.16%)
		6,977
			Vodafone Group PLC ADR	151,700	2,923
Property & Casualty Insurance (1.59%)
Chubb Corp	195,700	10,141	Telephone - Integrated (5.47%)
Fidelity National Financial Inc	412,000	3,712	AT&T Inc	2,455,100	65,723
Travelers Cos Inc/The	369,291	15,714	Sprint Nextel Corp	1,528,900	4,785
		29,567	Verizon Communications Inc	1,058,400	31,403
					101,911
Publishing - Newspapers (0.19%)
Gannett Co Inc	318,000	3,498	Television (0.25%)
			CBS Corp	471,200	4,575
Regional Banks (3.82%)
Fifth Third Bancorp	157,000	1,703	Tobacco (2.70%)
Keycorp	193,500	2,367	Altria Group Inc	563,400	10,812
PNC Financial Services Group Inc	308,400	20,561	Philip Morris International Inc	690,200	30,003
SunTrust Banks Inc	107,800	4,327	Reynolds American Inc	195,800	9,586
US Bancorp	200,700	5,983			50,401
Wells Fargo & Co	1,062,900	36,192	Tools - Hand Held (0.32%)
		71,133	Black & Decker Corp	118,600	6,004
Reinsurance (0.87%)
			Wireless Equipment (0.68%)
Berkshire Hathaway Inc - Class B (a)	2,368	9,093
			Motorola Inc	592,700	3,183
PartnerRe Ltd	22,000	1,489
			Nokia OYJ ADR	344,100	5,223
RenaissanceRe Holdings Ltd	121,700	5,586
			Telefonaktiebolaget LM Ericsson ADR	606,800	4,290
		16,168
					12,696
Retail - Apparel & Shoe (0.39%)
Gap Inc/The	558,300	7,224	TOTAL COMMON STOCKS	$ 1,778,134
Ltd Brands Inc	5,600	67
		7,291

See accompanying notes

296

Schedule of Investments
LargeCap Value Fund III

October 31, 2008

		Principal
		Amount	Value
		(000's)	(000's)
SHORT TERM INVESTMENTS (3.05%)
Commercial Paper (3.05%)
Investment in Joint Trading Account; HSBC
Funding
0.25%, 11/ 3/2008	$ 28,486 $		28,486
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008		28,486	28,486
			56,972
TOTAL SHORT TERM INVESTMENTS		$ 56,972
MONEY MARKET FUNDS (0.06%)
Money Center Banks (0.06%)
BNP Paribas Securities Corporation
Repurchase Agreement; 0.20% dated
10/31/08 maturing 11/03/08 (collateralized
by U.S. Government Agency Issues;
$1,094,000; 0.00% - 6.25%; dated
12/23/08 - 07/13/37) (c)	$ 1,085$		1,085
TOTAL MONEY MARKET FUNDS		$ 1,085
Total Investments		$ 1,836,191
Other Assets in Excess of Liabilities, Net - 1.53%			28,497
TOTAL NET ASSETS - 100.00%		$ 1,864,688

(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)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 88,964
Unrealized Depreciation		(728,927)
Net Unrealized Appreciation (Depreciation)		(639,963)
Cost for federal income tax purposes		2,476,154
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Financial		26.05%
Consumer, Non-cyclical		19.85%
Energy		17.15%
Communications		9.55%
Industrial		7.85%
Consumer, Cyclical		6.70%
Technology		5.31%
Utilities		3.43%
Basic Materials		2.58%
Other Assets in Excess of Liabilities, Net		1.53%
TOTAL NET ASSETS		100.00%
Other Assets Summary (unaudited)
Asset Type		Percent
Futures		2.68%

See accompanying notes

297

	Schedule of Investments
	LargeCap Value Fund III
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P 500; December 2008	Buy	207	$ 46,754	$ 50,057	$ 3,303
All dollar amounts are shown in thousands (000's)

See accompanying notes

298

Schedule of Investments
MidCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (91.80%)			COMMON STOCKS (continued)
Advertising Sales (0.43%)			Diversified Operations (1.21%)
Lamar Advertising Co (a)	166,612 $	2,527	Onex Corp (a)	413,768 $	7,095
Aerospace & Defense Equipment (1.69%)			E-Commerce - Services (0.29%)
Alliant Techsystems Inc (a)	119,846	9,875	Liberty Media Corp - Interactive (a)	343,200	1,675
Applications Software (0.55%)			Electric - Generation (0.94%)
Intuit Inc (a)	127,880	3,205	AES Corp/The (a)	688,915	5,491
Belgium (0.19%)			Electric - Integrated (4.79%)
RHJ International (a)	209,761	1,119	Allegheny Energy Inc	260,392	7,851
			Ameren Corp	122,688	3,981
Broadcasting Services & Programming (4.11%)			Constellation Energy Group Inc	540,442	13,084
Discovery Communications Inc - A Shares (a)	407,790	5,562	SCANA Corp	95,556	3,145
Discovery Communications Inc - C Shares (a)	407,790	5,432			28,061
Liberty Global Inc - A Shares (a)	265,070	4,371
			Electric - Transmission (0.07%)
Liberty Global Inc - B Shares (a)	338,909	5,477
			Brookfield Infrastructure Partners LP	27,148	407
Liberty Media Corp - Capital Series A (a)	471,929	3,214
		24,056
			Electronic Components - Miscellaneous (0.78%)
Building & Construction Products -			Gentex Corp	473,298	4,539
Miscellaneous (0.11%)
USG Corp (a)	41,749	619	Electronic Components - Semiconductors (0.07%)
			Microchip Technology Inc	17,901	441
Cable TV (1.67%)
DISH Network Corp (a)	622,458	9,797	Energy - Alternate Sources (2.98%)
			Covanta Holding Corp (a)	809,109	17,444
Casino Services (0.04%)
International Game Technology	15,277	214	Food - Wholesale & Distribution (1.42%)
			Sysco Corp	317,855	8,328
Commercial Services (2.61%)
Iron Mountain Inc (a)	628,498	15,260	Forestry (1.18%)
			Weyerhaeuser Co	180,399	6,895
Commercial Services - Finance (2.22%)
Automatic Data Processing Inc	68,594	2,397	Gas - Distribution (0.62%)
Lender Processing Services Inc	156,889	3,619	National Fuel Gas Co	100,088	3,622
Western Union Co/The	457,779	6,986
		13,002	Gold Mining (1.69%)
			Newmont Mining Corp	375,510	9,891
Consulting Services (1.93%)
SAIC Inc (a)	612,689	11,316	Independent Power Producer (1.40%)
			Calpine Corp (a)	700,190	8,192
Data Processing & Management (1.11%)
Broadridge Financial Solutions Inc	149,058	1,804	Insurance Brokers (2.77%)
Fidelity National Information Services Inc	311,551	4,701	Aon Corp	118,090	4,995
		6,505	Brown & Brown Inc	275,433	5,652
Dental Supplies & Equipment (0.93%)			Marsh & McLennan Cos Inc	188,935	5,540
Dentsply International Inc	179,948	5,467			16,187
			Investment Management & Advisory Services (0.78%)
Diversified Manufacturing Operations (0.57%)
			Ameriprise Financial Inc	112,839	2,437
Tyco International Ltd	130,941	3,310
			Legg Mason Inc	97,192	2,157
					4,594

See accompanying notes

299

Schedule of Investments
MidCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Linen Supply & Related Items (3.09%)			Property & Casualty Insurance (4.94%)
Cintas Corp	763,427 $	18,093	Fidelity National Financial Inc	45,424 $	409
			Markel Corp (a)	34,566	12,127
Medical - Drugs (2.12%)			Mercury General Corp	216,505	11,122
Valeant Pharmaceuticals International (a)	661,856	12,423	White Mountains Insurance Group Ltd	15,313	5,276
					28,934
Medical - HMO (0.99%)
Coventry Health Care Inc (a)	440,221	5,807	Publishing - Newspapers (1.67%)
			Washington Post Co/The	22,851	9,753
Medical - Outpatient & Home Medical Care (1.51%)
Lincare Holdings Inc (a)	335,809	8,849	Real Estate Operator & Developer (2.17%)
			Brookfield Asset Management Inc	496,460	8,951
Medical Instruments (2.39%)			Forest City Enterprises Inc	314,052	3,734
St Jude Medical Inc (a)	367,351	13,970			12,685
Medical Laboratory & Testing Service (2.52%)			Reinsurance (1.94%)
Laboratory Corp of America Holdings (a)	239,788	14,745	Everest Re Group Ltd	152,012	11,355
Medical Products (1.65%)			Retail - Auto Parts (2.31%)
Covidien Ltd	217,558	9,636	O'Reilly Automotive Inc (a)	499,010	13,528
Motion Pictures & Services (0.18%)			Retail - Major Department Store (0.18%)
Ascent Media Corp (a)	41,479	1,049	TJX Cos Inc	39,816	1,065
Multi-Line Insurance (2.43%)			Retail - Restaurants (0.04%)
Loews Corp	427,524	14,198	Yum! Brands Inc	7,763	225
Multimedia (1.73%)			Satellite Telecommunications (0.66%)
Liberty Media Corp - Entertainment (a)	628,444	10,118	EchoStar Holding Corp (a)	198,063	3,846
Oil - Field Services (0.36%)			Telephone - Integrated (1.14%)
Weatherford International Ltd (a)	124,192	2,096	Telephone & Data Systems Inc	243,258	6,665
Oil & Gas Drilling (1.12%)			Textile - Home Furnishings (0.35%)
Nabors Industries Ltd (a)	458,068	6,587	Mohawk Industries Inc (a)	42,358	2,049
Oil Company - Exploration & Production (9.89%)			Tobacco (1.97%)
Cimarex Energy Co	298,139	12,063	UST Inc	170,957	11,555
Encore Acquisition Co (a)	416,846	12,985
			Transport - Truck (0.27%)
EOG Resources Inc	95,962	7,765
			Heartland Express Inc	102,712	1,576
Equitable Resources Inc	271,792	9,434
Newfield Exploration Co (a)	53,685	1,233	Wireless Equipment (0.53%)
Questar Corp	274,369	9,455	American Tower Corp (a)	95,405	3,083
Rosetta Resources Inc (a)	283,500	2,991	TOTAL COMMON STOCKS	$ 537,272
XTO Energy Inc	54,708	1,967
				Principal
		57,893
				Amount	Value
Pipelines (3.60%)				(000's)	(000's)
Spectra Energy Corp	478,422	9,248	SHORT TERM INVESTMENTS (4.40%)
Williams Cos Inc	563,284	11,812	Commercial Paper (4.40%)
		21,060	Investment in Joint Trading Account; HSBC
			Funding
Precious Metals (0.90%)			0.25%, 11/ 3/2008	$ 12,868 $	12,868
Franco-Nevada Corp	369,528	5,295

See accompanying notes

300

Schedule of Investments
MidCap Blend Fund
October 31, 2008

			Principal
			Amount	Value
			(000's)	(000's)
SHORT TERM INVESTMENTS (continued)
Commercial Paper (continued)
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008		$ 12,869 $		12,869
				25,737
TOTAL SHORT TERM INVESTMENTS			$ 25,737
REPURCHASE AGREEMENTS (4.02%)
Money Center Banks (4.02%)
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $24,240,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)		$ 23,534$		23,534
TOTAL REPURCHASE AGREEMENTS			$ 23,534
Total Investments			$ 586,543
Liabilities in Excess of Other Assets, Net - (0.22)%				(1,265)
TOTAL NET ASSETS - 100.00%			$ 585,278
(a)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 35,254
Unrealized Depreciation		(187,039)
Net Unrealized Appreciation (Depreciation)		(151,785)
Cost for federal income tax purposes		738,328
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Financial		23.64%
Consumer, Non-cyclical		22.27%
Energy		17.96%
Communications		12.22%
Utilities		7.82%
Consumer, Cyclical		6.19%
Basic Materials		3.77%
Industrial		3.40%
Technology		1.74%
Diversified		1.21%
Liabilities in Excess of Other Assets, Net		(0.22%)
TOTAL NET ASSETS		100.00%

See accompanying notes

301

Schedule of Investments
MidCap Growth Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (99.29%)			COMMON STOCKS (continued)
Aerospace & Defense (0.43%)			Commercial Services (0.46%)
Teledyne Technologies Inc (a)	16,700 $	761	Alliance Data Systems Corp (a)	16,350 $	820
Aerospace & Defense Equipment (0.69%)			Commercial Services - Finance (2.62%)
Goodrich Corp	33,425	1,222	H&R Block Inc	107,950	2,129
			Heartland Payment Systems Inc	53,250	927
Agricultural Chemicals (0.50%)			Total System Services Inc	79,400	1,091
CF Industries Holdings Inc	13,725	881	Western Union Co/The	33,225	507
					4,654
Apparel Manufacturers (1.62%)
Coach Inc (a)	75,700	1,559	Computer Aided Design (0.51%)
Polo Ralph Lauren Corp	10,700	505	Ansys Inc (a)	31,600	905
VF Corp	14,700	810
			Computer Services (1.08%)
		2,874
			Accenture Ltd	35,825	1,184
Applications Software (0.33%)			Cognizant Technology Solutions Corp (a)	37,825	726
Salesforce.com Inc (a)	18,825	583			1,910
Beverages - Non-Alcoholic (1.05%)			Computers - Integrated Systems (1.28%)
Coca-Cola Enterprises Inc	92,950	934	NCR Corp (a)	83,875	1,533
Hansen Natural Corp (a)	36,825	933	Teradata Corp (a)	48,700	750
		1,867			2,283
Beverages - Wine & Spirits (0.39%)			Computers - Memory Devices (0.86%)
Brown-Forman Corp	15,375	698	NetApp Inc (a)	83,975	1,136
			Western Digital Corp (a)	24,125	398
Building - Heavy Construction (0.22%)					1,534
Perini Corp (a)	20,675	393
			Consulting Services (1.70%)
			SAIC Inc (a)	92,275	1,704
Building - Residential & Commercial (0.47%)
NVR Inc (a)	1,700	833	Watson Wyatt Worldwide Inc	31,150	1,323
					3,027
Cable TV (0.76%)			Cosmetics & Toiletries (1.14%)
DISH Network Corp (a)	85,400	1,344	Avon Products Inc	81,450	2,022
Cellular Telecommunications (0.90%)			Data Processing & Management (0.68%)
Millicom International Cellular SA	10,500	420	Dun & Bradstreet Corp	16,350	1,205
NII Holdings Inc (a)	45,725	1,178
		1,598	Dental Supplies & Equipment (0.46%)
			Patterson Cos Inc (a)	32,150	814
Chemicals - Diversified (0.34%)
FMC Corp	13,900	605
			Diversified Manufacturing Operations (2.27%)
			Brink's Co/The	22,450	1,089
Chemicals - Specialty (0.72%)
Sigma-Aldrich Corp	13,475	591	Cooper Industries Ltd	16,500	511
Terra Industries Inc	31,050	683	Harsco Corp	26,550	628
		1,274	ITT Corp	28,350	1,262
			SPX Corp	14,000	542
Coal (0.60%)					4,032
Alpha Natural Resources Inc (a)	15,975	572
Massey Energy Co	21,800	503	E-Commerce - Services (0.37%)
		1,075	Priceline.com Inc (a)	12,525	659
Commercial Banks (0.39%)			Electric - Integrated (1.34%)
Bank of Hawaii Corp	13,675	693	Alliant Energy Corp	20,150	592

See accompanying notes

302

Schedule of Investments
MidCap Growth Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Electric - Integrated (continued)			Finance - Investment Banker & Broker
Edison International	50,450 $	1,796	(continued)
			TD Ameritrade Holding Corp (a)	64,375 $	855
		2,388
					2,708
Electronic Components - Miscellaneous (0.36%)
Garmin Ltd	28,750	645	Food - Miscellaneous/Diversified (0.49%)
			ConAgra Foods Inc	49,725	866
Electronic Components - Semiconductors (3.07%)
Broadcom Corp (a)	83,025	1,418	Footwear & Related Apparel (0.24%)
			Deckers Outdoor Corp (a)	5,025	426
Intersil Corp	48,150	659
MEMC Electronic Materials Inc (a)	32,925	605
			Gas - Distribution (2.20%)
Microchip Technology Inc	58,550	1,442
			Laclede Group Inc/The	29,025	1,519
National Semiconductor Corp	38,025	501
			Sempra Energy	55,975	2,384
Nvidia Corp (a)	94,600	829
					3,903
		5,454
			Hospital Beds & Equipment (0.26%)
Electronic Design Automation (0.16%)			Kinetic Concepts Inc (a)	18,725	453
Cadence Design Systems Inc (a)	69,150	281
			Hotels & Motels (0.72%)
Electronic Measurement Instruments (1.06%)			Choice Hotels International Inc	46,475	1,271
Agilent Technologies Inc (a)	63,575	1,411
Trimble Navigation Ltd (a)	23,275	479	Industrial Audio & Video Products (0.59%)
		1,890	Dolby Laboratories Inc (a)	33,450	1,056
Electronic Parts Distribution (0.27%)
			Industrial Gases (0.95%)
Arrow Electronics Inc (a)	27,925	487
			Airgas Inc	44,175	1,695
Electronics - Military (0.93%)
			Instruments - Controls (0.96%)
L-3 Communications Holdings Inc	20,250	1,644
			Mettler Toledo International Inc (a)	22,250	1,703
Engineering - Research & Development Services (2.52%)
			Instruments - Scientific (1.14%)
EMCOR Group Inc (a)	19,075	339
			Applied Biosystems Inc	41,225	1,271
Fluor Corp	51,975	2,075
			Waters Corp (a)	17,300	758
Foster Wheeler Ltd (a)	41,700	1,143
					2,029
Jacobs Engineering Group Inc (a)	25,325	923
		4,480	Internet Infrastructure Equipment (0.32%)
			Avocent Corp (a)	37,525	564
Engines - Internal Combustion (0.65%)
Cummins Inc	44,800	1,158	Internet Infrastructure Software (0.37%)
			Akamai Technologies Inc (a)	45,375	652
Enterprise Software & Services (1.98%)
BMC Software Inc (a)	33,325	860	Internet Security (1.03%)
CA Inc	77,475	1,379	McAfee Inc (a)	56,150	1,828
Sybase Inc (a)	47,950	1,277
		3,516	Investment Management & Advisory Services (0.33%)
			Waddell & Reed Financial Inc	40,250	584
Entertainment Software (0.41%)
Activision Blizzard Inc (a)	57,925	722
			Machinery - Construction & Mining (0.64%)
			Bucyrus International Inc	14,675	354
Fiduciary Banks (1.48%)
Northern Trust Corp	46,750	2,632	Joy Global Inc	27,250	790
					1,144
Finance - Investment Banker & Broker (1.52%)			Machinery - Farm (0.21%)
Greenhill & Co Inc	9,200	607	AGCO Corp (a)	11,650	367
Lazard Ltd	41,300	1,246

See accompanying notes

303

Schedule of Investments
MidCap Growth Fund I
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Machinery - General Industry (0.33%)			Oil Company - Exploration & Production
Manitowoc Co Inc/The	18,175 $	179	(continued)
			Noble Energy Inc	30,600 $	1,585
Robbins & Myers Inc	20,400	416
			Stone Energy Corp (a)	39,050	1,185
		595
			W&T Offshore Inc	12,925	248
Machinery - Pumps (0.42%)					6,704
Flowserve Corp	13,225	753
			Oil Company - Integrated (0.88%)
Medical - Biomedical/Gene (0.80%)			Murphy Oil Corp	31,000	1,570
Invitrogen Corp (a)	34,875	1,004
OSI Pharmaceuticals Inc (a)	11,100	421	Oil Refining & Marketing (0.76%)
			Frontier Oil Corp	22,150	293
		1,425
			Sunoco Inc	34,625	1,056
Medical - Drugs (2.31%)					1,349
Endo Pharmaceuticals Holdings Inc (a)	105,575	1,953
Forest Laboratories Inc (a)	51,375	1,193	Quarrying (0.38%)
			Compass Minerals International Inc	12,300	676
King Pharmaceuticals Inc (a)	109,300	961
		4,107
			Racetracks (0.45%)
Medical - HMO (2.28%)			International Speedway Corp	25,650	805
Cigna Corp	91,625	1,493
Coventry Health Care Inc (a)	42,350	559	Recreational Vehicles (0.29%)
Health Net Inc (a)	38,450	495	Polaris Industries Inc	15,525	523
Humana Inc (a)	50,850	1,505
			REITS - Office Property (0.42%)
		4,052
			Boston Properties Inc	10,450	741
Medical Instruments (1.45%)
St Jude Medical Inc (a)	67,525	2,568	Rental - Auto & Equipment (0.86%)
			Rent-A-Center Inc/TX (a)	104,425	1,525
Medical Laboratory & Testing Service (0.69%)
Laboratory Corp of America Holdings (a)	19,900	1,224	Retail - Apparel & Shoe (2.15%)
			Aeropostale Inc (a)	45,925	1,112
Medical Products (0.85%)			Dress Barn Inc (a)	49,675	475
Henry Schein Inc (a)	32,100	1,503	Gymboree Corp (a)	12,475	323
			Ross Stores Inc	43,100	1,409
Metal - Iron (0.18%)
			Urban Outfitters Inc (a)	22,750	494
Cliffs Natural Resources Inc	12,000	324
					3,813
Metal Processors & Fabrication (1.00%)			Retail - Auto Parts (1.36%)
Precision Castparts Corp	21,375	1,385	Autozone Inc (a)	18,925	2,409
Timken Co	24,875	395
		1,780	Retail - Automobile (0.87%)
			Copart Inc (a)	44,275	1,545
Office Automation & Equipment (0.30%)
Xerox Corp	65,925	529	Retail - Computer Equipment (0.50%)
			GameStop Corp (a)	32,300	885
Oil & Gas Drilling (3.32%)
ENSCO International Inc	49,225	1,871	Retail - Discount (3.59%)
Noble Corp	64,075	2,064	Big Lots Inc (a)	29,100	711
Patterson-UTI Energy Inc	44,800	594	BJ's Wholesale Club Inc (a)	26,850	945
Unit Corp (a)	36,625	1,375	Dollar Tree Inc (a)	25,750	979
		5,904	Family Dollar Stores Inc	138,950	3,739
Oil Company - Exploration & Production (3.77%)					6,374
Cimarex Energy Co	54,250	2,195
Nexen Inc	93,250	1,491

See accompanying notes

304

Schedule of Investments
MidCap Growth Fund I
October 31, 2008
	Shares	Value			Shares	Value
	Held	(000's)			Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Major Department Store (0.91%)			Toys (continued)
TJX Cos Inc	60,500 $	1,619	Marvel Entertainment Inc (a)		47,500 $	1,529
						3,520
Retail - Regional Department Store (0.41%)
			Transport - Marine (1.57%)
Kohl's Corp (a)	20,825	732
			Kirby Corp (a)		41,650	1,429
Retail - Restaurants (1.59%)			Tidewater Inc		31,250	1,363
Yum! Brands Inc	97,550	2,830				2,792
			Transport - Services (0.71%)
Savings & Loans - Thrifts (1.30%)
			Ryder System Inc		32,050	1,270
Hudson City Bancorp Inc	123,075	2,315
			Vitamins & Nutrition Products (0.41%)
Schools (2.17%)
			Herbalife Ltd		30,000	733
Apollo Group Inc (a)	42,725	2,970
ITT Educational Services Inc (a)	10,150	889	Web Portals (0.30%)
		3,859	Sohu.com Inc (a)		9,575	526
Semiconductor Component - Integrated Circuits (2.29%)
			Wireless Equipment (0.89%)
Analog Devices Inc	45,425	970
			American Tower Corp (a)		49,000	1,583
Emulex Corp (a)	43,450	413
Integrated Device Technology Inc (a)	113,950	725	TOTAL COMMON STOCKS		$ 176,431
Linear Technology Corp	86,075	1,952	Total Investments		$ 176,431
		4,060	Other Assets in Excess of Liabilities, Net - 0.71%			1,257
Semiconductor Equipment (1.37%)			TOTAL NET ASSETS - 100.00%		$ 177,688
Kla-Tencor Corp	29,050	675
Lam Research Corp (a)	56,600	1,266
			(a)	Non-Income Producing Security
Novellus Systems Inc (a)	31,200	493
		2,434	Unrealized Appreciation (Depreciation)
Steel - Producers (1.18%)			The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			of investments held by the fund as of the period end were as follows:
AK Steel Holding Corp	30,400	423
Nucor Corp	16,650	675
			Unrealized Appreciation		$ 3,209
Reliance Steel & Aluminum Co	13,775	345
			Unrealized Depreciation			(85,450)
Steel Dynamics Inc	55,375	660
			Net Unrealized Appreciation (Depreciation)			(82,241)
		2,103
			Cost for federal income tax purposes			258,672
Steel - Specialty (0.35%)			All dollar amounts are shown in thousands (000's)
Allegheny Technologies Inc	23,450	622
				Portfolio Summary (unaudited)
Telecommunication Services (0.44%)			Sector			Percent
NeuStar Inc (a)	39,275	774	Consumer, Non-cyclical			21.90%
			Consumer, Cyclical			17.14%
Telephone - Integrated (0.66%)			Industrial			17.00%
Windstream Corp	155,525	1,168	Technology			14.30%
			Energy			9.34%
			Communications			6.02%
Therapeutics (1.05%)
			Financial			5.45%
Warner Chilcott Ltd (a)	134,925	1,871	Basic Materials			4.60%
			Utilities			3.54%
Tobacco (0.46%)			Other Assets in Excess of Liabilities, Net			0.71%
Reynolds American Inc	16,850	825	TOTAL NET ASSETS			100.00%
Toys (1.98%)
Hasbro Inc	68,500	1,991

See accompanying notes

305

Schedule of Investments
MidCap Growth Fund III
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (96.63%)			COMMON STOCKS (continued)
Airlines (0.51%)			Dental Supplies & Equipment (0.83%)
Continental Airlines Inc (a)	141,910 $	2,685	Dentsply International Inc	144,230 $	4,382
Beverages - Non-Alcoholic (0.39%)			Diversified Manufacturing Operations (1.65%)
Hansen Natural Corp (a)	81,840	2,072	ESCO Technologies Inc (a)	97,310	3,357
			Pentair Inc	128,834	3,561
Building - Residential & Commercial (2.77%)			SPX Corp	47,060	1,823
Pulte Homes Inc	644,960	7,185			8,741
Toll Brothers Inc (a)	323,160	7,471
			Electric - Integrated (0.93%)
		14,656
			PPL Corp	150,030	4,924
Cable TV (0.65%)
Cablevision Systems Corp	194,610	3,451	Electric Products - Miscellaneous (1.08%)
			Ametek Inc	172,430	5,733
Casino Hotels (1.12%)
Wynn Resorts Ltd	98,640	5,958	Electronic Components - Semiconductors (5.66%)
			Altera Corp	486,310	8,438
Cellular Telecommunications (0.68%)			Broadcom Corp (a)	487,960	8,334
MetroPCS Communications Inc (a)	261,840	3,598	Cavium Networks Inc (a)	249,598	3,180
			Micron Technology Inc (a)	1,132,579	5,334
Chemicals - Specialty (1.54%)
			PMC - Sierra Inc (a)	1,002,030	4,690
Ecolab Inc	102,890	3,834
					29,976
Sigma-Aldrich Corp	98,476	4,319
		8,153	Electronic Forms (0.69%)
			Adobe Systems Inc (a)	138,410	3,687
Coal (2.17%)
Alpha Natural Resources Inc (a)	63,990	2,289	Energy - Alternate Sources (1.78%)
Consol Energy Inc	163,280	5,125	Covanta Holding Corp (a)	266,170	5,739
Walter Industries Inc	105,550	4,090	First Solar Inc (a)	25,800	3,707
		11,504			9,446
Coatings & Paint (1.02%)			Engineering - Research & Development Services (1.13%)
Sherwin-Williams Co/The	94,690	5,389	Fluor Corp	149,400	5,966
Commercial Services (1.11%)			Engines - Internal Combustion (0.63%)
Quanta Services Inc (a)	297,140	5,872	Cummins Inc	129,840	3,356
Computer Software (0.50%)			Enterprise Software & Services (0.35%)
Omniture Inc (a)	230,695	2,653	Concur Technologies Inc (a)	73,060	1,843
Computers - Memory Devices (0.30%)			Entertainment Software (1.45%)
SanDisk Corp (a)	180,630	1,606	Activision Blizzard Inc (a)	618,150	7,702
Consulting Services (1.70%)			Fiduciary Banks (1.60%)
FTI Consulting Inc (a)	154,270	8,986	Northern Trust Corp	150,730	8,488
Consumer Products - Miscellaneous (1.15%)			Finance - Investment Banker & Broker (0.96%)
Clorox Co	100,610	6,118	Lazard Ltd	168,200	5,075
Containers - Paper & Plastic (0.94%)			Food - Miscellaneous/Diversified (1.48%)
Pactiv Corp (a)	210,520	4,960	Campbell Soup Co	75,250	2,856
			McCormick & Co Inc/MD	148,490	4,998
Cosmetics & Toiletries (1.11%)
					7,854
Alberto-Culver Co	228,590	5,882

See accompanying notes

306

Schedule of Investments
MidCap Growth Fund III
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Footwear & Related Apparel (0.89%)			Medical Products (1.04%)
Deckers Outdoor Corp (a)	55,330 $	4,695	Henry Schein Inc (a)	117,843 $	5,516
Hazardous Waste Disposal (2.60%)			Metal Processors & Fabrication (0.93%)
Clean Harbors Inc (a)	81,930	5,372	Precision Castparts Corp	76,380	4,950
Stericycle Inc (a)	143,607	8,391
		13,763	Motorcycle/Motor Scooter (0.44%)
			Harley-Davidson Inc	94,650	2,317
Human Resources (0.99%)
Robert Half International Inc	277,890	5,244	Networking Products (3.33%)
			Atheros Communications Inc (a)	230,832	4,148
Industrial Gases (1.11%)
			Juniper Networks Inc (a)	491,980	9,220
Airgas Inc	153,290	5,880
			Polycom Inc (a)	202,640	4,257
					17,625
Insurance Brokers (1.28%)
Aon Corp	160,840	6,804	Oil - Field Services (1.43%)
			Smith International Inc	220,160	7,591
Internet Content - Information & News (0.81%)
Baidu.com ADR (a)	20,730	4,270	Oil & Gas Drilling (1.02%)
			Diamond Offshore Drilling Inc	60,910	5,409
Internet Infrastructure Software (1.93%)
F5 Networks Inc (a)	412,941	10,249	Oil Company - Exploration & Production (4.34%)
			Continental Resources Inc/OK (a)	123,790	4,010
Internet Security (1.82%)			Questar Corp	147,620	5,087
McAfee Inc (a)	295,896	9,631	Range Resources Corp	146,925	6,203
			Southwestern Energy Co (a)	215,760	7,685
Investment Management & Advisory Services (1.89%)
					22,985
T Rowe Price Group Inc	253,540	10,025
			Oil Field Machinery & Equipment (1.85%)
Leisure & Recreation Products (1.24%)			Cameron International Corp (a)	234,090	5,679
WMS Industries Inc (a)	263,310	6,583	Dresser-Rand Group Inc (a)	183,820	4,118
					9,797
Machinery - Pumps (0.64%)
Flowserve Corp	59,930	3,411	Pharmacy Services (2.30%)
			Express Scripts Inc (a)	200,700	12,164
Medical - Biomedical/Gene (5.51%)
Alexion Pharmaceuticals Inc (a)	209,980	8,557	Power Converter & Supply Equipment (0.67%)
Charles River Laboratories International Inc	86,720	3,107	Sunpower Corp - Class A (a)	90,684	3,542
(a)
Illumina Inc (a)	191,780	5,912	Printing - Commercial (0.49%)
Myriad Genetics Inc (a)	55,207	3,483	VistaPrint Ltd (a)	153,215	2,615
United Therapeutics Corp (a)	93,350	8,143
			REITS - Storage (1.52%)
		29,202
			Public Storage	98,550	8,032
Medical - Drugs (0.72%)
Allergan Inc/United States	96,240	3,818	Retail - Apparel & Shoe (2.95%)
			Foot Locker Inc	304,320	4,449
Medical Instruments (1.82%)			Guess ? Inc	283,300	6,168
Beckman Coulter Inc	63,290	3,159	Urban Outfitters Inc (a)	230,960	5,021
Intuitive Surgical Inc (a)	37,460	6,473			15,638
		9,632
			Retail - Computer Equipment (0.78%)
Medical Laboratory & Testing Service (0.61%)			GameStop Corp (a)	150,380	4,119
Covance Inc (a)	64,858	3,243

See accompanying notes

307

Schedule of Investments
MidCap Growth Fund III
October 31, 2008
					Unrealized Appreciation (Depreciation)
					The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			Shares	Value	of investments held by the fund as of the period end were as follows:
			Held	(000's)
COMMON STOCKS (continued)					Unrealized Appreciation	$ 19,585
Retail - Discount (0.55%)					Unrealized Depreciation		(170,790)
Dollar Tree Inc (a)			76,890 $	2,923	Net Unrealized Appreciation (Depreciation)		(151,205)
					Cost for federal income tax purposes		675,112
Retail - Office Supplies (0.89%)					All dollar amounts are shown in thousands (000's)
Staples Inc			242,430	4,710
					Portfolio Summary (unaudited)
Retail - Regional Department Store (1.81%)					Sector		Percent
Kohl's Corp (a)			272,810	9,584
					Consumer, Non-cyclical		23.67%
					Consumer, Cyclical		13.94%
Savings & Loans - Thrifts (2.18%)					Energy		12.59%
Hudson City Bancorp Inc			476,180	8,957	Industrial		11.94%
People's United Financial Inc			147,860	2,588	Financial		11.68%
					Technology		11.24%
				11,545	Communications		9.22%
Schools (2.42%)					Basic Materials		3.67%
					Utilities		0.93%
Apollo Group Inc (a)			133,190	9,258	Other Assets in Excess of Liabilities, Net		1.12%
ITT Educational Services Inc (a)			40,510	3,551	TOTAL NET ASSETS		100.00%
				12,809
					Other Assets Summary (unaudited)
Semiconductor Equipment (2.28%)
					Asset Type		Percent
Lam Research Corp (a)			294,460	6,584
					Futures		2.59%
Varian Semiconductor Equipment
Associates Inc (a)			280,226	5,498
				12,082
Transport - Rail (0.77%)
Kansas City Southern (a)			131,870	4,071
Transport - Truck (0.90%)
JB Hunt Transport Services Inc			168,090	4,779
TOTAL COMMON STOCKS			$ 511,969
			Principal
			Amount	Value
			(000's)	(000's)
SHORT TERM INVESTMENTS (2.25%)
Commercial Paper (2.25%)
Investment in Joint Trading Account; HSBC
Funding
0.25%, 11/ 3/2008		$ 5,969 $		5,969
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008			5,969	5,969
				11,938
TOTAL SHORT TERM INVESTMENTS			$ 11,938
Total Investments			$ 523,907
Other Assets in Excess of Liabilities, Net - 1.12%				5,911
TOTAL NET ASSETS - 100.00%			$ 529,818
(a)	Non-Income Producing Security

See accompanying notes

308

	Schedule of Investments
	MidCap Growth Fund III
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
S&P Mid 400 eMini; December 2008	Buy	241	$ 12,405	$ 13,699	$ 1,294
All dollar amounts are shown in thousands (000's)

See accompanying notes

309

Schedule of Investments
MidCap Stock Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.85%)			COMMON STOCKS (continued)
Aerospace & Defense (1.38%)			Electric - Integrated (continued)
Spirit Aerosystems Holdings Inc (a)	339,300 $	5,473	Wisconsin Energy Corp	255,100 $	11,097
					33,715
Airlines (4.20%)
			Electronic Components - Semiconductors (2.77%)
AMR Corp (a)	700,200	7,149
			Microchip Technology Inc	444,900	10,958
Continental Airlines Inc (a)	500,300	9,466
		16,615
			Electronic Parts Distribution (2.08%)
Auto - Medium & Heavy Duty Trucks (1.12%)			Arrow Electronics Inc (a)	473,200	8,257
Paccar Inc	151,300	4,424
			Engineering - Research & Development Services (1.06%)
Auto/Truck Parts & Equipment - Original (1.96%)			Jacobs Engineering Group Inc (a)	115,700	4,215
Magna International Inc	229,300	7,753
			Enterprise Software & Services (3.06%)
Chemicals - Diversified (0.22%)			BMC Software Inc (a)	469,300	12,117
Rockwood Holdings Inc (a)	71,100	878
			Food - Dairy Products (0.54%)
Chemicals - Specialty (5.43%)			Dean Foods Co (a)	97,250	2,126
Cabot Corp	508,700	13,455
Lubrizol Corp	214,200	8,050	Machinery Tools & Related Products (3.02%)
		21,505	Lincoln Electric Holdings Inc	277,100	11,957
Coatings & Paint (2.27%)			Medical - Generic Drugs (0.28%)
Valspar Corp	439,300	8,984	Mylan Inc/PA (a)	129,325	1,108
Commercial Banks (1.97%)			Medical - Hospitals (3.16%)
Cullen/Frost Bankers Inc	36,879	2,064	Universal Health Services Inc	297,400	12,503
TCF Financial Corp	323,674	5,742
		7,806	Medical - Wholesale Drug Distribution (0.55%)
			AmerisourceBergen Corp	69,300	2,167
Commercial Services (2.65%)
Weight Watchers International Inc	335,000	10,479
			Medical Information Systems (1.63%)
			IMS Health Inc	450,582	6,461
Commercial Services - Finance (1.66%)
Lender Processing Services Inc	284,826	6,571
			Medical Instruments (1.79%)
			Edwards Lifesciences Corp (a)	134,000	7,081
Computers - Integrated Systems (0.67%)
Diebold Inc	88,800	2,639
			Medical Laboratory & Testing Service (2.02%)
			Covance Inc (a)	159,800	7,990
Computers - Memory Devices (1.70%)
NetApp Inc (a)	498,200	6,741
			Multi-Line Insurance (2.15%)
			HCC Insurance Holdings Inc	386,697	8,531
Cosmetics & Toiletries (2.77%)
Estee Lauder Cos Inc/The	304,500	10,974
			Non-Hazardous Waste Disposal (2.24%)
			Allied Waste Industries Inc (a)	243,000	2,532
Data Processing & Management (1.44%)
			Republic Services Inc	267,150	6,332
Fidelity National Information Services Inc	377,623	5,698
					8,864
Diversified Manufacturing Operations (2.77%)			Office Furnishings - Original (0.97%)
Teleflex Inc	207,315	10,986	HNI Corp	208,862	3,826
Electric - Integrated (8.51%)			Oil & Gas Drilling (1.78%)
DTE Energy Co	319,800	11,289	Nabors Industries Ltd (a)	489,458	7,038
Northeast Utilities	502,200	11,329

See accompanying notes

310

Schedule of Investments
MidCap Stock Fund
October 31, 2008
							Principal
		Shares	Value				Amount	Value
		Held	(000's)				(000's)	(000's)
COMMON STOCKS (continued)				REPURCHASE AGREEMENTS (continued)
Oil Company - Exploration & Production (2.25%)				Money Center Banks (continued)
Cimarex Energy Co		220,600 $	8,925	Investment in Joint Trading Account;
				Morgan Stanley Repurchase Agreement;
Oil Refining & Marketing (1.36%)				0.15%; dated 10/31/2008 maturing
				11/03/2008 (collateralized by Sovereign
Frontier Oil Corp		409,009	5,403
				Agency Issues; $8,365,000; 2.63% -
				4.63%; dated 09/09/09 - 06/12/15)		$ 8,122$		8,122
Property & Casualty Insurance (1.96%)
								16,243
Fidelity National Financial Inc		862,138	7,768
				TOTAL REPURCHASE AGREEMENTS			$ 16,243
Reinsurance (2.10%)				Total Investments			$ 395,877
Max Capital Group Ltd		522,100	8,327
				Other Assets in Excess of Liabilities, Net - 0.05%				187
REITS - Office Property (2.62%)				TOTAL NET ASSETS - 100.00%			$ 396,064
Alexandria Real Estate Equities Inc		149,500	10,393
				(a)	Non-Income Producing Security
REITS - Shopping Centers (1.06%)
Tanger Factory Outlet Centers		115,900	4,192
				Unrealized Appreciation (Depreciation)
Rental - Auto & Equipment (0.79%)				The net federal income tax unrealized appreciation (depreciation) and federal tax cost
				of investments held by the fund as of the period end were as follows:
Aaron Rents Inc		126,135	3,127
				Unrealized Appreciation			$ 48,516
Retail - Apparel & Shoe (1.70%)
				Unrealized Depreciation				(86,308)
J Crew Group Inc (a)		192,000	3,888
				Net Unrealized Appreciation (Depreciation)				(37,792)
Nordstrom Inc		157,870	2,856
				Cost for federal income tax purposes				433,669
			6,744
				All dollar amounts are shown in thousands (000's)
Retail - Jewelry (2.87%)
Tiffany & Co		413,900	11,362		Portfolio Summary (unaudited)
				Sector				Percent
Retail - Restaurants (0.57%)
				Financial				19.25%
Chipotle Mexican Grill Inc (a)		44,700	2,269	Consumer, Cyclical				16.25%
				Consumer, Non-cyclical				16.19%
Savings & Loans - Thrifts (3.28%)				Industrial				15.16%
Washington Federal Inc		737,750	12,999	Technology				11.27%
				Utilities				8.51%
				Basic Materials				7.92%
Toys (2.87%)				Energy				5.40%
Mattel Inc		757,400	11,376	Other Assets in Excess of Liabilities, Net				0.05%
				TOTAL NET ASSETS				100.00%
Transport - Marine (2.60%)
Tidewater Inc		236,400	10,309
TOTAL COMMON STOCKS		$ 379,634
		Principal
		Amount	Value
		(000's)	(000's)
REPURCHASE AGREEMENTS (4.10%)
Money Center Banks (4.10%)
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $8,365,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)	$ 8,122$		8,121

See accompanying notes

311

Schedule of Investments
MidCap Value Fund II
October 31, 2008

	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (99.46%)			COMMON STOCKS (continued)
Advanced Materials & Products (0.13%)			Cellular Telecommunications (0.13%)
Ceradyne Inc (a)	16,600 $	390	US Cellular Corp (a)	10,800 $	414
Aerospace & Defense (0.03%)			Chemicals - Diversified (0.26%)
Empresa Brasileira de Aeronautica SA ADR	4,078	85	Olin Corp	44,600	810
Agricultural Operations (1.00%)			Chemicals - Specialty (1.85%)
Bunge Ltd	80,500	3,092	Ashland Inc	110,800	2,503
			Eastman Chemical Co	51,800	2,092
Apparel Manufacturers (0.59%)			HB Fuller Co	64,400	1,138
Columbia Sportswear Co	40,100	1,479			5,733
Jones Apparel Group Inc	12,700	141
			Commercial Banks (6.07%)
Quiksilver Inc (a)	82,800	214
			Bancorpsouth Inc	31,100	755
		1,834
			Bank of Hawaii Corp	3,000	152
Appliances (0.10%)			City National Corp/CA	60,200	3,222
Whirlpool Corp	6,905	322	Commerce Bancshares Inc	63,000	2,979
			East West Bancorp Inc	13,700	238
Auto - Car & Light Trucks (0.39%)
			First Horizon National Corp	384,000	4,573
General Motors Corp	206,431	1,193
			M&T Bank Corp	14,400	1,168
Auto/Truck Parts & Equipment - Original (1.12%)			NBT Bancorp Inc	11,000	307
Autoliv Inc	84,378	1,802	United Bankshares Inc	40,300	1,286
Lear Corp (a)	199,500	401	Webster Financial Corp	121,600	2,254
TRW Automotive Holdings Corp (a)	158,200	1,000	Westamerica Bancorporation	22,700	1,300
WABCO Holdings Inc	14,300	263	Zions Bancorporation	14,600	556
		3,466			18,790
Beverages - Non-Alcoholic (0.99%)			Commercial Services (0.46%)
Coca-Cola Enterprises Inc	264,146	2,655	Convergys Corp (a)	186,400	1,433
Dr Pepper Snapple Group Inc (a)	12,600	288
			Commercial Services - Finance (0.50%)
Pepsi Bottling Group Inc	4,700	109
			Deluxe Corp	81,600	992
		3,052
			Lender Processing Services Inc	12,150	280
Beverages - Wine & Spirits (0.15%)			Moody's Corp	11,200	287
Constellation Brands Inc (a)	36,031	452			1,559
Building - Heavy Construction (0.31%)			Computer Services (1.06%)
Chicago Bridge & Iron Co NV	22,296	276	Affiliated Computer Services Inc (a)	12,700	521
Granite Construction Inc	12,500	446	Computer Sciences Corp (a)	69,600	2,099
Perini Corp (a)	12,100	230	Unisys Corp (a)	430,463	654
		952			3,274
Building - Residential & Commercial (1.23%)			Computers (0.82%)
Centex Corp	238,000	2,916	Sun Microsystems Inc (a)	554,700	2,552
NVR Inc (a)	1,051	515
			Computers - Memory Devices (0.41%)
Ryland Group Inc	20,300	381
			Seagate Technology	187,300	1,268
		3,812
Casino Hotels (0.58%)			Computers - Peripheral Equipment (0.96%)
Ameristar Casinos Inc	52,452	483	Lexmark International Inc (a)	115,500	2,983
Boyd Gaming Corp	194,504	1,323
		1,806	Consumer Products - Miscellaneous (1.19%)
			Jarden Corp (a)	143,200	2,549

See accompanying notes

312

Schedule of Investments
MidCap Value Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Consumer Products - Miscellaneous (continued)			Electronic Components - Miscellaneous
Scotts Miracle-Gro Co/The	43,300 $	1,131	(continued)
			Vishay Intertechnology Inc (a)	184,300 $	795
		3,680
					2,986
Containers - Paper & Plastic (0.19%)
Smurfit-Stone Container Corp (a)	436,300	589	Electronic Components - Semiconductors (0.19%)
			Amkor Technology Inc (a)	66,300	269
Distribution & Wholesale (2.00%)			International Rectifier Corp (a)	19,659	304
Ingram Micro Inc (a)	184,600	2,461			573
Scansource Inc (a)	23,800	472	Electronic Design Automation (0.04%)
Tech Data Corp (a)	24,732	530	Cadence Design Systems Inc (a)	27,100	110
United Stationers Inc (a)	31,900	1,193
WESCO International Inc (a)	77,202	1,535	Electronic Parts Distribution (0.82%)
		6,191	Avnet Inc (a)	151,088	2,529
Diversified Banking Institutions (0.09%)
			Electronics - Military (0.05%)
Morgan Stanley	16,700	292
			L-3 Communications Holdings Inc	1,900	154
Diversified Manufacturing Operations (0.60%)
			Engineering - Research & Development Services (0.65%)
AO Smith Corp	34,700	1,095
			KBR Inc	127,000	1,885
Eaton Corp	10,145	452
			McDermott International Inc (a)	7,700	132
Trinity Industries Inc	19,200	324
					2,017
		1,871
			Fiduciary Banks (0.83%)
Diversified Minerals (0.05%)			Northern Trust Corp	17,700	997
Teck Cominco Ltd	14,900	146
			Wilmington Trust Corp	54,300	1,567
					2,564
Electric - Integrated (11.00%)
Alliant Energy Corp	42,100	1,237	Finance - Credit Card (1.38%)
American Electric Power Co Inc	20,800	679	Discover Financial Services	347,654	4,259
Avista Corp	58,400	1,160
CMS Energy Corp	245,600	2,517	Finance - Investment Banker & Broker (1.17%)
Consolidated Edison Inc	106,300	4,605	Investment Technology Group Inc (a)	82,804	1,690
DPL Inc	17,596	401	Jefferies Group Inc	39,800	630
DTE Energy Co	98,800	3,488	Piper Jaffray Cos (a)	33,000	1,302
Edison International	5,712	203			3,622
El Paso Electric Co (a)	13,500	250	Food - Confectionery (1.19%)
Entergy Corp	4,400	343	Hershey Co/The	99,300	3,698
FirstEnergy Corp	12,100	631
Integrys Energy Group Inc	67,000	3,189	Food - Meat Products (0.91%)
Northeast Utilities	70,700	1,595	Hormel Foods Corp	95,700	2,705
NSTAR	19,900	658	Smithfield Foods Inc (a)	11,600	122
Otter Tail Corp	32,600	765			2,827
Pepco Holdings Inc	156,455	3,231	Food - Miscellaneous/Diversified (1.59%)
Pinnacle West Capital Corp	80,500	2,548	Chiquita Brands International Inc (a)	95,300	1,301
Portland General Electric Co	109,500	2,247	ConAgra Foods Inc	18,800	327
PPL Corp	13,700	450	Sara Lee Corp	296,030	3,310
TECO Energy Inc	214,119	2,471			4,938
Xcel Energy Inc	80,700	1,406
			Food - Retail (1.69%)
		34,074
			Safeway Inc	123,400	2,625
Electronic Components - Miscellaneous (0.96%)			SUPERVALU Inc	182,400	2,597
Jabil Circuit Inc	260,547	2,191

See accompanying notes

313

Schedule of Investments
MidCap Value Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Food - Retail (continued)			Medical - Drugs (1.74%)
Winn-Dixie Stores Inc (a)	300 $	5	Forest Laboratories Inc (a)	107,900 $	2,507
		5,227	King Pharmaceuticals Inc (a)	306,300	2,692
			Shire PLC ADR	4,420	174
Footwear & Related Apparel (0.15%)
Timberland Co (a)	39,600	479			5,373
			Medical - HMO (1.97%)
Gas - Distribution (5.14%)			Aetna Inc	9,605	239
Atmos Energy Corp	136,901	3,323	AMERIGROUP Corp (a)	65,100	1,628
Laclede Group Inc/The	4,165	218	Centene Corp (a)	22,000	414
New Jersey Resources Corp	49,700	1,851	Cigna Corp	10,700	174
Nicor Inc	68,600	3,170	Coventry Health Care Inc (a)	9,381	124
NiSource Inc	129,500	1,678	Health Net Inc (a)	144,599	1,862
Northwest Natural Gas Co	28,000	1,425	Magellan Health Services Inc (a)	44,600	1,648
Southwest Gas Corp	56,300	1,470			6,089
UGI Corp	69,905	1,669
			Medical - Hospitals (0.24%)
WGL Holdings Inc	34,800	1,120
			Universal Health Services Inc	17,900	753
		15,924
Home Furnishings (0.17%)			Medical - Nursing Homes (0.04%)
Ethan Allen Interiors Inc	30,200	540	Kindred Healthcare Inc (a)	8,000	116
Hotels & Motels (0.53%)			Medical - Wholesale Drug Distribution (0.83%)
Choice Hotels International Inc	17,589	481	AmerisourceBergen Corp	81,700	2,555
Wyndham Worldwide Corp	140,900	1,154
		1,635	Medical Products (0.05%)
			Covidien Ltd	3,500	155
Human Resources (0.67%)
Manpower Inc	66,300	2,064	Metal - Aluminum (0.51%)
			Century Aluminum Co (a)	89,700	1,128
Independent Power Producer (0.69%)
			Kaiser Aluminum Corp	13,300	446
Dynegy Inc (a)	79,000	288
					1,574
NRG Energy Inc (a)	19,686	458
Reliant Energy Inc (a)	263,700	1,384	Metal - Diversified (0.09%)
		2,130	Freeport-McMoRan Copper & Gold Inc	9,200	268
Insurance Brokers (0.93%)			Metal - Iron (0.07%)
Arthur J Gallagher & Co	118,300	2,882	Cliffs Natural Resources Inc	7,800	211
Investment Management & Advisory Services (0.24%)			Metal Processors & Fabrication (0.07%)
Invesco Ltd	32,600	486	Commercial Metals Co	19,900	221
Legg Mason Inc	11,100	246
		732	Motorcycle/Motor Scooter (0.06%)
			Harley-Davidson Inc	7,564	185
Life & Health Insurance (0.45%)
Conseco, Inc. (a)	176,200	328
			Multi-Line Insurance (0.93%)
Protective Life Corp	53,600	447	American Financial Group Inc/OH	72,300	1,643
StanCorp Financial Group Inc	17,700	603	Assurant Inc	15,100	385
		1,378	CNA Financial Corp	54,000	840
Machinery - Construction & Mining (0.74%)					2,868
Terex Corp (a)	137,106	2,288
			Multimedia (0.15%)
			McGraw-Hill Cos Inc/The	17,400	467
Machinery - General Industry (0.55%)
Gardner Denver Inc (a)	66,600	1,706

See accompanying notes

314

Schedule of Investments
MidCap Value Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Networking Products (0.13%)			Property & Casualty Insurance (continued)
Anixter International Inc (a)	11,700 $	393	First American Corp	102,700 $	2,096
			Harleysville Group Inc	14,219	449
Office Furnishings - Original (0.96%)			OneBeacon Insurance Group Ltd	36,775	507
Herman Miller Inc	77,500	1,705	WR Berkley Corp	31,500	828
Steelcase Inc	136,600	1,270			7,558
		2,975
			Publishing - Books (0.30%)
Oil - Field Services (1.77%)			Scholastic Corp	50,000	928
BJ Services Co	245,000	3,148
Oceaneering International Inc (a)	6,600	186	Publishing - Newspapers (1.11%)
Oil States International Inc (a)	93,400	2,161	Gannett Co Inc	265,500	2,921
		5,495	New York Times Co/The	50,922	509
					3,430
Oil & Gas Drilling (0.43%)
Noble Corp	6,600	213	Racetracks (0.44%)
Parker Drilling Co (a)	221,000	1,131	International Speedway Corp	43,450	1,364
		1,344
			Regional Banks (1.33%)
Oil Company - Exploration & Production (4.63%)
			Huntington Bancshares Inc/OH	380,902	3,600
Apache Corp	3,300	272
			Keycorp	27,400	335
Cabot Oil & Gas Corp	89,600	2,515
			National City Corp	71,100	192
Cimarex Energy Co	85,100	3,443
					4,127
Denbury Resources Inc (a)	19,814	252
Mariner Energy Inc (a)	79,276	1,141	Reinsurance (3.45%)
Noble Energy Inc	5,200	270	Allied World Assurance Co Holdings Ltd	42,300	1,356
Rosetta Resources Inc (a)	53,500	564	Endurance Specialty Holdings Ltd	59,400	1,796
Southwestern Energy Co (a)	11,774	419	PartnerRe Ltd	61,957	4,194
St Mary Land & Exploration Co	32,400	806	Reinsurance Group of America Inc	14,000	523
Stone Energy Corp (a)	63,800	1,936	RenaissanceRe Holdings Ltd	54,000	2,479
Swift Energy Co (a)	56,300	1,806	Transatlantic Holdings Inc	8,100	347
Talisman Energy Inc	29,480	297			10,695
Whiting Petroleum Corp (a)	9,000	468	REITS - Apartments (0.55%)
XTO Energy Inc	4,473	161	Apartment Investment & Management Co	115,411	1,688
		14,350
			REITS - Diversified (0.35%)
Oil Field Machinery & Equipment (0.50%)
			Colonial Properties Trust	48,262	509
Complete Production Services Inc (a)	105,600	1,308
			Duke Realty Corp	23,200	327
National Oilwell Varco Inc (a)	8,400	251
			Lexington Realty Trust	6,200	50
		1,559
			Vornado Realty Trust	2,700	190
Oil Refining & Marketing (0.09%)					1,076
Sunoco Inc	8,626	263
			REITS - Healthcare (0.05%)
Paper & Related Products (1.49%)			Ventas Inc	4,000	144
Domtar Corp (a)	692,049	1,716
			REITS - Hotels (0.54%)
International Paper Co	87,400	1,505
			Hospitality Properties Trust	165,500	1,680
Potlatch Corp	42,200	1,402
		4,623	REITS - Mortgage (1.41%)
Photo Equipment & Supplies (0.78%)			Annaly Capital Management Inc	314,100	4,366
Eastman Kodak Co	263,100	2,415
			REITS - Office Property (1.50%)
Property & Casualty Insurance (2.44%)			Brandywine Realty Trust	209,600	1,811
Arch Capital Group Ltd (a)	52,724	3,678

See accompanying notes

315

Schedule of Investments
MidCap Value Fund II
October 31, 2008
	Shares	Value			Shares	Value
	Held	(000's)			Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
REITS - Office Property (continued)			Savings & Loans - Thrifts (0.95%)
Mack-Cali Realty Corp	124,800 $	2,835	Astoria Financial Corp		155,400 $	2,956
		4,646
			Semiconductor Component - Integrated Circuits (0.27%)
REITS - Regional Malls (0.46%)
			Emulex Corp (a)		87,600	832
CBL & Associates Properties Inc	155,100	1,432
			Steel - Producers (0.60%)
REITS - Shopping Centers (0.50%)
			Steel Dynamics Inc		138,600	1,652
Developers Diversified Realty Corp	17,075	225
			United States Steel Corp		5,300	196
Inland Real Estate Corp	35,900	411
						1,848
Regency Centers Corp	22,900	904
		1,540	Telecommunication Equipment (1.98%)
			ADC Telecommunications Inc (a)		310,705	1,970
REITS - Warehouse & Industrial (1.04%)
			Arris Group Inc (a)		42,218	291
AMB Property Corp	30,500	733
			Plantronics Inc		51,300	741
First Industrial Realty Trust Inc	60,500	625
			Tellabs Inc (a)		738,150	3,130
Prologis	132,000	1,848
						6,132
		3,206
			Telephone - Integrated (1.04%)
Rental - Auto & Equipment (0.52%)
			CenturyTel Inc		20,200	507
Avis Budget Group Inc (a)	250,600	411
			Frontier Communications Corp		182,511	1,389
United Rentals Inc (a)	118,324	1,213
			Telephone & Data Systems Inc		49,010	1,316
		1,624
						3,212
Retail - Apparel & Shoe (0.25%)
			Television (1.03%)
AnnTaylor Stores Corp (a)	61,991	779
			CBS Corp		292,600	2,841
			Hearst-Argyle Television Inc		23,053	345
Retail - Automobile (0.09%)
Penske Auto Group Inc	34,400	282				3,186
			Transport - Marine (0.23%)
Retail - Bookstore (0.69%)			Ship Finance International Ltd		23,703	323
Barnes & Noble Inc	113,400	2,141	Tidewater Inc		8,800	384
						707
Retail - Drug Store (0.04%)
Rite Aid Corp (a)	240,799	117	Transport - Truck (0.53%)
			Arkansas Best Corp		46,200	1,349
Retail - Hair Salons (0.24%)			YRC Worldwide Inc (a)		66,200	303
Regis Corp	59,900	741				1,652
Retail - Major Department Store (0.13%)			Vitamins & Nutrition Products (0.17%)
JC Penney Co Inc	17,000	407	NBTY Inc (a)		22,100	516
Retail - Office Supplies (1.19%)			Web Portals (0.11%)
Office Depot Inc (a)	544,127	1,959	United Online Inc		47,000	348
OfficeMax Inc	213,440	1,718	TOTAL COMMON STOCKS		$ 307,938
		3,677			Principal
					Amount	Value
Retail - Regional Department Store (0.30%)
					(000's)	(000's)
Dillard's Inc	82,600	440
			REPURCHASE AGREEMENTS (0.27%)
Macy's Inc	39,200	482
			Money Center Banks (0.27%)
		922
			Investment in Joint Trading Account; Bank
Retail - Restaurants (0.11%)			of America Repurchase Agreement;
Darden Restaurants Inc	15,800	350	0.15%; dated 10/31/2008 maturing
			11/03/2008 (collateralized by Sovereign
			Agency Issues; $434,000; 2.75% - 5.38%;
			dated 11/28/08 - 02/13/17)	$ 421$		422

See accompanying notes

316

Schedule of Investments
MidCap Value Fund II
October 31, 2008

			Principal
			Amount	Value
			(000's)	(000's)
REPURCHASE AGREEMENTS (continued)
Money Center Banks (continued)
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $434,000; 2.63% - 4.63%;
dated 09/09/09 - 06/12/15)		$ 421$		421
				843
TOTAL REPURCHASE AGREEMENTS			$ 843
Total Investments			$ 308,781
Other Assets in Excess of Liabilities, Net - 0.27%				851
TOTAL NET ASSETS - 100.00%			$ 309,632
(a)	Non-Income Producing Security

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 3,881
Unrealized Depreciation		(165,646)
Net Unrealized Appreciation (Depreciation)		(161,765)
Cost for federal income tax purposes		470,546
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Financial		26.92%
Utilities		16.84%
Consumer, Non-cyclical		15.05%
Consumer, Cyclical		12.21%
Energy		7.43%
Industrial		6.64%
Communications		5.98%
Basic Materials		4.91%
Technology		3.75%
Other Assets in Excess of Liabilities, Net		0.27%
TOTAL NET ASSETS		100.00%

See accompanying notes

317

Schedule of Investments
Money Market Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
COMMERCIAL PAPER (88.04%)			COMMERCIAL PAPER (continued)
Aerospace & Defense Equipment (0.43%)			Commercial Banks (continued)
United Technologies Corp			Nordea North America (continued)
2.05%, 1/21/2009	$ 12,000 $	11,945	3.41%, 1/26/2009	$ 13,000 $	12,894
			3.37%, 2/ 3/2009	11,000	10,903
Agricultural Operations (1.14%)			Royal Bank of Scotland
Cargill Inc			2.75%, 11/ 3/2008	11,700	11,698
2.54%, 11/ 7/2008	10,000	9,996	2.76%, 12/11/2008	12,700	12,661
3.15%, 11/26/2008	13,500	13,470	Skandinaviska Enskilda Banken
4.20%, 1/15/2009	8,720	8,644	2.77%, 11/17/2008	10,600	10,587
		32,110	2.78%, 11/25/2008	12,000	11,978
Asset Backed Securities (1.99%)			Societe Generale North America Inc
			2.75%, 11/18/2008	11,800	11,785
CAFCO
3.50%, 11/ 3/2008	13,500	13,497	2.77%, 12/ 2/2008	4,925	4,913
2.77%, 11/ 6/2008	7,500	7,497	3.05%, 12/30/2008	6,320	6,288
4.00%, 12/ 3/2008	12,000	11,957	State Street Corp
			2.65%, 11/21/2008	12,500	12,482
3.00%, 1/15/2009	10,000	9,938
			2.63%, 12/ 1/2008	13,600	13,570
3.05%, 1/20/2009	13,000	12,912
			2.70%, 12/10/2008	13,900	13,859
		55,801
			2.68%, 1/ 2/2009	12,000	11,945
Auto - Car & Light Trucks (1.31%)			2.77%, 1/ 6/2009	9,000	8,954
BMW US Capital Corp			Svenska Handelsbanken
2.77%, 11/24/2008	12,000	11,983	2.70%, 11/13/2008	6,100	6,095
2.10%, 12/24/2008	12,000	11,963	2.69%, 12/12/2008	9,000	8,972
1.95%, 12/29/2008	12,900	12,859	Toronto - Dominion Holdings
		36,805	2.70%, 11/20/2008	9,800	9,786
Beverages - Non-Alcoholic (1.69%)			Westpac Banking Corp
			2.89%, 11/12/2008	6,870	6,864
Coca-Cola Co
2.25%, 11/13/2008	11,600	11,591			269,211
2.25%, 12/16/2008	10,600	10,570	Commercial Banks - Non US (2.38%)
2.25%, 12/17/2008	12,500	12,464	DNB NOR BANK ASA
2.40%, 1/21/2009	13,000	12,930	2.50%, 11/ 5/2008	8,130	8,128
		47,555	2.72%, 11/12/2008	3,500	3,497
			2.75%, 11/18/2008	11,600	11,585
Chemicals - Diversified (2.34%)
			2.90%, 11/24/2008	10,800	10,780
BASF AG
2.47%, 11/14/2008	11,000	10,990	3.49%, 1/21/2009	12,900	12,799
2.55%, 11/20/2008	12,600	12,583	Swedbank AB
			2.90%, 11/ 5/2008	6,000	5,998
2.20%, 12/ 4/2008	10,600	10,578
			2.95%, 11/24/2008	13,975	13,948
2.65%, 12/ 9/2008	10,500	10,471
					66,735
3.58%, 1/15/2009	13,000	12,903
2.88%, 1/28/2009	8,125	8,068	Computers (1.14%)
		65,593	IBM Capital Corp
			2.39%, 12/ 5/2008	7,300	7,284
Commercial Banks (9.58%)
			2.39%, 12/ 8/2008	12,500	12,469
Calyon North America
			3.05%, 1/ 5/2009	12,300	12,232
2.76%, 11/ 3/2008	12,700	12,698
					31,985
2.66%, 11/ 5/2008	15,000	14,996
2.76%, 12/ 5/2008	15,000	14,961	Cosmetics & Toiletries (0.88%)
3.51%, 12/22/2008	11,000	10,945	Procter & Gamble
2.92%, 1/20/2009	13,000	12,916	2.20%, 12/ 3/2008	12,500	12,476
Nordea North America			2.20%, 12/12/2008	12,300	12,269
3.75%, 1/12/2009	11,000	10,918			24,745
2.88%, 1/23/2009	5,580	5,543

See accompanying notes

318

Schedule of Investments
Money Market Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
COMMERCIAL PAPER (continued)				COMMERCIAL PAPER (continued)
Diversified Financial Services (1.38%)				Finance - Consumer Loans (continued)
General Electric Capital				John Deere Capital Corp (continued)
2.62%, 11/19/2008	$ 7,370 $		7,360	3.00%, 1/27/2009	$ 9,020 $		8,955
2.57%, 11/28/2008		11,000	10,979				74,275
2.57%, 12/ 4/2008		5,050	5,038
				Finance - Credit Card (0.94%)
2.70%, 12/ 8/2008		11,000	10,970	American Express Credit
2.57%, 12/17/2008		4,500	4,485	2.73%, 11/ 5/2008		3,950	3,949
			38,832	2.73%, 11/17/2008		5,600	5,593
Diversified Manufacturing Operations (2.79%)				2.77%, 11/17/2008		11,000	10,987
Danaher Corp				2.77%, 12/17/2008		5,840	5,819
1.60%, 12/24/2008		5,860	5,846				26,348
Dover Corp
				Finance - Investment Banker & Broker (6.56%)
2.20%, 12/ 4/2008		12,000	11,976
				Citigroup Funding
Illinois Tool Works Inc				2.74%, 11/ 6/2008		7,840	7,837
2.20%, 11/21/2008		11,600	11,586
				2.82%, 11/13/2008		10,000	9,991
2.00%, 12/18/2008		12,000	11,969
				2.84%, 11/19/2008		10,000	9,986
2.15%, 12/18/2008		13,000	12,963
				2.78%, 11/24/2008		11,100	11,080
2.00%, 12/19/2008		12,000	11,968
				2.82%, 12/11/2008		3,740	3,728
1.90%, 12/23/2008		12,000	11,967
				ING U.S. Funding
			78,275	2.79%, 12/ 9/2008		10,700	10,669
Electric - Integrated (1.68%)				3.61%, 12/30/2008		13,000	12,923
E. ON AG				3.44%, 1/27/2009		13,000	12,892
2.41%, 12/11/2008		12,500	12,467	JP Morgan Chase
2.35%, 12/12/2008		10,700	10,671	2.75%, 11/18/2008		13,800	13,782
2.85%, 12/15/2008		12,000	11,958	2.75%, 11/20/2008		10,700	10,684
Southern Company Funding Corp				2.75%, 11/25/2008		7,500	7,486
1.95%, 11/10/2008		12,000	11,994	2.72%, 12/17/2008		5,420	5,401
			47,090	2.80%, 2/ 2/2009		13,800	13,700
Finance - Auto Loans (2.94%)				Merrill Lynch & Co Inc
Paccar Financial				0.75%, 11/ 3/2008		35,000	34,999
3.15%, 1/ 5/2009		12,000	11,932	Morgan Stanley
Toyota Motor Credit				2.91%, 12/ 3/2008		10,000	9,974
2.62%, 11/12/2008		4,520	4,516	2.92%, 12/19/2008		9,250	9,214
2.65%, 11/19/2008		6,030	6,022				184,346
2.54%, 11/20/2008		8,250	8,239	Finance - Leasing Company (0.58%)
3.20%, 12/23/2008		8,000	7,963	River Fuel Funding Co
3.10%, 1/ 2/2009		12,900	12,831	3.03%, 12/ 5/2008		6,000	5,983
2.66%, 1/ 5/2009		12,700	12,639	3.33%, 1/30/2009		10,400	10,313
2.63%, 1/ 8/2009		9,500	9,453				16,296
3.10%, 2/ 2/2009		9,000	8,928
				Finance - Mortgage Loan/Banker (9.25%)
			82,523	Fannie Mae Discount Notes
Finance - Consumer Loans (2.64%)				2.58%, 11/12/2008		14,000	13,989
HSBC Finance				2.48%, 12/15/2008		9,700	9,671
2.80%, 12/22/2008		8,000	7,968	2.45%, 12/22/2008		11,500	11,460
John Deere Capital Corp				2.85%, 1/21/2009		12,500	12,420
2.60%, 11/ 4/2008		12,000	11,998	2.78%, 1/28/2009		10,500	10,429
2.20%, 11/25/2008		12,000	11,982	1.70%, 1/29/2009		12,000	11,950
2.50%, 1/ 9/2009		12,000	11,943	2.82%, 2/ 9/2009		13,500	13,394
2.70%, 1/12/2009		12,000	11,935	Federal Home Loan Bank Discount Notes
2.85%, 1/27/2009		9,560	9,494	2.50%, 11/13/2008		13,500	13,489

See accompanying notes

319

Schedule of Investments
Money Market Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
COMMERCIAL PAPER (continued)				COMMERCIAL PAPER (continued)
Finance - Mortgage Loan/Banker (continued)				Money Center Banks (continued)
Federal Home Loan Bank Discount Notes				Bank of America (continued)
(continued)				2.76%, 12/10/2008	$ 5,000 $	4,985
2.35%, 12/26/2008	$ 10,500 $		10,462	2.76%, 12/12/2008	11,800	11,763
2.50%, 12/30/2008		10,500	10,457	2.75%, 12/16/2008	11,600	11,560
2.40%, 1/30/2009		13,000	12,922	2.76%, 12/18/2008	13,700	13,651
2.50%, 1/30/2009		10,000	9,937	2.90%, 12/23/2008	7,480	7,449
2.35%, 2/ 4/2009		13,000	12,919	Bank of Scotland PLC
Freddie Mac Discount Notes				2.78%, 12/15/2008	12,000	11,959
2.62%, 12/ 9/2008		13,000	12,964	BNP Paribas Finance
2.55%, 12/16/2008		22,000	21,930	2.78%, 11/10/2008	10,700	10,693
2.05%, 1/ 7/2009		13,000	12,950	2.81%, 11/10/2008	12,500	12,491
2.84%, 1/26/2009		10,000	9,932	2.76%, 11/26/2008	15,000	14,971
2.82%, 2/ 2/2009		11,000	10,920	2.75%, 12/ 9/2008	10,000	9,971
2.61%, 2/19/2009		12,900	12,797	3.41%, 1/22/2009	14,900	14,784
2.83%, 3/ 2/2009		12,500	12,381	UBS Finance Delaware LLC
2.90%, 3/16/2009		12,500	12,364	2.83%, 12/ 3/2008	10,000	9,975
			259,737			160,180
Finance - Other Services (3.59%)				Multimedia (0.49%)
CRC Funding				Walt Disney Co
2.75%, 11/ 4/2008		11,700	11,697	2.00%, 1/ 7/2009	13,700	13,649
2.74%, 11/ 7/2008		4,410	4,408
2.78%, 11/ 7/2008		5,000	4,998	Oil Company - Integrated (2.51%)
2.76%, 11/14/2008		15,000	14,985	BP Capital Markets PLC
				2.10%, 11/18/2008	10,000	9,990
2.77%, 11/17/2008		14,000	13,983
				2.15%, 1/16/2009	12,000	11,946
Park Avenue Receivables Company
2.65%, 11/21/2008		11,000	10,984	ConocoPhilipps
				2.10%, 12/10/2008	12,000	11,973
2.70%, 12/ 1/2008		10,700	10,676
				2.00%, 12/11/2008	12,000	11,973
Private Export Funding
2.15%, 11/ 6/2008		5,065	5,064	2.10%, 12/26/2008	12,600	12,560
				2.00%, 12/29/2008	12,000	11,961
2.10%, 12/19/2008		12,000	11,966
1.80%, 12/22/2008		12,000	11,969			70,403
			100,730	Publicly Traded Investment Fund (1.19%)
				Merrill Lynch Funds for Instutitions Series -
Food - Miscellaneous/Diversified (2.26%)
				Government Fund
Unilever Capital				1.59%, 12/31/2008	33,370	33,370
2.70%, 11/ 5/2008		8,800	8,797
3.65%, 1/ 8/2009		10,300	10,229	Regional Banks (0.33%)
2.90%, 1/12/2009		7,700	7,655	Wells Fargo & Co
3.40%, 1/14/2009		12,200	12,115	2.63%, 12/ 3/2008	9,400	9,378
3.85%, 1/23/2009		12,000	11,894
2.55%, 2/ 6/2009		13,000	12,911	Retail - Discount (0.92%)
			63,601	Target Corp
				2.15%, 12/ 2/2008	13,400	13,375
Life & Health Insurance (0.36%)				Wal-Mart Stores
Prudential PLC				2.17%, 12/ 5/2008	12,500	12,475
2.81%, 11/10/2008		10,000	9,993			25,850
Money Center Banks (5.70%)				Special Purpose Banks (1.00%)
Bank of America				Dexia Delaware LLC
3.25%, 12/ 2/2008		8,000	7,978	0.74%, 11/ 3/2008	28,000	27,999
2.71%, 12/ 3/2008		3,000	2,993
2.76%, 12/ 8/2008		15,000	14,957

See accompanying notes

320

Schedule of Investments
Money Market Fund
October 31, 2008
	Principal			Principal
	Amount	Value		Amount	Value
	(000's)	(000's)		(000's)	(000's)
COMMERCIAL PAPER (continued)			COMMERCIAL PAPER (continued)
Special Purpose Entity (12.36%)			Telephone - Integrated (2.87%)
American Honda Finance Corp			AT&T Corp
2.22%, 12/ 2/2008	$ 12,000 $	11,977	2.20%, 11/14/2008	$ 12,500 $	12,490
2.22%, 12/ 8/2008	12,000	11,973	2.25%, 11/17/2008	10,500	10,490
2.00%, 12/10/2008	10,600	10,577	AT&T Inc
2.70%, 1/ 6/2009	2,975	2,960	2.30%, 12/15/2008	10,200	10,171
2.85%, 1/ 6/2009	8,010	7,968	2.30%, 12/16/2008	13,000	12,963
2.90%, 1/29/2009	13,000	12,907	2.30%, 12/17/2008	11,140	11,107
Danske Corp			2.10%, 1/13/2009	12,900	12,845
3.11%, 1/28/2009	12,000	11,909	Telstra Corp
3.04%, 2/ 5/2009	10,000	9,919	2.65%, 11/12/2008	10,600	10,591
3.00%, 2/23/2009	11,500	11,391			80,657
Gemini Securitization Corp			Tobacco (1.24%)
4.20%, 12/ 1/2008	10,000	9,965	Philip Morris Capital
2.77%, 12/ 2/2008	12,500	12,470	2.35%, 11/12/2008	12,500	12,491
2.77%, 12/ 4/2008	12,700	12,668	2.36%, 12/17/2008	12,000	11,964
2.90%, 1/ 6/2009	10,000	9,947	Philip Morris International Inc
3.10%, 1/21/2009	10,000	9,930	2.35%, 12/23/2008	10,500	10,464
National Australia Funding					34,919
2.87%, 12/31/2008	9,520	9,474
			Tools - Hand held (0.25%)
Prudential Funding Corp
			Stanley Works
2.53%, 11/21/2008	10,600	10,585
			2.50%, 2/ 4/2009	7,000	6,954
Ranger Funding
2.70%, 11/ 6/2008	10,000	9,996	TOTAL COMMERCIAL PAPER	$ 2,472,550
2.74%, 11/19/2008	22,500	22,469	CERTIFICATE OF DEPOSIT (0.79%)
3.85%, 12/ 1/2008	12,500	12,460	Commercial Banks (0.79%)
2.75%, 12/11/2008	12,800	12,761	Wachovia Bank
3.90%, 12/19/2008	12,000	11,938	2.91%, 11/ 4/2008	11,800	11,800
Shell International Finance BV			2.93%, 11/13/2008	10,500	10,500
2.30%, 2/20/2009	13,000	12,908			22,300
Southern Company Funding
			TOTAL CERTIFICATE OF DEPOSIT	$ 22,300
2.45%, 1/13/2009	13,000	12,935
2.50%, 1/14/2009	13,000	12,933	BONDS (6.34%)
2.55%, 1/16/2009	10,300	10,245	Asset Backed Securities (0.10%)
2.45%, 1/22/2009	12,000	11,933	Caterpillar Financial Asset Trust
2.45%, 1/23/2009	10,000	9,944	3.01%, 12/26/2008	668	668
Yorktown Capital			CNH Equipment Trust
2.75%, 11/ 4/2008	11,000	10,997	2.75%, 12/15/2008	835	835
2.76%, 11/ 7/2008	13,800	13,794	John Deere Owner Trust
			2.79%, 2/17/2009	1,355	1,355
3.85%, 11/14/2008	5,000	4,993
					2,858
2.70%, 12/ 5/2008	10,390	10,363
		347,289	Automobile Sequential (0.72%)
			Honda Auto Receivables Owner Trust
Supranational Bank (1.33%)
			2.92%, 2/18/2009 (a)	4,406	4,406
Corp Andina de Fomento
			Hyundai Auto Receivables Trust
2.77%, 11/ 6/2008	8,000	7,997
			2.85%, 1/15/2009	5,427	5,427
2.78%, 11/14/2008	9,000	8,991
			Nissan Auto Receivables Owner Trust
2.90%, 1/ 7/2009	10,000	9,946	2.79%, 6/15/2009	4,018	4,018
2.94%, 1/13/2009	10,500	10,437	Volkswagen Auto Loan Enhanced Trust
		37,371	2.84%, 1/20/2009	1,224	1,224

See accompanying notes

321

Schedule of Investments
Money Market Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				TAX-EXEMPT BONDS (continued)
Automobile Sequential (continued)				California (continued)
World Omni Auto Receivables Trust				California Statewide Communities
3.00%, 4/15/2009	$ 5,201 $		5,201	Development Authority
			20,276	2.85%, 8/15/2034	$ 800 $		800
				City of Fairfield CA Landesbank
Commercial Banks (1.25%)				Hessen-Thueringen
Commonwealth Bank of Australia				4.25%, 6/ 1/2034		2,000	2,000
2.96%, 12/ 3/2008 (b)(c)		25,000	25,000	4.25%, 6/ 1/2034		2,700	2,700
Svenska Handelsbanken AB				City of Richmond CA FNMA
4.42%, 1/ 6/2009 (c)		10,000	10,000	2.85%, 8/15/2037		3,200	3,200
			35,000	City of Santa Rosa CA Landesbank
				Hessen-Thueringen
Diversified Banking Institutions (0.09%)
				4.25%, 9/ 1/2024		4,665	4,665
JP Morgan Chase & Co
				Kern Water Bank Authority Wells Fargo Bank
3.92%, 11/ 2/2008 (a)		2,500	2,500
				NA
				3.75%, 7/ 1/2028		2,600	2,600
Diversified Financial Services (0.47%)
				Los Angeles Community College District/CA
IBM International Group Capital LLC				3.05%, 8/ 1/2009		1,800	1,800
3.03%, 11/26/2008 (a)(c)		13,100	13,100
				Los Angeles Department of Water & Power
				Dexia
Life & Health Insurance (0.53%)				6.00%, 7/ 1/2025		5,400	5,400
Monumental Global Funding III				San Jose Redevelopment Agency/CA JP
4.95%, 1/20/2009 (b)(c)		15,000	15,000	Morgan Chase Bank
				3.10%, 8/ 1/2028		32,150	32,150
Medical - Hospitals (0.44%)							57,315
Portland Clinic LLP/The
5.50%, 11/20/2027		12,390	12,390	Colorado (0.29%)
				Colorado Housing & Finance Authority/CO
Medical - Outpatient & Home Medical Care (0.22%)				Wells Fargo Bank NA
Everett Clinic PS				3.75%, 4/ 1/2029		525	525
5.45%, 5/ 1/2022		6,100	6,100	County of Kit Carson CO Wells Fargo Bank NA
				3.25%, 6/ 1/2027		2,100	2,100
Money Center Banks (1.28%)				County of Montrose CO Wells Fargo Bank NA
Bank of New York/The				3.75%, 6/ 1/2010		400	400
2.93%, 11/ 3/2008 (b)		36,000	36,000	Sheridan Redevelopment Agency Citibank NA
				3.50%, 12/ 1/2029		5,000	5,000
Special Purpose Entity (1.24%)							8,025
Corporate Finance Managers Inc
				Georgia (0.08%)
5.50%, 2/ 2/2043		14,900	14,900
				Savannah College of Art & Design Inc Bank of
NGSP Inc				America NA
4.00%, 6/ 1/2046		20,000	20,000	4.00%, 4/ 1/2024		2,200	2,200
			34,900
				Illinois (0.63%)
TOTAL BONDS		$ 178,124
				Memorial Health System/IL JP Morgan Chase
TAX-EXEMPT BONDS (4.72%)				Bank
Arizona (0.40%)				3.25%, 10/ 1/2024		17,780	17,780
Glendale Industrial Development Authority
Bank of New York				Indiana (0.09%)
4.00%, 7/ 1/2035		7,495	7,495	Ball State University/IN
Tucson Airport Authority Inc/AZ Bank of				3.00%, 9/ 1/2031		2,550	2,550
America NA
4.00%, 12/ 1/2018		3,635	3,635	Iowa (0.09%)
			11,130	Iowa Finance Authority
				3.25%, 3/ 1/2018		2,590	2,590
California (2.04%)
Abag Finance Authority for Nonprofit Corps
4.25%, 11/ 1/2031		2,000	2,000
See accompanying notes			322

Schedule of Investments
Money Market Fund
October 31, 2008
					Portfolio Summary (unaudited)
			Principal
					Sector	Percent
			Amount	Value
			(000's)	(000's)	Financial	57.33%
					Government	9.25%
TAX-EXEMPT BONDS (continued)					Consumer, Non-cyclical	7.88%
New York (0.20%)					Revenue	3.92%
New York City Housing Development Corp					Industrial	3.46%
Landesbank Hessen-Thueringen					Communications	3.36%
4.50%, 6/ 1/2039		$ 5,500 $		5,500	Asset Backed Securities	2.81%
					Energy	2.51%
					Basic Materials	2.34%
North Carolina (0.23%)					Consumer, Cyclical	2.23%
North Carolina Capital Facilities Finance					Utilities	1.68%
Agency					Exchange Traded Funds	1.19%
4.00%, 9/ 1/2018			6,615	6,615	Technology	1.14%
					Insured	0.51%
Oklahoma (0.21%)					Tax Allocation	0.22%
					General Obligation	0.06%
University Hospital Bank of America NA
					Other Assets in Excess of Liabilities, Net	0.11%
4.00%, 8/15/2021			5,790	5,790
					TOTAL NET ASSETS	100.00%
Oregon (0.05%)
Lake Oswego Redevelopment Agency Wells
Fargo Bank NA
3.75%, 6/ 1/2020			1,285	1,285
Texas (0.11%)
Port of Port Arthur Navigation District Motiva
Enterprises LLC
5.75%, 5/ 1/2038			3,200	3,200
Washington (0.30%)
Washington State Housing Finance
Commission/WA
2.85%, 9/ 1/2028			1,205	1,205
3.30%, 12/ 1/2028			640	640
2.85%, 9/15/2037			2,730	2,730
2.85%, 12/15/2037			3,855	3,855
				8,430
TOTAL TAX-EXEMPT BONDS			$ 132,410
Total Investments			$ 2,805,384
Other Assets in Excess of Liabilities, Net - 0.11%				3,206
TOTAL NET ASSETS - 100.00%			$ 2,808,590
(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
(b)	Security is Illiquid
(c)	Security exempt from registration under Rule 144A of the Securities Act
	of 1933. These securities may be resold in transactions exempt from
	registration, normally to qualified institutional buyers. Unless otherwise
	indicated, these securities are not considered illiquid. At the end of the
	period, the value of these securities totaled $63,100 or 2.25% of net
	assets.

See accompanying notes

323

Schedule of Investments
Mortgage Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (29.64%)			BONDS (continued)
Finance - Mortgage Loan/Banker (0.11%)			Mortgage Backed Securities (continued)
Fannie Mae			Prime Mortgage Trust (continued)
6.21%, 8/ 6/2038	$ 1,250 $	1,318	4.75%, 10/25/2020 (a)	$ 14,641 $		14,015
			Residential Funding Mortgage Securities I
Mortgage Backed Securities (29.53%)			5.50%, 12/25/2033		17,000	14,366
Banc of America Mortgage Securities Inc			Structured Asset Securities Corp
4.75%, 8/25/2033	21,500	21,012	5.50%, 12/25/2033		14,918	14,801
5.50%, 5/25/2034	10,927	10,220	5.00%, 5/25/2035		14,174	12,012
Chase Mortgage Finance Corp			Wells Fargo Mortgage Backed Securities Trust
6.00%, 5/25/2035	21,000	17,077	6.00%, 4/25/2037		21,000	17,019
Countrywide Alternative Loan Trust						344,494
4.00%, 8/25/2033	1,885	1,829
Countrywide Home Loan Mortgage Pass			TOTAL BONDS		$ 345,812
Through Trust			U.S. GOVERNMENT & GOVERNMENT AGENCY
5.00%, 11/25/2018	12,576	11,664	OBLIGATIONS (69.37%)
5.25%, 5/25/2034	21,500	19,285	Federal Home Loan Mortgage Corporation
5.75%, 12/25/2035	23,235	20,613	(FHLMC) (36.31%)
CS First Boston Mortgage Securities Corp			9.00%, 12/ 1/2008		2	2
5.75%, 4/25/2033	8,888	7,974	6.50%, 2/ 1/2011		12	13
6.00%, 12/25/2033	5,039	4,647	6.50%, 3/ 1/2011		62	63
Fannie Mae			6.50%, 3/ 1/2011		12	12
9.00%, 5/25/2020	71	77	6.50%, 3/ 1/2011		48	49
5.00%, 2/25/2027	2,941	171	6.50%, 3/ 1/2011		104	107
3.85%, 4/25/2027 (a)	62	61	6.50%, 4/ 1/2011		3	3
5.50%, 2/25/2032	19,925	19,803	6.50%, 4/ 1/2011		26	26
7.00%, 4/25/2032	6,649	6,908	7.50%, 3/ 1/2013		944	979
5.50%, 12/25/2035 (a)	21,990	20,766	9.00%, 9/ 1/2016		5	5
Fannie Mae Grantor Trust			6.50%, 11/ 1/2016		594	610
7.30%, 5/25/2010	7,000	7,360	9.00%, 1/ 1/2017		1	1
Fannie Mae Interest Strip			6.00%, 4/ 1/2017		1,139	1,146
7.00%, 4/ 1/2024	310	86	6.00%, 4/ 1/2017		1,372	1,389
Freddie Mac			6.00%, 5/ 1/2017		1,495	1,514
5.52%, 2/15/2021 (a)	83	83
			9.00%, 5/ 1/2017		2	2
6.50%, 8/15/2027	455	470
			4.50%, 4/ 1/2018		6,217	5,961
5.00%, 9/15/2027	13,294	954
			4.00%, 8/ 1/2018		10,733	10,114
6.50%, 5/15/2030	667	667
			5.50%, 11/ 1/2018		5,559	5,565
6.00%, 6/15/2030	234	235
			4.50%, 1/ 1/2019		11,405	10,935
6.50%, 6/15/2031	2,426	2,459
			8.50%, 4/ 1/2019		17	18
5.50%, 10/15/2031	25,000	25,058
			4.50%, 7/ 1/2019		13,495	12,889
4.50%, 5/15/2032	3,488	3,444
			9.00%, 5/ 1/2021		4	5
5.50%, 1/15/2033	9,000	8,913
			9.00%, 9/ 1/2021		3	3
5.50%, 4/15/2033 (a)	15,000	14,509
			6.50%, 12/ 1/2021		2,129	2,174
GMAC Commercial Mortgage Securities Inc
4.50%, 6/25/2033	3,322	3,277	9.00%, 1/ 1/2022		6	7
GSR Mortgage Loan Trust			6.50%, 4/ 1/2022		2,033	2,076
5.00%, 5/25/2033	3,031	3,019	6.50%, 5/ 1/2022		1,188	1,212
6.00%, 2/25/2035	9,998	9,574	9.00%, 8/ 1/2022		2	2
LF Rothschild Mortgage Trust			6.50%, 5/ 1/2023		204	208
9.95%, 9/ 1/2017	37	38	6.50%, 7/ 1/2023		13	14
MASTR Alternative Loans Trust			6.50%, 1/ 1/2024		31	32
5.38%, 1/25/2020 (a)	16,589	15,964	5.50%, 6/ 1/2024		13,768	13,570
Prime Mortgage Trust			7.00%, 7/ 1/2024		17	18
4.75%, 11/25/2019	15,163	14,064	6.50%, 7/ 1/2025		4	4

See accompanying notes

324

Schedule of Investments
Mortgage Securities Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)				OBLIGATIONS (continued)
Federal Home Loan Mortgage Corporation				Federal Home Loan Mortgage Corporation
(FHLMC) (continued)				(FHLMC) (continued)
6.50%, 7/ 1/2025	$ 3 $		3	5.50%, 9/ 1/2035	$ 21,322 $	20,819
6.50%, 9/ 1/2025		6	7	5.50%, 10/ 1/2035	19,279	18,824
6.50%, 9/ 1/2025		3	3	5.00%, 6/ 1/2036	20,618	19,532
6.50%, 9/ 1/2025		1	1	7.00%, 7/ 1/2036	12,912	13,176
6.50%, 10/ 1/2025		24	24	9.50%, 6/ 1/2016	9	10
6.50%, 10/ 1/2025		13	14	9.50%, 4/ 1/2017	15	17
6.50%, 4/ 1/2027		5	5	5.73%, 1/ 1/2037 (a)	12,087	12,059
7.00%, 1/ 1/2028		1,882	1,951	5.86%, 1/ 1/2037 (a)	20,083	20,396
6.50%, 2/ 1/2028		1	1			423,633
6.50%, 3/ 1/2029		368	376
				Federal National Mortgage Association (FNMA) (28.15%)
6.50%, 4/ 1/2029		3,647	3,762	7.00%, 6/ 1/2010	9	9
7.00%, 6/ 1/2029		800	823	7.00%, 9/ 1/2010	5	5
8.50%, 7/ 1/2029		216	232	7.00%, 9/ 1/2010	6	6
8.00%, 12/ 1/2030		112	118	7.00%, 9/ 1/2010	1	1
7.50%, 2/ 1/2031		217	228	7.00%, 9/ 1/2010	1	1
7.00%, 3/ 1/2031		192	197	7.00%, 9/ 1/2010	8	8
6.50%, 4/ 1/2031		1,311	1,342	7.00%, 9/ 1/2010	1	1
7.00%, 4/ 1/2031		606	623	7.00%, 10/ 1/2010	1	1
6.00%, 5/ 1/2031		930	933	7.00%, 10/ 1/2010	3	3
7.00%, 6/ 1/2031		157	161	7.00%, 11/ 1/2010	3	3
6.50%, 10/ 1/2031		589	602	7.00%, 11/ 1/2010	2	2
7.00%, 10/ 1/2031		296	304	7.00%, 5/ 1/2011	9	9
6.50%, 1/ 1/2032		3,170	3,239	7.00%, 3/ 1/2012	3	3
7.00%, 4/ 1/2032		1,165	1,195	6.00%, 12/ 1/2016	1,587	1,606
6.00%, 9/ 1/2032		1,747	1,751	5.50%, 1/ 1/2017	2,938	2,965
5.50%, 11/ 1/2032		5,705	5,586	9.00%, 3/ 1/2017	2	3
5.00%, 2/ 1/2033		7,508	7,127	6.00%, 8/ 1/2017	2,951	2,985
5.50%, 4/ 1/2033		10,849	10,616	5.50%, 12/ 1/2017	3,523	3,537
5.00%, 6/ 1/2033		8,378	7,940	5.50%, 5/ 1/2018	6,677	6,695
4.50%, 8/ 1/2033		4,203	3,822	5.00%, 6/ 1/2018	12,396	12,234
4.50%, 8/ 1/2033		3,929	3,573	6.00%, 8/ 1/2018	1,340	1,356
5.00%, 8/ 1/2033		12,277	11,646	5.00%, 10/ 1/2018	8,160	8,050
5.00%, 8/ 1/2033		12,749	12,079	4.50%, 12/ 1/2018	9,561	9,190
5.50%, 8/ 1/2033		9,190	9,004	9.00%, 1/ 1/2019	1	1
6.00%, 11/ 1/2033		4,850	4,871	5.00%, 2/ 1/2019	2,551	2,514
6.00%, 11/ 1/2033		4,137	4,155	5.00%, 2/ 1/2019	2,812	2,769
5.50%, 12/ 1/2033		11,730	11,468	8.00%, 5/ 1/2022	30	31
6.00%, 12/ 1/2033		4,740	4,753	6.00%, 10/ 1/2022	2,864	2,877
5.50%, 1/ 1/2034		11,503	11,239	8.50%, 2/ 1/2023	8	8
5.00%, 5/ 1/2034		14,286	13,542	6.50%, 9/ 1/2024	1,616	1,644
6.00%, 5/ 1/2034		9,087	9,090	8.00%, 9/ 1/2024	-	1
6.00%, 5/ 1/2034		7,832	7,817	7.50%, 12/ 1/2024	375	397
6.00%, 1/ 1/2035		10,690	10,658	8.00%, 12/ 1/2024	3	4
6.00%, 2/ 1/2035		7,462	7,465	8.00%, 1/ 1/2025	1	1
5.00%, 5/ 1/2035		17,837	16,897	8.00%, 1/ 1/2025	2	2
4.50%, 6/ 1/2035		23,022	20,905	8.50%, 9/ 1/2025	5	5
5.00%, 7/ 1/2035		18,795	17,805	7.00%, 3/ 1/2027	29	31
5.00%, 7/ 1/2035		19,127	18,119	5.34%, 3/ 1/2028 (a)	21	21

See accompanying notes

325

Schedule of Investments
Mortgage Securities Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)				OBLIGATIONS (continued)
Federal National Mortgage Association (FNMA)				Federal National Mortgage Association (FNMA)
(continued)				(continued)
6.50%, 8/ 1/2028	$ 213 $		218	5.50%, 7/ 1/2034	$ 5,207 $		5,081
7.00%, 8/ 1/2028		283	290	6.50%, 7/ 1/2034		2,034	2,071
6.50%, 9/ 1/2028		65	66	6.50%, 7/ 1/2034		3,721	3,804
6.50%, 11/ 1/2028		39	39	5.50%, 9/ 1/2034		16,688	16,314
6.50%, 11/ 1/2028		195	199	6.00%, 9/ 1/2034		8,545	8,527
6.50%, 12/ 1/2028		130	134	5.50%, 1/ 1/2035		10,591	10,365
7.00%, 12/ 1/2028		249	256	5.50%, 2/ 1/2035		13,008	12,723
6.50%, 1/ 1/2029		80	82	5.50%, 3/ 1/2035		14,742	14,428
6.50%, 2/ 1/2029		117	120	6.50%, 2/ 1/2036		12,384	12,560
6.00%, 3/ 1/2029		451	454	6.50%, 5/ 1/2036		14,733	14,944
6.50%, 3/ 1/2029		303	310	6.00%, 10/ 1/2036 (a)		15,463	15,641
6.50%, 4/ 1/2029		559	572	6.00%, 4/ 1/2037		19,143	19,144
7.00%, 4/ 1/2029		105	108	6.00%, 5/ 1/2038		20,587	20,586
7.00%, 7/ 1/2029		267	273				328,395
7.50%, 7/ 1/2029		260	274
				Government National Mortgage Association
7.50%, 2/ 1/2030		171	180	(GNMA) (4.91%)
9.00%, 9/ 1/2030		80	87	13.50%, 9/15/2014		1	2
6.50%, 6/ 1/2031		1,308	1,326	13.50%, 12/15/2014		4	5
6.50%, 6/ 1/2031		386	395	9.50%, 4/15/2016		5	6
6.50%, 6/ 1/2031		166	169	9.50%, 9/15/2016		5	5
6.00%, 8/ 1/2031		2,223	2,233	9.50%, 11/15/2016		26	29
7.00%, 11/ 1/2031		1,503	1,557	9.50%, 7/15/2017		38	41
6.00%, 1/ 1/2032		1,478	1,489	9.50%, 7/15/2017		22	25
6.50%, 1/ 1/2032		503	514	9.50%, 10/15/2017		13	14
6.50%, 3/ 1/2032		1,529	1,560	9.50%, 11/15/2017		25	27
6.50%, 3/ 1/2032		669	684	9.50%, 9/15/2020		21	23
6.50%, 4/ 1/2032		2,137	2,181	9.50%, 8/15/2021		230	254
7.00%, 7/ 1/2032		464	481	9.00%, 11/15/2021		248	270
6.50%, 8/ 1/2032		954	973	8.00%, 4/15/2022		105	112
6.50%, 11/ 1/2032		894	911	6.50%, 3/15/2024		274	279
6.50%, 11/ 1/2032		1,225	1,248	7.50%, 3/15/2024		68	73
6.50%, 11/ 1/2032		413	421	7.00%, 10/15/2027		18	18
6.50%, 12/ 1/2032		2,216	2,262	7.00%, 10/15/2027		61	62
5.50%, 2/ 1/2033		8,768	8,614	7.00%, 10/15/2027		5	5
6.50%, 2/ 1/2033		927	944	7.00%, 10/15/2027		4	4
6.00%, 4/ 1/2033		1,088	1,094	7.00%, 11/15/2027		6	6
5.50%, 5/ 1/2033		703	696	7.00%, 12/15/2027		4	4
5.50%, 5/ 1/2033		4,901	4,805	7.00%, 12/15/2027		4	4
5.50%, 5/ 1/2033		6,709	6,576	7.00%, 2/15/2028		3	3
5.50%, 6/ 1/2033		12,322	12,079	7.00%, 2/15/2028		1	1
6.00%, 1/ 1/2034		5,479	5,492	7.00%, 5/15/2028		1	1
5.50%, 2/ 1/2034		5,732	5,618	7.00%, 5/15/2028		1	1
5.50%, 2/ 1/2034		20,652	20,193	7.00%, 6/15/2028		190	196
6.00%, 2/ 1/2034		1,095	1,096	7.00%, 12/15/2028		197	202
5.50%, 3/ 1/2034		5,422	5,310	7.00%, 1/15/2029		132	135
6.00%, 3/ 1/2034		2,741	2,745	7.00%, 3/15/2029		133	136
5.50%, 4/ 1/2034		4,193	4,104	7.00%, 4/15/2029		114	117
5.00%, 6/ 1/2034		12,432	11,796	7.00%, 4/15/2029		239	245

See accompanying notes

326

Schedule of Investments
Mortgage Securities Fund
October 31, 2008
		Principal					Principal
		Amount	Value				Amount	Value
		(000's)	(000's)				(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				REPURCHASE AGREEMENTS (continued)
OBLIGATIONS (continued)				Money Center Banks (continued)
Government National Mortgage Association				Investment in Joint Trading Account;
(GNMA) (continued)				Morgan Stanley Repurchase Agreement;
7.50%, 8/15/2029	$ 279 $		295	0.15%; dated 10/31/2008 maturing
7.50%, 9/15/2029		128	135	11/03/2008 (collateralized by Sovereign
7.50%, 9/15/2029		171	181	Agency Issues; $3,570,000; 2.63% -
7.50%, 10/15/2029		132	139	4.63%; dated 09/09/09 - 06/12/15)		$ 3,466$		3,466
7.50%, 11/15/2029		121	128					6,931
7.50%, 11/15/2029		99	104	TOTAL REPURCHASE AGREEMENTS			$ 6,931
7.75%, 12/15/2029		54	57
				Total Investments			$ 1,162,026
6.50%, 7/15/2032		937	951	Other Assets in Excess of Liabilities, Net - 0.40%				4,649
6.00%, 8/15/2034		12,089	12,118
				TOTAL NET ASSETS - 100.00%			$ 1,166,675
9.50%, 9/20/2018		107	117
9.50%, 12/20/2020		28	31
9.50%, 1/20/2021		5	6	(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
9.50%, 2/20/2021		3	4
9.50%, 3/20/2021		8	9	Unrealized Appreciation (Depreciation)
6.80%, 4/20/2025		93	95	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
6.00%, 4/20/2026		299	301	of investments held by the fund as of the period end were as follows:
6.00%, 2/20/2029		454	457
				Unrealized Appreciation			$ 2,532
6.50%, 3/20/2031		392	397
				Unrealized Depreciation				(47,079)
6.50%, 4/20/2031		291	295
				Net Unrealized Appreciation (Depreciation)				(44,547)
7.00%, 6/20/2031		202	206
				Cost for federal income tax purposes				1,206,573
6.00%, 5/20/2032 (a)		1,790	1,795
				All dollar amounts are shown in thousands (000's)
5.50%, 7/20/2033		8,827	8,682
6.00%, 7/20/2033		5,811	5,839		Portfolio Summary (unaudited)
5.50%, 2/20/2034		9,483	9,318
				Sector				Percent
5.50%, 3/20/2034		8,981	8,825
				Mortgage Securities				98.90%
6.50%, 4/20/2034		2,444	2,468	Financial				0.59%
6.50%, 5/20/2034		1,978	1,997	Government				0.11%
			57,255	Other Assets in Excess of Liabilities, Net				0.40%
				TOTAL NET ASSETS				100.00%
TOTAL U.S. GOVERNMENT & GOVERNMENT
AGENCY OBLIGATIONS		$ 809,283

REPURCHASE AGREEMENTS (0.59%)
Money Center Banks (0.59%)

Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $3,570,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)	$ 3,466$	3,465

See accompanying notes

327

Schedule of Investments
Preferred Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (0.58%)			PREFERRED STOCKS (continued)
Publicly Traded Investment Fund (0.58%)			Diversified Banking Institutions (continued)
BlackRock Preferred and Corporate Income			Royal Bank of Scotland Group PLC 6.60%;
Strategies Fund Inc	25,500 $	179	Series S	339,600 $	3,726
BlackRock Preferred Income Strategies Fund			Royal Bank of Scotland Group PLC 6.75%;
Inc	242,500	1,964	Series Q	322,439	3,576
Blackrock Preferred Opportunity Trust	121,600	1,035	Royal Bank of Scotland Group PLC 7.25%;
Flaherty & Crumrine/Claymore Preferred			Series H	58,000	702
Securities Income Fund Inc	335,900	2,956	Royal Bank of Scotland Group PLC 7.25%;
Flaherty & Crumrine/Claymore Total Return			Series T	201,200	2,392
Fund Inc	109,800	999			53,722
		7,133
			Diversified Financial Services (2.01%)
TOTAL COMMON STOCKS	$ 7,133		Citigroup Capital IX	89,500	1,436
			Citigroup Capital VII	342,100	5,901
PREFERRED STOCKS (69.78%)
			Citigroup Capital VIII	43,879	761
Cable TV (1.43%)
			Citigroup Capital X	127,400	1,886
Comcast Corp 6.63%	341,754	6,186
			Citigroup Capital XI	131,600	1,944
Comcast Corp 7.00%; Series B	289,300	5,803
			Citigroup Capital XIX	35,200	595
Comcast Corp 7.00%	282,045	5,714
			Citigroup Capital XV	63,900	967
		17,703
			Citigroup Capital XVI	83,900	1,250
Cellular Telecommunications (0.04%)			Citigroup Capital XX	163,500	3,108
US Cellular Corp	31,500	522	General Electric Capital Corp 5.88%	39,648	814
			General Electric Capital Corp 6.00%	100,800	2,102
Commercial Banks (5.90%)
			General Electric Capital Corp 6.05%	98,200	2,108
ASBC Capital I	97,601	1,732
			General Electric Capital Corp 6.10%	19,000	410
BancorpSouth Capital Trust I	50,400	1,189
			General Electric Capital Corp 6.45%	15,000	338
Banesto Holdings (a)	11,700	306
			General Electric Capital Corp 6.50% (b)	19,900	442
Barclays Bank PLC 6.63%	21,000	344
			Harris Preferred Capital Corp	53,500	869
Barclays Bank PLC 7.10%	989,135	15,589
					24,931
Barclays Bank PLC 7.75%	118,899	1,977
Barclays Bank PLC 8.13%	204,569	3,298	Electric - Integrated (5.60%)
BB&T Capital Trust V (b)	936,200	22,684	Alabama Power Co - Series 2007B	215,722	4,951
CoBank ACB (a)(b)	202,000	10,220	Alabama Power Co - Series II	363,817	8,302
M&T Capital Trust IV	347,400	8,126	Dte Energy Trust I	18,300	399
National Bank of Greece SA (b)	371,700	6,873	Entergy Arkansas Inc	2,000	49
Regions Financing Trust II	27,000	542	Entergy Louisiana LLC	65,800	1,523
Zions Capital Trust B	3,000	65	Entergy Mississippi Inc 6.00%	4,100	95
		72,945	Entergy Mississippi Inc 7.25%	75,200	1,728
			FPL Group Capital Inc 6.60%	93,500	2,160
Diversified Banking Institutions (4.34%)
			FPL Group Capital Inc 7.45%	5,000	122
Citigroup Inc 8.13%	814,000	13,716
			FPL Group Capital Trust I	284,769	6,479
HSBC Holdings PLC 6.20%	490,400	8,680
			Georgia Power Capital Trust VII	108,500	2,360
HSBC Holdings PLC 8.13%	6,600	152
			Georgia Power Co 5.70%	7,800	179
JP Morgan Chase & Co	286,200	7,126
			Georgia Power Co 5.75%	10,300	224
Royal Bank of Scotland Group PLC 5.75%;
Series L	207,773	2,182	Georgia Power Co 5.90%	61,830	1,353
Royal Bank of Scotland Group PLC 6.13%;			Georgia Power Co 6.00%	6,700	147
Series R	319,700	3,389	Gulf Power Co	9,000	202
Royal Bank of Scotland Group PLC 6.25%;			Mississippi Power Co	19,800	404
Series P	169,800	1,810	PPL Capital Funding Inc	437,800	10,407
Royal Bank of Scotland Group PLC 6.35%;			PPL Energy Supply LLC	211,900	5,170
Series N	414,632	4,818
			Xcel Energy Inc 7.60%	966,289	23,036
Royal Bank of Scotland Group PLC 6.40%;
Series M	133,800	1,453			69,290

See accompanying notes

328

Schedule of Investments
Preferred Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
PREFERRED STOCKS (continued)			PREFERRED STOCKS (continued)
Fiduciary Banks (0.24%)			Insurance Brokers (0.13%)
BNY Capital V	138,975 $	2,971	ABN AMRO North America Capital
			Funding Trust I (a)	2,500 $	1,558
Finance - Consumer Loans (0.61%)
HSBC Finance Corp 6.00%	25,500	467	Investment Management & Advisory Services (1.78%)
HSBC Finance Corp 6.88%	336,955	7,096	Deutsche Bank Contingent Capital Trust II	1,443,200	21,561
		7,563	Deutsche Bank Contingent Capital Trust III	30,300	521
					22,082
Finance - Investment Banker & Broker (3.26%)
Credit Suisse Guernsey Ltd	481,000	9,206	Life & Health Insurance (3.17%)
JP Morgan Chase Capital XI	108,600	2,254	Delphi Financial Group Inc 7.38%	481,700	4,836
JP Morgan Chase Capital XII	1,000	20	Delphi Financial Group Inc 8.00%	52,900	699
JP Morgan Chase Capital XIV	26,000	516	Lincoln National Capital VI	123,937	1,943
JP Morgan Chase Capital XIX	4,600	95	Lincoln National Corp 6.75%	4,600	67
JP Morgan Chase Capital XXVI	160,800	3,761	PLC Capital Trust III	12,500	156
Merrill Lynch & Co Inc	325,700	6,690	PLC Capital Trust IV	41,400	476
Merrill Lynch Capital Trust III 7.375%	8,700	165	PLC Capital Trust V	267,300	3,015
Merrill Lynch Preferred Capital Trust IV	85,500	1,437	Protective Life Corp	561,700	7,190
Merrill Lynch Preferred Capital Trust V	140,294	2,373	Prudential Financial Inc	847,700	16,411
Morgan Stanley Capital Trust III	103,700	1,548	Prudential PLC 6.50%	132,682	1,810
Morgan Stanley Capital Trust IV	194,171	2,833	Prudential PLC 6.75%	158,492	2,137
Morgan Stanley Capital Trust V	195,250	2,577	Torchmark Capital Trust III	23,100	437
Morgan Stanley Capital Trust VI	304,930	4,498			39,177
Morgan Stanley Capital Trust VII	141,000	2,029	Money Center Banks (2.54%)
Morgan Stanley Capital Trust VIII	26,800	378	BNY Capital IV	45,300	1,005
		40,380	Fleet Capital Trust IX	37,000	607
Finance - Mortgage Loan/Banker (0.69%)			JP Morgan Chase Capital XVI	14,700	306
Countrywide Capital V	343,197	5,749	National Westminster Bank Plc	52,700	685
Countrywide Financial Corp	167,422	2,737	Santander Finance Preferred SA Unipersonal
			6.00%	157,000	1,648
		8,486
			Santander Finance Preferred SA Unipersonal
Finance - Other Services (0.51%)			6.41%	15,231	331
ABN AMRO Capital Funding Trust V	151,900	1,891	Santander Finance Preferred SA Unipersonal
ABN AMRO Capital Funding Trust VII	244,600	2,979	6.50%	1,105,756	17,692
National Rural Utilities Cooperative Finance			Santander Finance Preferred SA Unipersonal
Corp 5.95%	14,300	253	6.80%	532,504	9,106
National Rural Utilities Cooperative Finance					31,380
Corp 6.10%	46,800	806	Multi-Line Insurance (4.02%)
National Rural Utilities Cooperative Finance			Aegon NV 4.00%	67,500	549
Corp 6.75%	20,300	405
			Aegon NV 6.375%	508,865	5,089
		6,334
			Aegon NV 6.50%	38,800	384
Financial Guarantee Insurance (0.22%)			Aegon NV 7.25%	113,900	1,300
AMBAC Financial Group Inc 5.88%	20,336	137	Allianz SE	702,550	13,665
AMBAC Financial Group Inc 5.95%	26,917	196	ING Groep NV 6.13%	157,300	1,947
Financial Security Assurance Holdings Ltd			ING Groep NV 6.20%	22,200	275
5.60%	67,500	375
			ING Groep NV 6.38%	601,100	7,580
Financial Security Assurance Holdings Ltd
			ING Groep NV 7.05%	382,438	5,224
6.25%	342,525	1,935
Financial Security Assurance Holdings Ltd			ING Groep NV 7.20%	77,500	1,063
6.88%	14,800	120	ING Groep NV 7.38%	638,200	9,254
		2,763	ING Groep NV 8.50%	118,400	2,040
			MetLife Inc 6.50%	4,700	77

See accompanying notes

329

Schedule of Investments
Preferred Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
PREFERRED STOCKS (continued)			PREFERRED STOCKS (continued)
Multi-Line Insurance (continued)			Regional Banks (continued)
XL Capital Ltd (c)	200,000 $	1,251	Wells Fargo Capital XII	242,000 $	5,989
		49,698	Wells Fargo Capital XIV (b)	371,748	9,308
					136,548
Multimedia (0.54%)
Viacom Inc	387,400	6,694	Reinsurance (1.67%)
			Everest Re Capital Trust II	329,119	4,838
Oil Company - Exploration & Production (0.27%)			PartnerRe Ltd 6.50%	182,466	3,074
Nexen Inc	184,060	3,317	PartnerRe Ltd 6.75%	129,200	2,261
			RenaissanceRe Holdings Ltd - Series B	66,100	1,172
Property & Casualty Insurance (2.13%)
			RenaissanceRe Holdings Ltd - Series C	209,035	2,954
Arch Capital Group Ltd 7.88%	56,500	1,020
			RenaissanceRe Holdings Ltd - Series D	388,800	6,349
Arch Capital Group Ltd 8.00%	548,082	10,496
					20,648
Berkley W R Capital Trust	779,125	11,329
Markel Corp	174,200	3,569	REITS - Apartments (0.73%)
		26,414	BRE Properties Inc - Series C	201,177	3,213
			BRE Properties Inc - Series D	12,876	206
Regional Banks (11.04%)
			Equity Residential	6,000	102
BAC Capital Trust I	27,100	555
			UDR Inc	325,500	5,533
BAC Capital Trust II	92,500	1,866
					9,054
BAC Capital Trust III	23,400	480
BAC Capital Trust IV	23,800	415	REITS - Diversified (3.49%)
BAC Capital Trust V	58,600	1,025	Duke Realty Corp 6.50%	267,000	2,921
BAC Capital Trust VIII	126,100	2,333	Duke Realty Corp 6.60%	55,200	607
BAC Capital Trust X	153,200	3,176	Duke Realty Corp 6.63%	203,200	2,388
BAC Capital Trust XII	210,500	4,385	Duke Realty Corp 6.95%	369,911	4,864
Bank One Capital VI	154,200	3,169	Duke Realty Corp 7.25%	142,932	1,658
Fifth Third Capital Trust VI	149,400	2,269	Duke Realty Corp 8.38%	747,029	10,682
Fleet Capital Trust VIII	35,300	671	PS Business Parks Inc Series H	162,200	2,511
KeyCorp Capital IX	71,000	1,012	PS Business Parks Inc Series I	159,400	2,327
KeyCorp Capital V	18,300	258	PS Business Parks Inc Series K	89,100	1,537
Keycorp Capital VI	3,600	60	PS Business Parks Inc Series L	2,400	39
KeyCorp Capital VIII	264,700	4,015	PS Business Parks Inc Series M	18,700	282
National City Capital Trust II	214,908	3,438	PS Business Parks Inc Series O	36,900	583
PNC Capital Trust C	745,900	17,156	PS Business Parks Inc Series P	521,600	7,798
PNC Capital Trust D	538,200	10,592	Vornado Realty Trust - Series F	236,848	3,816
SunTrust Capital IX	542,600	11,612	Vornado Realty Trust - Series G	2,000	31
Union Planters Preferred Funding Corp (a)	10	350	Vornado Realty Trust - Series H	27,900	446
USB Capital VI	696,800	13,065	Vornado Realty Trust - Series I	41,600	664
USB Capital VII	103,000	2,000			43,154
USB Capital VIII	19,000	390	REITS - Mortgage (0.07%)
USB Capital X	61,800	1,298	PFGI Capital Corp	48,300	874
USB Capital XI	211,192	4,526
USB Capital XII	68,100	1,362	REITS - Office Property (0.67%)
Wachovia Capital Trust IV	28,952	465	HRPT Properties Trust - Series B	52,051	650
Wachovia Capital Trust IX	531,400	8,609	HRPT Properties Trust - Series C	726,400	7,700
Wachovia Corp 7.25%	395,100	6,559			8,350
Wells Fargo Capital IV	108,621	2,657	REITS - Shopping Centers (4.18%)
Wells Fargo Capital IX	179,843	3,622	Developers Diversified Realty Corp 7.50%	75,112	751
Wells Fargo Capital VII	366,139	7,286	Developers Diversified Realty Corp 8.00%	134,100	1,468
Wells Fargo Capital VIII	11,700	231	Kimco Realty Corp 6.65%	3,400	60
Wells Fargo Capital XI	16,400	344	Kimco Realty Corp 7.75%	1,321,100	22,776

See accompanying notes

330

Schedule of Investments
Preferred Securities Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
PREFERRED STOCKS (continued)			PREFERRED STOCKS (continued)
REITS - Shopping Centers (continued)			Special Purpose Entity (continued)
Regency Centers Corp 6.70%	274,600 $	4,619	CORTS Trust for First Union Institutional
Regency Centers Corp 7.25%	244,300	4,099	Capital I	41,000 $	892
Regency Centers Corp 7.45%	228,000	3,899	CORTS Trust for General Electric Capital
			Corp	10,800	212
Weingarten Realty Investors 6.50%	708,000	10,797
			CORTS Trust for Goldman Sachs Capital I	28,700	485
Weingarten Realty Investors 6.75%	2,400	37
			CORTS Trust for IBM - Series IV	1,900	49
Weingarten Realty Investors 6.95%	196,000	3,234
			CORTS Trust for SunAmerica	14,016	115
		51,740
			CORTS Trust II for Bellsouth
REITS - Single Tenant (0.69%)			Telecommunications (d)	29,600	622
Realty Income Corp - Series D	495,093	8,268	CORTS Trust II for Goldman Sachs Capital I	12,700	211
Realty Income Corp - Series E	12,900	239	CORTS Trust III for Verizon Global Funding
		8,507	Corp	1,300	30
			CORTS Trust VI for IBM Debentures	2,800	65
REITS - Storage (2.75%)			CORTS-IBM	6,200	138
Public Storage Inc 6.18%; Series D	29,500	482
			Deutsche Bank Capital Funding Trust VIII	696,900	11,178
Public Storage Inc 6.25%; Series Z	17,700	310
			Deutsche Bank Capital Funding Trust X	14,700	240
Public Storage Inc 6.45%; Series F	399,600	6,693
			Merrill Lynch Capital Trust I	271,700	4,456
Public Storage Inc 6.45%; Series X	95,100	1,663
			Merrill Lynch Capital Trust II	35,700	577
Public Storage Inc 6.50%; Series W	21,800	373
			PreferredPlus TR-CCR1 5.75%; Series GSG2	16,400	248
Public Storage Inc 6.60%; Series C	90,100	1,524
			PreferredPlus TR-CCR1 6.00%; Series GSC3	44,400	610
Public Storage Inc 6.63%; Series M	292,200	5,055
			PreferredPlus TR-CCR1 6.00%; Series GSC4	31,200	456
Public Storage Inc 6.75%; Series E	22,028	391
			PreferredPlus TR-CCR1 6.00%; Series GSG1	13,000	212
Public Storage Inc 6.75%; Series L	97,400	1,705
			PreferredPlus TR-CCR1 7.63%; Series VER1	6,700	154
Public Storage Inc 6.85%; Series Y	98,900	1,870
			SATURNS - Series VZ; 6.130%	10,800	237
Public Storage Inc 6.95%; Series H	37,000	668
			SATURNS 2002-11 6.00%; Series AIG	921	6
Public Storage Inc 7.00%; Series G	45,500	884
			SATURNS 2003-06 6.00%; Series GS	3,300	53
Public Storage Inc 7.00%; Series N	57,100	1,051
			SATURNS 2003-11 5.63%; Series GS	12,400	176
Public Storage Inc 7.25%; Series I	107,500	2,139
			SATURNS 2003-13 6.25%; Series CSFB	13,800	226
Public Storage Inc 7.25%; Series K	443,733	8,697
			SATURNS 2004-04 6.00%; Series GS	182,100	2,730
Public Storage Inc 7.63%; Series T	24,100	492
			SATURNS 2004-06 6.00%; Series GS	177,900	2,624
		33,997
			SATURNS 2004-2 5.75%; Series GS	26,300	426
REITS - Warehouse & Industrial (0.68%)			Trust Certificates Series 2001-2	20,010	471
AMB Property Corp - Series L	137,700	1,792			33,329
AMB Property Corp - Series M	52,800	651
			Telecommunication Services (0.68%)
AMB Property Corp - Series P	196,400	2,818
			Centaur Funding Corp (a)	10,000	8,425
First Industrial Realty Trust Inc - Series J	174,600	1,798
First Industrial Realty Trust Inc - Series K	12,100	145	Telephone - Integrated (0.09%)
Prologis - Series G	93,600	1,217	AT&T Inc	45,400	1,085
		8,421
			Television (0.92%)
Special Purpose Entity (2.69%)
			CBS Corp 6.75%	560,800	8,261
Citigroup Capital XVII	124,100	1,847
			CBS Corp 7.25%	189,900	3,082
Corporate-Backed Trust Certificates 6.00%;
Series GS	143,900	2,049			11,343
Corporate-Backed Trust Certificates 6.00%	5,900	94	TOTAL PREFERRED STOCKS	$ 863,405
Corporate-Backed Trust Certificates 6.30%	3,300	51
Corporate-Backed Trust Certificates - Series
BMY	15,700	337
Corporate-Backed Trust Certificates - Series
VZ	30,300	691
CORTS Trust for AIG	12,216	49
CORTS Trust for Bristol Meyers Squibb	14,200	312

See accompanying notes

331

Schedule of Investments
Preferred Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (21.40%)			BONDS (continued)
Commercial Banks (4.34%)			Diversified Banking Institutions (continued)
Banponce Trust I			Royal Bank of Scotland Group PLC (continued)
8.33%, 2/ 1/2027	$ 1,000 $	782	7.65%, 8/29/2049 (e)	$ 1,200 $		661
Barclays Bank PLC						24,594
8.55%, 9/29/2049 (a)(e)	3,900	3,012
			Diversified Financial Services (1.02%)
BB&T Capital Trust IV
			General Electric Capital Corp
6.82%, 6/12/2057 (e)	4,000	2,228
			6.38%, 11/15/2067 (e)		19,500	12,609
BOI Capital Funding No. 3
6.11%, 2/ 4/2016 (a)(e)	5,000	1,648
			Electric - Integrated (0.18%)
Caisse Nationale des Caisses
			FPL Group Capital Inc 6.35%
6.75%, 1/27/2049	1,500	753
			6.35%, 10/ 1/2066 (e)		4,000	2,280
CBA Capital Trust I
5.81%, 12/31/2049 (a)	10,500	6,356
			Finance - Consumer Loans (0.26%)
CBG Florida REIT Corp			HSBC Finance Capital Trust IX
7.11%, 5/29/2049 (a)(e)	4,000	818	5.91%, 11/30/2035		6,000	3,277
Centura Capital Trust I
8.85%, 6/ 1/2027 (a)	3,000	2,825	Finance - Credit Card (0.04%)
Credit Agricole SA/London			Capital One Capital III
6.64%, 5/31/2049 (a)(e)	11,500	5,510	7.69%, 8/15/2036		1,000	477
First Empire Capital Trust I
8.23%, 2/ 1/2027	2,000	1,440	Finance - Investment Banker & Broker (0.31%)
First Empire Capital Trust II			JP Morgan Chase Capital XXV
8.28%, 6/ 1/2027	2,000	1,445	6.80%, 10/ 1/2037		3,050	2,195
First Hawaiian Capital I			JPMorgan Chase Capital XXI
8.34%, 7/ 1/2027	5,000	3,814	3.74%, 2/ 2/2037 (e)		2,000	930
First Midwest Capital Trust I			Schwab Capital Trust I
6.95%, 12/ 1/2033	1,000	791	7.50%, 11/15/2037 (e)		1,000	694
HBOS PLC						3,819
6.41%, 10/ 1/2035 (a)(e)	4,400	1,834
			Investment Management & Advisory Services (0.05%)
North Fork Capital Trust II
8.00%, 12/15/2027	3,450	2,919	Kleinwort Benson Group PLC
			3.25%, 6/29/2049 (e)		1,000	565
Northgroup Preferred Capital Corp
6.38%, 12/29/2049 (a)(e)	10,000	5,769
			Life & Health Insurance (0.77%)
Popular North America Capital Trust I
6.56%, 9/15/2034	1,000	542	Great West Life & Annuity Insurance Capital I
			6.63%, 11/15/2034 (a)		4,000	2,838
Regions Financing Trust II
6.63%, 5/15/2047	3,000	1,029	Great West Life & Annuity Insurance Co
			7.15%, 5/16/2046 (a)(e)		4,750	3,224
Shinsei Finance II
7.16%, 7/29/2049 (a)(e)	6,200	2,513	Nationwide Financial Services
			6.75%, 5/15/2037		1,000	537
Standard Chartered PLC
7.01%, 12/29/2049 (a)	9,500	5,104	Prudential Financial Inc
			8.88%, 6/15/2038 (e)		5,000	2,879
Swedbank AB
9.00%, 12/29/2049 (a)(e)	2,000	1,758				9,478
Westpac Capital Trust III			Money Center Banks (2.87%)
5.82%, 9/30/2013 (a)	1,300	856	ABN Amro North American Holding Preferred
		53,746	Capital Repackage Trust I
			6.52%, 12/29/2049 (a)(e)		9,600	8,323
Diversified Banking Institutions (1.99%)
			BankAmerica Institutional Capital A
Citigroup Inc			8.07%, 12/31/2026 (a)		500	390
8.40%, 4/29/2049	5,000	3,475
			BBVA International Preferred SA Unipersonal
JP Morgan Chase & Co			5.92%, 12/29/2049 (e)		7,600	3,565
7.90%, 4/29/2049 (e)	21,700	17,587
			Dresdner Funding Trust I
Royal Bank of Scotland Group PLC			8.15%, 6/30/2031 (a)		4,200	2,010
7.64%, 3/31/2049 (e)(f)	6,000	2,871
			HBOS Capital Funding LP
			6.07%, 6/29/2049 (a)(e)		10,000	4,394

See accompanying notes

332

Schedule of Investments
Preferred Securities Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Money Center Banks (continued)			Regional Banks (continued)
HSBC Capital Funding LP/Jersey Channel			PNC Preferred Funding Trust I
Islands			8.70%, 2/28/2049 (a)(e)	$ 5,500 $		4,437
10.18%, 12/29/2049 (a)(e)	$ 6,000 $	4,767	6.52%, 12/31/2049 (a)(e)		6,700	4,725
KBC Bank Funding Trust III			Wells Fargo Capital XV
9.86%, 11/29/2049 (a)(e)	2,700	2,309	9.75%, 12/29/2049 (e)		11,000	10,670
Mizuho Finance Group						26,609
8.38%, 1/29/2049	9,000	8,331
UBS Preferred Funding Trust I			Savings & Loans - Thrifts (0.00%)
8.62%, 10/29/2049	2,000	1,483	Washington Mutual Preferred Funding Cayman
		35,572	7.25%, 3/29/2049 (a)(d)		5,759	7
			Washington Mutual Preferred Funding LLC
Mortgage Banks (0.18%)			6.67%, 12/29/2049 (a)(d)(e)		3,221	4
Abbey National Capital Trust I						11
8.96%, 12/29/2049	2,900	2,191
			Special Purpose Banks (0.13%)
Multi-Line Insurance (2.94%)			Agfirst Farm Credit Bank
Allstate Corp/The			7.30%, 12/15/2008 (a)(d)		2,000	1,611
6.50%, 5/15/2057	2,000	1,094
AXA SA			Special Purpose Entity (1.94%)
6.46%, 12/31/2049 (a)(e)	12,300	6,751	BankBoston Capital Trust IV
Hartford Financial Services Group Inc			3.41%, 6/ 8/2028 (e)		5,000	2,490
8.13%, 6/15/2068 (e)	13,000	6,488	BayernLB Capital Trust I
MetLife Capital Trust IV			6.20%, 12/31/2049		8,230	3,762
7.88%, 12/15/2037 (a)	19,500	10,920	CA Preferred Trust
MetLife Capital Trust X			7.00%, 1/29/2049		1,400	810
9.25%, 4/ 8/2068 (a)	6,000	3,735	Capital One Capital IV
MMI Capital Trust I			6.75%, 2/17/2037		2,000	942
7.63%, 12/15/2027	1,073	994	Glen Meadow Pass-Through Trust
USF&G Capital III			6.51%, 2/12/2067 (a)(e)		5,000	2,445
8.31%, 7/ 1/2046 (a)	2,000	1,606	Goldman Sachs Capital I
XL Capital Ltd			6.35%, 2/15/2034		500	309
6.50%, 12/31/2049 (e)	17,000	4,760	ILFC E-Capital Trust II
		36,348	6.25%, 12/21/2065 (a)(e)		4,000	1,295
			JP Morgan Chase Capital XX
Mutual Insurance (0.20%)			6.55%, 9/29/2036		850	595
Liberty Mutual Group Inc			Old Mutual Capital Funding
7.80%, 3/15/2037 (a)	2,000	986	8.00%, 5/29/2049		4,000	2,333
Oil Insurance Ltd			QBE Capital Funding II LP
7.56%, 12/29/2049 (a)(e)	3,000	1,518	6.80%, 6/29/2049 (a)(e)(f)		21,200	9,010
		2,504				23,991
Property & Casualty Insurance (1.46%)			Tools - Hand Held (0.42%)
Chubb Corp			Stanley Works Capital Trust I
6.38%, 3/29/2037 (e)	9,000	5,747	5.90%, 12/ 1/2045 (e)		7,000	5,136
Everest Reinsurance Holdings Inc
6.60%, 5/15/2037 (e)	6,700	3,077	Transport - Rail (0.15%)
Progressive Corp/The			BNSF Funding Trust I
6.70%, 6/15/2037	15,550	9,260	6.61%, 12/15/2055 (e)		3,150	1,912
		18,084	TOTAL BONDS		$ 264,814
Regional Banks (2.15%)
KeyCorp Capital II
6.88%, 3/17/2029	5,000	2,654
PNC Financial Services Group Inc
8.25%, 5/29/2049 (e)	5,000	4,123

See accompanying notes

333

Schedule of Investments
Preferred Securities Fund

October 31, 2008

		Principal
		Amount	Value
		(000's)	(000's)
REPURCHASE AGREEMENTS (7.25%)
Money Center Banks (7.25%)
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $92,411,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)	$ 89,720$		89,720
TOTAL REPURCHASE AGREEMENTS		$ 89,720
Total Investments		$ 1,225,072
Other Assets in Excess of Liabilities, Net - 0.99%			12,274
TOTAL NET ASSETS - 100.00%		$ 1,237,346

(a)	Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. Unless otherwise indicated, these securities are not considered illiquid. At the end of the period, the value of these securities totaled $136,167 or 11.00% of net assets.
(b)	Non-Income Producing Security
(c)	Market value is determined in accordance with procedures established in good faith by the Board of Directors. At the end of the period, the value of these securities totaled $1,251 or 0.10% of net assets.
(d)	Security is Illiquid
(e)	Variable Rate. Rate shown is in effect at October 31, 2008.
(f)	Security purchased on a when-issued basis.

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 16,543
Unrealized Depreciation		(455,118)
Net Unrealized Appreciation (Depreciation)		(438,575)
Cost for federal income tax purposes		1,665,942
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Financial		88.11%
Utilities		5.78%
Communications		3.70%
Exchange Traded Funds		0.58%
Industrial		0.57%
Energy		0.27%
Other Assets in Excess of Liabilities, Net		0.99%
TOTAL NET ASSETS		100.00%

See accompanying notes

334

Schedule of Investments
Real Estate Securities Fund
October 31, 2008
	Shares	Value			Shares	Value
	Held	(000's)			Held	(000's)
COMMON STOCKS (94.22%)			COMMON STOCKS (continued)
REITS - Apartments (16.40%)			REITS - Single Tenant (2.20%)
American Campus Communities Inc	607,812 $	15,791	National Retail Properties Inc		1,458,330 $	26,002
AvalonBay Communities Inc	653,576	46,417
Equity Residential	1,058,330	36,968	REITS - Storage (8.54%)
Essex Property Trust Inc	488,439	47,525	Public Storage		1,239,170	100,992
Home Properties Inc	748,660	30,313
			REITS - Warehouse & Industrial (0.87%)
Mid-America Apartment Communities Inc	480,942	16,948
			EastGroup Properties Inc		308,630	10,333
		193,962
			TOTAL COMMON STOCKS		$ 1,114,607
REITS - Diversified (11.21%)
					Principal
Digital Realty Trust Inc	804,710	26,942
					Amount	Value
Entertainment Properties Trust	820,332	30,721			(000's)	(000's)
PS Business Parks Inc	150,780	6,826
			SHORT TERM INVESTMENTS (4.24%)
Vornado Realty Trust	964,780	68,065
			Commercial Paper (4.24%)
		132,554	Investment in Joint Trading Account; HSBC
REITS - Healthcare (13.91%)			Funding
			0.25%, 11/ 3/2008	$ 25,090 $		25,090
HCP Inc	1,257,931	37,650
			Investment in Joint Trading Account;
Health Care REIT Inc	813,038	36,188
			Prudential Funding
LTC Properties Inc	126,880	3,067	0.30%, 11/ 3/2008		25,089	25,089
Nationwide Health Properties Inc	627,720	18,731				50,179
Omega Healthcare Investors Inc	870,090	13,112
Ventas Inc	1,549,074	55,860	TOTAL SHORT TERM INVESTMENTS		$ 50,179
		164,608	REPURCHASE AGREEMENTS (2.32%)
			Money Center Banks (2.32%)
REITS - Hotels (1.97%)
			Investment in Joint Trading Account; Bank
Host Hotels & Resorts Inc	2,211,937	22,871
			of America Repurchase Agreement;
Sunstone Hotel Investors Inc	73,091	479	0.15%; dated 10/31/2008 maturing
		23,350	11/03/2008 (collateralized by Sovereign
			Agency Issues; $28,300,000; 2.75% -
REITS - Manufactured Homes (1.32%)			5.38%; dated 11/28/08 - 02/13/17)	$ 27,476$		27,476
Equity Lifestyle Properties Inc	372,162	15,627
			TOTAL REPURCHASE AGREEMENTS		$ 27,476
REITS - Office Property (12.27%)			Total Investments		$ 1,192,262
Alexandria Real Estate Equities Inc	418,589	29,101	Liabilities in Excess of Other Assets, Net - (0.78)%			(9,279)
Boston Properties Inc	1,304,331	92,451	TOTAL NET ASSETS - 100.00%		$ 1,182,983
Corporate Office Properties Trust SBI MD	239,280	7,439
Douglas Emmett Inc	1,069,548	16,150
		145,141
			Unrealized Appreciation (Depreciation)
REITS - Regional Malls (13.17%)			The net federal income tax unrealized appreciation (depreciation) and federal tax cost
General Growth Properties Inc	1,629,246	6,745	of investments held by the fund as of the period end were as follows:
Simon Property Group Inc	1,798,288	120,539
Taubman Centers Inc	859,215	28,543	Unrealized Appreciation		$ 19,853
		155,827	Unrealized Depreciation			(399,504)
			Net Unrealized Appreciation (Depreciation)			(379,651)
REITS - Shopping Centers (12.36%)
			Cost for federal income tax purposes			1,571,913
Acadia Realty Trust	1,078,436	19,487	All dollar amounts are shown in thousands (000's)
Federal Realty Investment Trust	887,458	54,375
Kimco Realty Corp	1,244,480	28,100
Saul Centers Inc	279,990	10,245
Tanger Factory Outlet Centers	940,100	34,004
		146,211

See accompanying notes

335

	Schedule of Investments
	Real Estate Securities Fund
	October 31, 2008
Portfolio Summary (unaudited)
REIT	Percent
REITS - Apartments	16.40%
REITS - Healthcare	13.91%
REITS - Regional Malls	13.17%
REITS - Shopping Centers	12.36%
REITS - Office Property	12.27%
REITS - Diversified	11.21%
REITS - Storage	8.54%
Money Center Banks	2.32%
REITS - Single Tenant	2.20%
Finance - Other Services	2.12%
Special Purpose Entity	2.12%
REITS - Hotels	1.97%
REITS - Manufactured Homes	1.32%
REITS - Warehouse & Industrial	0.87%
Liabilities in Excess of Other Assets, Net	(0.78%)
TOTAL NET ASSETS	100.00%

See accompanying notes

336

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (84.47%)			BONDS (continued)
Agricultural Operations (0.70%)			Asset Backed Securities (continued)
Bunge Ltd Finance Corp			Marriott Vacation Club Owner Trust
4.38%, 12/15/2008 (a)	$ 700 $	698	5.81%, 10/20/2029 (b)	$ 221 $		207
Cargill Inc			Nomura Asset Acceptance Corp
5.20%, 1/22/2013 (b)	650	591	3.48%, 1/25/2036 (b)(c)		260	79
		1,289	Popular ABS Mortgage Pass-Through Trust
			3.52%, 11/25/2035 (a)(c)		181	179
Airlines (0.34%)
			Swift Master Auto Receivables Trust
American Airlines Inc			4.66%, 6/15/2012 (c)		425	371
7.25%, 2/ 5/2009	275	270
						8,578
Delta Air Lines Inc
6.62%, 3/18/2011	416	357	Auto - Car & Light Trucks (0.23%)
		627	Daimler Finance North America LLC
			5.88%, 3/15/2011		525	428
Appliances (0.11%)
Whirlpool Corp			Auto/Truck Parts & Equipment - Original (0.09%)
3.32%, 6/15/2009 (c)	200	200
			Tenneco Inc
			10.25%, 7/15/2013		206	175
Asset Backed Securities (4.65%)
Carrington Mortgage Loan Trust			Automobile Sequential (2.81%)
3.54%, 12/25/2035 (c)	475	433
			Capital Auto Receivables Asset Trust
Caterpillar Financial Asset Trust			4.59%, 10/15/2009 (a)(c)		136	136
4.09%, 12/27/2010 (a)	400	396
			5.34%, 1/15/2010 (a)(b)(c)		339	336
Chase Funding Mortgage Loan Asset-Backed
			4.79%, 3/15/2010 (a)(c)		294	291
Certificates
3.49%, 12/25/2033 (c)	95	84	4.93%, 6/15/2010 (a)(c)		185	182
Citigroup Mortgage Loan Trust Inc			5.52%, 3/15/2011 (c)		500	467
3.41%, 3/25/2037 (c)	400	344	Ford Credit Auto Owner Trust
CNH Equipment Trust			5.47%, 9/15/2012 (c)		350	258
5.41%, 9/15/2010 (a)(c)	137	137	5.60%, 10/15/2012		435	359
5.76%, 4/15/2011 (a)(c)	800	790	5.69%, 11/15/2012 (c)		430	356
4.12%, 5/15/2012	600	573	Honda Auto Receivables Owner Trust
Countrywide Asset-Backed Certificates			5.46%, 5/23/2011		850	846
3.76%, 2/25/2037 (c)	575	52	Hyundai Auto Receivables Trust
6.02%, 9/25/2046 (c)	1,900	1,626	4.96%, 1/17/2012 (c)		500	482
Countrywide Home Equity Loan Trust			Nissan Auto Lease Trust
4.79%, 12/15/2035 (c)	106	43	4.27%, 12/15/2010 (a)		825	804
4.80%, 2/15/2036 (c)	361	273	Nissan Auto Receivables Owner Trust
Fannie Mae Grantor Trust			4.28%, 7/15/2013		280	255
5.41%, 9/26/2033 (c)	72	64	WFS Financial Owner Trust
First Horizon Asset Backed Trust			4.50%, 5/17/2013		425	408
3.39%, 10/25/2026 (c)	503	345				5,180
First-Citizens Home Equity Loan LLC			Beverages - Non-Alcoholic (0.19%)
4.77%, 9/15/2022 (b)(c)	176	138	Panamerican Beverages Inc
Ford Credit Floorplan Master Owner Trust			7.25%, 7/ 1/2009 (a)		350	345
5.01%, 6/15/2011 (c)	625	594
GMAC Mortgage Corp Loan Trust			Brewery (0.22%)
3.44%, 8/25/2035 (c)	175	96	SABMiller PLC
Great America Leasing Receivables			6.20%, 7/ 1/2011 (b)		400	406
5.39%, 9/15/2011 (a)(b)	925	905
John Deere Owner Trust			Building Products - Cement & Aggregate (0.48%)
4.40%, 6/15/2012	535	519	CRH America Inc
JP Morgan Mortgage Acquisition Corp			6.95%, 3/15/2012		400	368
3.34%, 3/25/2037 (c)	354	330

See accompanying notes

337

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Building Products - Cement & Aggregate				Containers - Paper & Plastic (0.08%)
(continued)				Pactiv Corp
Martin Marietta Materials Inc				5.88%, 7/15/2012	$ 175 $		157
3.62%, 4/30/2010 (c)	$ 530 $		512
			880	Credit Card Asset Backed Securities (0.66%)
Building Products - Wood (0.17%)				Chase Issuance Trust
				5.01%, 1/15/2012 (c)		500	476
Masco Corp
3.12%, 3/12/2010 (c)		335	315	GE Capital Credit Card Master Note Trust
				4.73%, 3/15/2013 (c)		175	156
Cable TV (0.98%)				Providian Master Note Trust
Comcast Corp				5.10%, 11/15/2012 (b)		600	592
5.45%, 11/15/2010		300	288				1,224
COX Communications Inc				Diversified Banking Institutions (1.91%)
4.63%, 1/15/2010		475	455
				Bank of America Corp
7.13%, 10/ 1/2012		300	287	4.90%, 5/ 1/2013		615	569
DirecTV Holdings LLC/DirecTV Financing Co				Citigroup Inc
8.38%, 3/15/2013		300	281	5.50%, 8/27/2012		550	509
Rogers Cable Inc				5.50%, 4/11/2013		750	686
7.88%, 5/ 1/2012		500	494
				Goldman Sachs Group Inc/The
			1,805	6.88%, 1/15/2011		1,050	1,024
Cellular Telecommunications (0.21%)				2.98%, 2/ 6/2012 (c)		175	141
Vodafone Group PLC				JP Morgan Chase & Co
3.16%, 6/15/2011 (c)		475	396	5.60%, 6/ 1/2011		600	588
							3,517
Chemicals - Diversified (0.11%)
				Diversified Financial Services (0.82%)
Huntsman LLC
				General Electric Capital Corp
11.50%, 7/15/2012		200	199
				5.25%, 10/19/2012		750	691
Coatings & Paint (0.24%)				4.80%, 5/ 1/2013		575	517
Valspar Corp				TNK-BP Finance SA
5.63%, 5/ 1/2012		430	441	6.13%, 3/20/2012 (b)		575	305
							1,513
Commercial Banks (0.76%)				Diversified Manufacturing Operations (0.60%)
American Express Bank FSB				Tyco Electronics Group SA
5.50%, 4/16/2013		650	533	6.00%, 10/ 1/2012		540	508
BBVA Bancomer SA/Grand Cayman				Tyco International Finance SA
6.01%, 5/17/2022 (b)(c)		305	203	6.13%, 1/15/2009 (a)		600	599
Colonial Bank/Montgomery AL							1,107
8.00%, 3/15/2009 (d)		350	330
HSBC America Capital Trust I				Diversified Operations (0.13%)
7.81%, 12/15/2026 (b)		375	329	Capmark Financial Group Inc
			1,395	3.45%, 5/10/2010 (c)		600	241
Computer Services (0.08%)				Electric - Generation (0.14%)
Sungard Data Systems Inc				CE Casecnan Water & Energy
3.75%, 1/15/2009		150	146	11.95%, 11/15/2010		70	61
				Indiantown Cogeneration LP
Computers - Integrated Systems (0.35%)				9.26%, 12/15/2010		202	207
NCR Corp							268
7.13%, 6/15/2009		650	650
				Electric - Integrated (2.16%)
Computers - Memory Devices (0.10%)				Dominion Resources Inc/VA
Seagate Technology HDD Holdings				2.98%, 11/14/2008 (a)(c)		250	249
6.38%, 10/ 1/2011		200	178	Entergy Gulf States Inc
				3.57%, 12/ 8/2008 (b)(c)		100	100

See accompanying notes

338

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Electric - Integrated (continued)				Finance - Credit Card (0.13%)
Entergy Louisiana LLC				Capital One Bank USA NA
5.83%, 11/ 1/2010	$ 400 $		394	5.75%, 9/15/2010	$ 250 $		232
Entergy Mississippi Inc
5.15%, 2/ 1/2013		375	343	Finance - Investment Banker & Broker (1.57%)
Integrys Energy Group Inc				Bear Stearns Cos LLC/The
7.00%, 11/ 1/2009		700	704	4.91%, 7/16/2009 (a)(c)		470	471
Ohio Power Co				Jefferies Group Inc
4.39%, 4/ 5/2010 (c)		390	384	5.88%, 6/ 8/2014		575	482
Pepco Holdings Inc				Merrill Lynch & Co Inc
3.44%, 6/ 1/2010 (c)		350	346	3.05%, 2/ 6/2009 (a)(c)		150	146
Scottish Power Ltd				6.76%, 3/ 2/2009 (a)(c)		195	179
4.91%, 3/15/2010		450	442	3.01%, 2/ 5/2010 (c)		200	181
TECO Energy Inc				3.00%, 11/ 1/2011 (c)		300	250
4.80%, 5/ 1/2010 (c)		475	455	3.04%, 6/ 5/2012 (c)		250	204
Transelec SA				6.05%, 8/15/2012		400	364
7.88%, 4/15/2011		575	564
				5.45%, 2/ 5/2013		120	108
			3,981
				6.15%, 4/25/2013		550	507
Electronic Components - Semiconductors (0.13%)							2,892
Chartered Semiconductor Manufacturing Ltd
				Finance - Leasing Company (0.18%)
6.25%, 4/ 4/2013		280	246
				International Lease Finance Corp
				5.15%, 1/15/2010 (c)		100	75
Electronic Connectors (0.18%)
Thomas & Betts Corp				5.30%, 5/ 1/2012		400	261
7.25%, 6/ 1/2013		325	334				336
				Finance - Mortgage Loan/Banker (0.31%)
Fiduciary Banks (0.30%)
				Countrywide Financial Corp
Bank of New York Mellon Corp/The				3.33%, 12/19/2008 (a)(c)		230	229
4.50%, 4/ 1/2013		595	558
				5.80%, 6/ 7/2012		375	349
							578
Finance - Auto Loans (0.48%)
Ford Motor Credit Co LLC				Food - Miscellaneous/Diversified (0.68%)
9.88%, 8/10/2011		175	110	General Mills Inc
7.57%, 1/13/2012 (c)		300	182	4.19%, 1/22/2010 (c)		350	346
GMAC LLC				8.02%, 2/ 5/2013		650	660
4.05%, 5/15/2009 (c)		275	240	Kraft Foods Inc
6.00%, 12/15/2011		135	76	3.30%, 8/11/2010 (c)		275	252
Nissan Motor Acceptance Corp							1,258
4.63%, 3/ 8/2010 (b)		270	271
				Food - Retail (0.19%)
			879
				Safeway Inc
Finance - Commercial (0.43%)				6.50%, 11/15/2008 (a)		175	175
CIT Group Inc				4.12%, 3/27/2009 (a)(c)		175	169
3.76%, 4/27/2011 (c)		350	194				344
Textron Financial Canada Funding Corp
5.13%, 11/ 1/2010		650	600	Gas - Distribution (0.13%)
				Sempra Energy
			794
				4.75%, 5/15/2009 (a)		150	148
Finance - Consumer Loans (0.59%)				Southern California Gas Co
HSBC Finance Corp				2.98%, 12/ 1/2009 (c)		100	99
3.09%, 11/16/2009 (c)		475	431				247
3.17%, 9/14/2012 (c)		325	258
				Home Equity - Other (3.46%)
SLM Corp
				Bear Stearns Asset Backed Securities Trust
6.80%, 3/ 2/2009 (c)		475	396
				3.86%, 3/25/2034 (c)		409	330
			1,085

See accompanying notes

339

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Home Equity - Other (continued)			Life & Health Insurance (continued)
Bear Stearns Asset Backed Securities Trust			StanCorp Financial Group Inc
(continued)			6.88%, 10/ 1/2012	$ 510 $		506
3.44%, 6/25/2047 (c)	$ 950 $	748	Sun Life Financial Global Funding LP
Countrywide Asset-Backed Certificates			4.46%, 7/ 6/2010 (b)(c)		175	173
6.09%, 6/25/2021 (c)	1,825	662	Unum Group
First NLC Trust			5.86%, 5/15/2009		275	270
3.59%, 5/25/2035 (c)	210	171				2,781
GMAC Mortgage Corp Loan Trust
4.62%, 6/25/2035 (c)	178	166	Machinery - Farm (0.25%)
5.75%, 10/25/2036	950	764	Case New Holland Inc
			6.00%, 6/ 1/2009		475	454
6.05%, 12/25/2037 (c)	635	323
GSAA Trust
			Medical - HMO (0.65%)
6.04%, 7/25/2036	900	782
			Cigna Corp
Indymac Seconds Asset Backed Trust			7.00%, 1/15/2011		375	367
5.77%, 5/25/2036 (c)	1,400	817
			Coventry Health Care Inc
Mastr Asset Backed Securities Trust			6.30%, 8/15/2014		400	281
3.76%, 3/25/2035 (c)	575	404
			5.95%, 3/15/2017		210	136
New Century Home Equity Loan Trust
			UnitedHealth Group Inc
3.55%, 3/25/2035 (c)	5	4
			4.88%, 2/15/2013		445	415
Option One Mortgage Loan Trust
						1,199
3.71%, 3/25/2037 (c)	500	72
Residential Asset Securities Corp			Medical - Wholesale Drug Distribution (0.46%)
4.59%, 8/25/2031 (a)	360	346	Cardinal Health Inc
4.47%, 3/25/2032	625	532	4.32%, 10/ 2/2009 (c)		300	296
3.46%, 5/25/2035 (c)	7	7	5.65%, 6/15/2012		600	547
Specialty Underwriting & Residential Finance						843
3.77%, 2/25/2035 (c)	51	30
			Medical Products (0.32%)
3.49%, 3/25/2036 (c)	49	48
			Angiotech Pharmaceuticals Inc
WAMU Asset-Backed Certificates			6.56%, 12/ 1/2013 (c)		225	137
3.43%, 5/25/2037 (c)	250	183
			Covidien International Finance SA
		6,389	5.45%, 10/15/2012		465	449
Home Equity - Sequential (2.34%)						586
BNC Mortgage Loan Trust			Metal - Diversified (0.03%)
3.43%, 7/25/2037 (c)	726	449
			Xstrata Canada Corp
Countrywide Asset-Backed Certificates			7.25%, 7/15/2012		55	52
5.68%, 6/25/2035	2,000	1,431
5.71%, 11/25/2035 (c)	1,450	368	Metal Processors & Fabrication (0.16%)
5.56%, 4/25/2036	985	538	Timken Co
5.51%, 8/25/2036	565	400	5.75%, 2/15/2010		300	294
5.81%, 11/25/2036	1,199	602
New Century Home Equity Loan Trust			Money Center Banks (0.33%)
4.76%, 11/25/2033	557	530	Deutsche Bank AG/London
		4,318	5.38%, 10/12/2012		630	605
Life & Health Insurance (1.51%)			Mortgage Backed Securities (34.62%)
Lincoln National Corp			ACT Depositors Corp
6.05%, 4/20/2067 (c)	210	97	4.86%, 9/22/2041 (c)(e)		730	219
New York Life Global Funding			Banc of America Alternative Loan Trust
4.65%, 5/ 9/2013 (b)	795	745	3.66%, 6/25/2036 (c)		521	502
Pacific Life Global Funding			Banc of America Commercial Mortgage Inc
3.43%, 6/22/2011 (b)(c)	175	175	6.85%, 4/15/2036		200	195
Prudential Financial Inc			1.02%, 11/10/2038 (c)		13,346	252
5.15%, 1/15/2013	950	815
See accompanying notes		340

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Mortgage Backed Securities (continued)
Banc of America Commercial Mortgage Inc				Credit Suisse Mortgage Capital Certificates
(continued)				(continued)
0.68%, 7/10/2042 (c)	$ 27,428 $		390	5.87%, 9/15/2040	$ 725 $	441
0.06%, 10/10/2045		73,964	215	CS First Boston Mortgage Securities Corp
0.40%, 7/10/2046 (c)		51,130	780	6.38%, 12/16/2035	532	520
Banc of America Mortgage Securities Inc				0.50%, 11/15/2036 (b)(c)	17,156	570
4.08%, 3/25/2034 (c)		505	421	0.24%, 8/15/2038 (b)	44,018	353
4.79%, 5/25/2035 (c)		837	805	Fannie Mae
Bear Stearns Adjustable Rate Mortgage Trust				3.56%, 2/25/2032 (c)	267	264
5.08%, 9/25/2034 (c)		363	285	3.51%, 3/25/2035 (c)	113	110
Bear Stearns Alt-A Trust				Fannie Mae Whole Loan
3.54%, 7/25/2035 (c)		38	15	3.46%, 5/25/2035 (c)	342	321
6.10%, 8/25/2036 (c)		1,134	987	First Union National Bank Commercial
Bear Stearns Commercial Mortgage Securities				Mortgage Securities Inc
7.00%, 5/20/2030		592	584	7.84%, 5/17/2032	143	143
0.47%, 5/11/2039 (b)(c)		2,749	32	5.59%, 2/12/2034	15	15
0.21%, 2/11/2041 (c)		20,811	160	Freddie Mac
				5.13%, 12/15/2013	371	370
4.57%, 7/11/2042		500	460
				5.50%, 1/15/2017	10	10
Bella Vista Mortgage Trust
4.53%, 5/20/2045 (c)		146	97	5.04%, 6/15/2023 (c)	269	262
Chase Commercial Mortgage Securities Corp				4.99%, 7/15/2023 (c)	994	951
7.56%, 10/15/2032		500	472	4.79%, 4/15/2030 (c)	127	124
Chase Mortgage Finance Corp				4.89%, 10/15/2034 (c)	140	137
5.80%, 3/25/2037 (c)		750	262	GE Capital Commercial Mortgage Corp
5.01%, 7/25/2037 (c)		309	282	0.23%, 5/10/2014	62,847	540
Citigroup/Deutsche Bank Commercial				5.99%, 12/10/2035	146	144
Mortgage Trust				0.56%, 3/10/2040 (b)(c)	2,211	28
0.26%, 11/15/2044 (b)		49,865	499	Ginnie Mae
0.43%, 10/15/2048 (c)		36,702	626	1.57%, 10/16/2012 (c)	4,969	164
0.34%, 12/11/2049 (c)		59,665	780	4.51%, 10/16/2028 (c)	531	531
0.38%, 12/11/2049 (b)(c)		21,246	366	3.96%, 6/16/2031	1,745	1,724
Commercial Mortgage Pass Through Certificates				1.08%, 2/16/2047 (c)	14,636	668
1.49%, 6/10/2010 (b)(c)		3,610	77	0.82%, 3/16/2047 (c)	4,277	207
3.25%, 6/10/2038		145	131	GMAC Commercial Mortgage Securities Inc
0.07%, 12/10/2046 (b)(c)		12,835	112	0.79%, 3/10/2038 (b)(c)	1,995	35
Countrywide Alternative Loan Trust				0.37%, 8/10/2038 (b)(c)	58,180	527
4.16%, 7/20/2035 (c)		335	164	GMAC Mortgage Corp Loan Trust
3.67%, 2/25/2036 (c)		448	266	5.25%, 7/25/2034	750	691
6.00%, 5/25/2036		762	547	Greenpoint Mortgage Funding Trust
6.00%, 5/25/2036		140	137	3.53%, 6/25/2045 (c)	149	60
3.54%, 6/25/2036 (c)		1,436	362	3.56%, 6/25/2045 (c)	143	69
3.76%, 9/25/2036 (c)		420	332	3.57%, 10/25/2045 (c)	242	178
4.55%, 5/20/2046 (c)		1,269	510	Greenwich Capital Commercial Funding Corp
Countrywide Asset-Backed Certificates				0.27%, 6/10/2036 (b)(c)	17,553	111
3.54%, 11/25/2035 (c)		117	111	0.11%, 4/10/2037 (b)	148,222	464
3.53%, 1/25/2036 (c)		602	545	0.32%, 3/10/2039 (b)(c)	20,865	314
Countrywide Home Loan Mortgage Pass				0.76%, 8/10/2042 (b)(c)	6,435	104
Through Trust				0.30%, 12/10/2049 (b)(c)	50,235	660
4.49%, 12/25/2033		1,092	1,056
				GS Mortgage Securities Corp II
4.40%, 6/20/2035 (c)		304	293	0.67%, 11/10/2039 (b)	6,090	170
Credit Suisse Mortgage Capital Certificates				GSR Mortgage Loan Trust
0.09%, 12/15/2039		7,607	93	4.77%, 7/25/2035 (c)	567	517

See accompanying notes

341

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Mortgage Backed Securities (continued)			Mortgage Backed Securities (continued)
Heller Financial Commercial Mortgage Asset			MASTR Asset Securitization Trust
8.11%, 1/17/2034 (c)	$ 1,000 $	1,003	5.25%, 9/25/2033 (c)	$ 363 $		351
8.22%, 1/17/2034 (c)	1,175	1,180	Merrill Lynch Mortgage Trust
Impac CMB Trust			0.17%, 11/12/2035 (b)(c)		33,622	116
4.26%, 10/25/2033 (c)	62	44	0.14%, 7/12/2038		123,254	708
4.02%, 1/25/2035 (c)	347	237	5.80%, 5/12/2039 (c)		1,100	1,031
3.57%, 4/25/2035 (c)	119	51	3.59%, 9/12/2041		73	72
3.69%, 4/25/2035 (c)	99	34	0.25%, 9/12/2042 (c)		59,429	416
3.56%, 8/25/2035 (c)	83	36	Merrill Lynch/Countrywide Commercial
3.77%, 8/25/2035 (c)	72	25	Mortgage Trust
			0.11%, 7/12/2046 (b)(c)		31,864	359
3.80%, 8/25/2035 (c)	112	35
			0.65%, 7/12/2046		48,103	1,284
3.51%, 4/25/2037 (c)	724	438
			0.54%, 8/12/2048 (c)		11,333	301
Indymac Index Mortgage Loan Trust
3.86%, 4/25/2034 (c)	48	37	0.52%, 9/12/2049 (c)		23,421	516
3.49%, 4/25/2035 (c)	134	76	0.12%, 12/12/2049 (b)(c)		16,661	176
3.59%, 4/25/2035 (c)	102	43	0.63%, 12/12/2049 (c)		27,213	656
5.23%, 7/25/2035 (c)	963	308	5.11%, 12/12/2049 (c)		885	798
3.56%, 8/25/2035 (c)	220	126	Morgan Stanley Capital I
			0.94%, 1/13/2041 (b)(c)		25,038	621
3.44%, 1/25/2037 (c)	930	273
			3.49%, 5/24/2043 (b)(c)		750	670
3.50%, 6/25/2037 (c)	785	478
			0.06%, 12/15/2043 (b)(c)		12,626	122
JP Morgan Chase Commercial Mortgage
Securities Corp			3.64%, 8/25/2046 (c)(e)		725	181
0.45%, 10/12/2035 (b)(c)	10,763	300	4.88%, 12/20/2046 (b)(c)		225	29
6.04%, 11/15/2035	952	935	Morgan Stanley Dean Witter Capital I
7.20%, 11/15/2035 (b)(c)	350	337	6.54%, 2/15/2031		53	52
0.54%, 10/12/2037 (b)(c)	3,820	126	Nationslink Funding Corp
3.48%, 6/12/2041	212	208	7.20%, 6/20/2031 (a)(c)		29	29
5.30%, 5/15/2047 (c)	1,400	1,237	New Century Alternative Mortgage Loan Trust
			5.91%, 7/25/2036 (c)		1,275	1,168
5.31%, 1/15/2049	625	556
			Residential Accredit Loans Inc
0.33%, 2/12/2051 (c)	55,992	686	6.00%, 11/25/2032		730	691
JP Morgan Mortgage Trust			5.78%, 12/25/2035 (c)		129	112
3.81%, 5/25/2034	441	406
			3.41%, 2/25/2047 (c)		1,470	780
5.11%, 6/25/2035 (c)	389	357
			Residential Funding Mortgage Securities I
5.30%, 7/25/2035	935	804	5.26%, 11/25/2035 (c)		492	465
5.82%, 6/25/2036 (c)	400	252	5.67%, 2/25/2036 (c)		281	214
5.80%, 1/25/2037 (c)	259	231	3.86%, 7/25/2036 (c)		501	473
5.70%, 4/25/2037 (c)	555	383	Sequoia Mortgage Trust
LB-UBS Commercial Mortgage Trust			4.51%, 2/20/2035 (c)		46	35
6.06%, 6/15/2020	119	117	Structured Adjustable Rate Mortgage Loan Trust
4.90%, 6/15/2026	65	65	4.66%, 7/25/2034 (c)		870	810
3.09%, 5/15/2027	11	11	3.96%, 8/25/2034 (c)		312	135
4.19%, 8/15/2029	220	215	3.51%, 3/25/2035 (c)		6	5
3.63%, 10/15/2029 (a)	340	334	5.25%, 12/25/2035		88	61
4.44%, 12/15/2029 (c)	1,000	936	3.45%, 7/25/2037 (c)		637	345
0.52%, 7/15/2035 (b)(c)	4,094	116	Structured Asset Mortgage Investments Inc
0.63%, 10/15/2035 (b)(c)	9,491	317	3.56%, 5/25/2045 (c)		149	78
1.05%, 3/15/2036 (b)(c)	1,288	28	3.57%, 9/25/2045 (c)		131	79
0.65%, 8/15/2036 (b)(c)	2,073	21	Structured Asset Securities Corp
0.49%, 2/15/2040 (c)	6,102	134	5.50%, 6/25/2036 (c)		1,450	773
			Thornburg Mortgage Securities Trust
			3.61%, 12/25/2033 (c)		607	583

See accompanying notes

342

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Office Furnishings - Original (0.11%)
Wachovia Bank Commercial Mortgage Trust				Steelcase Inc
0.17%, 1/15/2041 (b)(c)	$ 16,406 $		72	6.50%, 8/15/2011	$ 195 $		204
0.33%, 4/15/2042 (b)(c)		77,097	720
5.25%, 12/15/2043		1,175	1,020	Oil - Field Services (0.32%)
4.52%, 5/15/2044		755	710	Weatherford International Inc
				6.63%, 11/15/2011		250	254
6.05%, 2/15/2051 (c)		1,100	984
				5.95%, 6/15/2012		375	337
WAMU Commercial Mortgage Securities Trust
3.83%, 1/25/2035 (b)		342	323				591
WaMu Mortgage Pass Through Certificates				Oil Company - Exploration & Production (0.72%)
5.76%, 3/25/2033 (c)		111	108	Canadian Natural Resources Ltd
4.83%, 9/25/2035 (c)		649	578	5.15%, 2/ 1/2013		650	588
5.69%, 6/25/2037 (c)		970	676	Devon OEI Operating Inc
4.23%, 7/25/2044 (c)		94	88	7.25%, 10/ 1/2011		475	476
3.66%, 1/25/2045 (c)		1,637	891	Nexen Inc
3.49%, 4/25/2045 (c)		18	11	5.05%, 11/20/2013		292	260
3.53%, 4/25/2045 (c)		81	42				1,324
3.55%, 7/25/2045 (c)		151	93	Oil Company - Integrated (0.20%)
3.51%, 11/25/2045 (c)		92	85	Husky Energy Inc
Washington Mutual Alternative Mortgage				6.25%, 6/15/2012		400	376
Pass-Through Certificates
3.54%, 6/25/2046 (c)		650	132	Oil Refining & Marketing (0.14%)
3.44%, 1/25/2047 (c)		618	225	Valero Energy Corp
Wells Fargo Mortgage Backed Securities Trust				6.88%, 4/15/2012		275	265
4.21%, 6/25/2035 (a)(c)		775	753
5.24%, 4/25/2036 (c)		980	570	Pharmacy Services (0.34%)
			63,831	Medco Health Solutions Inc
				7.25%, 8/15/2013		650	622
Multi-Line Insurance (0.39%)
CNA Financial Corp				Pipelines (1.20%)
6.60%, 12/15/2008		549	547	Enbridge Energy Partners LP
6.00%, 8/15/2011		150	139	4.00%, 1/15/2009		200	199
Genworth Financial Inc				Enbridge Inc
6.15%, 11/15/2066 (c)		185	43	5.80%, 6/15/2014		600	525
			729	NGPL PipeCo LLC
				6.51%, 12/15/2012 (b)		650	605
Multimedia (0.27%)
				ONEOK Partners LP
Viacom Inc
				5.90%, 4/ 1/2012		255	236
3.17%, 6/16/2009 (c)		520	492
				Rockies Express Pipeline LLC
				5.10%, 8/20/2009 (b)(c)		280	280
Mutual Insurance (0.23%)
				TEPPCO Partners LP
Health Care Service Corp
				7.63%, 2/15/2012		375	364
7.75%, 6/15/2011 (b)		400	421
							2,209
Non-Hazardous Waste Disposal (0.30%)				Property Trust (0.24%)
Oakmont Asset Trust				WEA Finance LLC / WCI Finance LLC
4.51%, 12/22/2008 (b)		550	551	5.40%, 10/ 1/2012 (b)		500	436
Office Automation & Equipment (0.30%)				Quarrying (0.27%)
Xerox Corp				Vulcan Materials Co
3.63%, 12/18/2009 (c)		350	320	4.07%, 12/15/2010 (c)		500	496
5.50%, 5/15/2012		295	229
			549

See accompanying notes

343

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Real Estate Management & Services (0.14%)				REITS - Mortgage (0.35%)
AMB Property LP				iStar Financial Inc
6.30%, 6/ 1/2013	$ 265 $		257	3.16%, 9/15/2009 (c)	$ 275 $		155
				3.16%, 3/ 9/2010 (c)		350	196
Real Estate Operator & Developer (0.67%)				6.00%, 12/15/2010		500	223
Duke Realty LP				5.65%, 9/15/2011		200	80
5.63%, 8/15/2011		180	157
							654
ERP Operating LP
5.50%, 10/ 1/2012		575	486	REITS - Office Property (0.55%)
Regency Centers LP				Brandywine Operating Partnership LP
8.45%, 9/ 1/2010		575	584	5.63%, 12/15/2010		605	526
			1,227	HRPT Properties Trust
				3.42%, 3/16/2011 (c)		188	171
Regional Banks (1.51%)
				6.95%, 4/ 1/2012		350	312
BAC Capital Trust XIII
							1,009
3.22%, 3/15/2043 (c)		435	157
BAC Capital Trust XIV				REITS - Regional Malls (0.25%)
5.63%, 3/15/2043 (c)		550	259	Simon Property Group LP
Capital One Financial Corp				3.75%, 1/30/2009 (a)		225	222
5.70%, 9/15/2011		300	264	4.60%, 6/15/2010		65	60
First Union Institutional Capital I				5.60%, 9/ 1/2011		200	178
8.04%, 12/ 1/2026		550	411				460
Fleet Capital Trust II
7.92%, 12/11/2026		525	405	REITS - Shopping Centers (0.51%)
NB Capital Trust II				Developers Diversified Realty Corp
7.83%, 12/15/2026		375	289	3.88%, 1/30/2009		510	503
SunTrust Preferred Capital I				5.38%, 10/15/2012		150	112
5.85%, 12/31/2049 (c)		365	201	Federal Realty Investment Trust
Wachovia Corp				6.00%, 7/15/2012		350	322
5.35%, 3/15/2011		600	556				937
2.96%, 3/ 1/2012 (c)		275	241	REITS - Warehouse & Industrial (0.49%)
			2,783	Prologis
REITS - Apartments (0.19%)				3.06%, 8/24/2009 (c)		250	243
Camden Property Trust				5.25%, 11/15/2010		400	261
4.38%, 1/15/2010		200	185	5.50%, 3/ 1/2013		625	405
UDR Inc							909
5.50%, 4/ 1/2014		200	160
				Rental - Auto & Equipment (0.42%)
			345
				Erac USA Finance Co
REITS - Diversified (0.45%)				3.71%, 4/30/2009 (a)(b)(c)		400	370
Duke Realty LP				5.80%, 10/15/2012 (b)		515	403
6.80%, 2/12/2009 (a)		450	440				773
Liberty Property LP
				Retail - Drug Store (0.22%)
7.75%, 4/15/2009		385	382
				CVS/Caremark Corp
			822
				3.11%, 6/ 1/2010 (c)		450	407
REITS - Healthcare (0.40%)
HCP Inc				Retail - Regional Department Store (0.15%)
5.65%, 12/15/2013		125	106	Macys Retail Holdings Inc
Nationwide Health Properties Inc				4.80%, 7/15/2009		300	284
6.50%, 7/15/2011		400	361
6.25%, 2/ 1/2013		325	263	Rubber - Tires (0.10%)
			730	Goodyear Tire & Rubber Co/The
				6.68%, 12/ 1/2009 (c)		200	183

See accompanying notes

344

Schedule of Investments
Short-Term Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Sovereign (0.14%)			Tools - Hand Held (0.31%)
Mexico Government International Bond			Snap-On Inc
8.38%, 1/14/2011	$ 250 $	264	4.95%, 1/12/2010 (c)	$ 575 $		568
Special Purpose Banks (0.19%)			Transport - Rail (0.17%)
Korea Development Bank			CSX Corp
4.35%, 4/ 3/2010 (c)	365	352	4.88%, 11/ 1/2009		335	319
			TOTAL BONDS		$ 155,749
Special Purpose Entity (0.61%)
BAE Systems Holdings Inc			SENIOR FLOATING RATE INTERESTS (0.83%)
4.75%, 8/15/2010 (b)	500	498	Aerospace & Defense Equipment (0.07%)
Genworth Global Funding Trusts			Sequa Corp, Term Loan B
5.20%, 10/ 8/2010	375	265	6.44%, 12/ 7/2014 (c)		179	131
USB Realty Corp
6.09%, 12/22/2049 (b)(c)	330	155	Cellular Telecommunications (0.15%)
Williams Cos Inc Credit Linked Certificate			Alltel Holdings Corp, Term Loan B
Trust/The			6.25%, 5/31/2015 (c)		297	282
6.05%, 5/ 1/2009 (b)(c)	200	199
		1,117	Money Center Banks (0.09%)
			Allied Waste North America Inc, LOC A
Steel - Producers (0.49%)			3.86%, 3/28/2014 (c)		177	168
Ispat Inland ULC
9.75%, 4/ 1/2014	600	588	Non-Hazardous Waste Disposal (0.13%)
United States Steel Corp			Allied Waste North America Inc, Term Loan B
5.65%, 6/ 1/2013	400	316	3.13%, 3/28/2014 (c)		247	235
		904

Publishing - Periodicals (0.11%)

Telephone - Integrated (1.69%)

			Dex Media East LLC, Term Loan B
British Telecommunications PLC
			5.04%, 10/17/2014 (c)	415	209
5.15%, 1/15/2013	750	689
Koninklijke KPN NV			Retail - Building Products (0.20%)
8.00%, 10/ 1/2010	475	455
			HD Supply Inc, Term Loan B
Telecom Italia Capital SA			4.37%, 8/30/2012 (c)	475	356
4.00%, 11/15/2008 (a)	320	320
5.11%, 7/18/2011 (c)	240	190	Satellite Telecommunications (0.08%)
Telefonica Emisiones SAU			Telesat Canada Inc, Term Loan B
5.86%, 2/ 4/2013 (f)	575	523	6.36%, 9/ 1/2014 (c)	183	139
Telefonos de Mexico SAB de CV			Telesat Canada Inc, Term Loan DD
4.50%, 11/19/2008 (a)	325	325	6.59%, 10/31/2014 (c)	16	12
Verizon California Inc					151
6.70%, 9/ 1/2009	615	613
		3,115	TOTAL SENIOR FLOATING RATE INTERESTS	$ 1,532
Television (0.32%)			U.S. GOVERNMENT & GOVERNMENT AGENCY
British Sky Broadcasting Group PLC			OBLIGATIONS (17.10%)
			Federal Home Loan Mortgage Corporation
6.88%, 2/23/2009	400	394
			(FHLMC) (2.34%)
Univision Communications Inc			5.50%, 12/ 1/2008	11	11
7.85%, 7/15/2011	325	205
			5.50%, 2/ 1/2009	27	27
		599
			5.50%, 3/ 1/2009	13	13
Tobacco (0.37%)			5.50%, 4/ 1/2009	31	31
Reynolds American Inc			6.50%, 4/ 1/2009	4	4
6.50%, 7/15/2010	400	399	5.00%, 9/ 1/2009	43	43
3.52%, 6/15/2011 (c)	350	291	4.50%, 11/ 1/2009	79	80
		690	4.50%, 12/ 1/2009	200	202
			4.50%, 4/ 1/2010	127	128

See accompanying notes

345

Schedule of Investments Short-Term Bond Fund October 31, 2008

		Principal					Principal
		Amount	Value				Amount	Value
		(000's)	(000's)				(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				U.S. GOVERNMENT & GOVERNMENT AGENCY
OBLIGATIONS (continued)				OBLIGATIONS (continued)
Federal Home Loan Mortgage Corporation				U.S. Treasury (continued)
(FHLMC) (continued)				4.75%, 2/15/2010		$ 3,000 $		3,123
4.50%, 9/ 1/2010	$ 220 $		223
				3.88%, 5/15/2010 (d)			1,000	1,038
4.50%, 2/ 1/2011		93	94
				2.63%, 5/31/2010 (d)			1,500	1,527
4.50%, 4/ 1/2011		111	113
				4.50%, 11/15/2010 (d)			500	531
4.50%, 7/ 1/2011		124	126
				4.50%, 4/30/2012 (d)			2,700	2,924
4.50%, 11/ 1/2011		550	557
				4.38%, 8/15/2012 (d)			1,350	1,464
6.50%, 4/ 1/2015		6	6
								20,752
6.50%, 12/ 1/2015		23	24
7.00%, 12/ 1/2022		157	162	TOTAL U.S. GOVERNMENT & GOVERNMENT
				AGENCY OBLIGATIONS			$ 31,522
7.50%, 12/ 1/2029		4	4
5.96%, 12/ 1/2034 (c)		209	214	SHORT TERM INVESTMENTS (2.76%)
4.55%, 1/ 1/2035 (c)		317	314	Commercial Paper (2.76%)
5.51%, 6/ 1/2035 (c)		1,141	1,158	Investment in Joint Trading Account; HSBC
				Funding
4.89%, 9/ 1/2035 (c)		386	385	0.25%, 11/ 3/2008		$ 2,548 $		2,548
4.97%, 9/ 1/2035 (c)		385	387	Investment in Joint Trading Account;
			4,306	Prudential Funding
				0.30%, 11/ 3/2008			2,548	2,548
Federal National Mortgage Association (FNMA) (3.51%)
								5,096
5.50%, 2/ 1/2009		68	68
5.50%, 5/ 1/2009		4	4	TOTAL SHORT TERM INVESTMENTS			$ 5,096
5.50%, 10/ 1/2009		51	51
				REPURCHASE AGREEMENTS (2.41%)
4.50%, 12/ 1/2009		17	17
				Money Center Banks (2.41%)
4.50%, 3/ 1/2010		93	93	BNP Paribas Securities Corporation
4.00%, 5/ 1/2010		407	406	Repurchase Agreement; 0.20% dated
4.50%, 5/ 1/2010		58	59	10/31/08 maturing 11/03/08 (collateralized
4.00%, 6/ 1/2010		175	175	by U.S. Government Agency Issues;
				$4,486,000; 0.00% - 6.25%; dated
4.00%, 7/ 1/2010		261	260	12/23/08 - 07/13/37) (a)		$ 4,450$		4,450
4.00%, 8/ 1/2010		138	137
				TOTAL REPURCHASE AGREEMENTS			$ 4,450
4.50%, 8/ 1/2011		302	304
				Total Investments			$ 198,349
8.50%, 5/ 1/2022		36	39
				Liabilities in Excess of Other Assets, Net - (7.57)%				(13,957)
8.00%, 5/ 1/2027		6	6
6.00%, 7/ 1/2028		77	78	TOTAL NET ASSETS - 100.00%			$ 184,392
7.50%, 10/ 1/2029		18	19
6.35%, 12/ 1/2032 (c)		182	183
				(a)	Security was purchased with the cash proceeds from securities loans.
4.31%, 7/ 1/2034 (c)		486	489
				(b)	Security exempt from registration under Rule 144A of the Securities Act
5.03%, 7/ 1/2034 (c)		177	177		of 1933. These securities may be resold in transactions exempt from
4.26%, 8/ 1/2034 (c)		300	300		registration, normally to qualified institutional buyers. Unless otherwise
4.30%, 9/ 1/2034 (c)		372	378		indicated, these securities are not considered illiquid. At the end of the
					period, the value of these securities totaled $18,348 or 9.95% of net
4.50%, 1/ 1/2035 (c)		438	440		assets.
6.28%, 1/ 1/2035 (c)		84	86	(c)	Variable Rate. Rate shown is in effect at October 31, 2008.
5.80%, 2/ 1/2035 (c)		70	70	(d)	Security or a portion of the security was on loan at the end of the period.
4.58%, 4/ 1/2035 (c)		623	621	(e)	Market value is determined in accordance with procedures established in
5.11%, 6/ 1/2035 (c)		88	90		good faith by the Board of Directors. At the end of the period, the value
4.86%, 10/ 1/2035 (c)		1,342	1,352		of these securities totaled $400 or 0.22% of net assets.
				(f)	Security purchased on a when-issued basis.
5.00%, 2/ 1/2037 (c)		550	562
			6,464
U.S. Treasury (11.25%)
3.00%, 2/15/2009 (d)		6,000	6,037
4.88%, 8/15/2009 (d)		4,000	4,108

See accompanying notes

346

Schedule of Investments
Short-Term Bond Fund
October 31, 2008

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 901
Unrealized Depreciation		(36,624)
Net Unrealized Appreciation (Depreciation)		(35,723)
Cost for federal income tax purposes		234,072
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Mortgage Securities		40.49%
Financial		21.73%
Asset Backed Securities		13.90%
Government		11.40%
Consumer, Non-cyclical		4.53%
Communications		3.82%
Industrial		2.90%
Energy		2.58%
Utilities		2.44%
Consumer, Cyclical		1.55%
Basic Materials		1.14%
Technology		0.96%
Diversified		0.13%
Liabilities in Excess of Other Assets, Net		(7.57%)
TOTAL NET ASSETS		100.00%

See accompanying notes

347

Schedule of Investments
Short-Term Income Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (96.88%)				BONDS (continued)
Aerospace & Defense Equipment (0.66%)				Finance - Commercial (0.78%)
United Technologies Corp				Caterpillar Financial Services Corp
4.38%, 5/ 1/2010	$ 2,000 $		1,976	4.85%, 12/ 7/2012	$ 2,500 $	2,322
Agricultural Operations (2.51%)				Finance - Consumer Loans (3.84%)
Cargill Inc				John Deere Capital Corp
5.20%, 1/22/2013 (a)		8,250	7,499	4.95%, 12/17/2012	8,250	7,646
				SLM Corp
Asset Backed Securities (0.17%)				4.00%, 1/15/2009	4,000	3,812
Atlantic City Electric Transition Funding LLC						11,458
2.89%, 7/20/2011		520	517
				Finance - Leasing Company (0.88%)
Chemicals - Diversified (2.68%)				International Lease Finance Corp
EI Du Pont de Nemours & Co				6.38%, 3/25/2013	4,000	2,616
5.00%, 7/15/2013		2,500	2,387
				Finance - Mortgage Loan/Banker (6.87%)
PPG Industries Inc
5.75%, 3/15/2013		6,000	5,600	Federal Home Loan Banks
				5.25%, 8/ 5/2009	10,500	10,688
			7,987
				Freddie Mac
Commercial Services - Finance (1.63%)				4.75%, 11/ 3/2009	4,500	4,576
Western Union Co/The				5.25%, 7/18/2011	5,000	5,254
5.40%, 11/17/2011		5,000	4,863			20,518
Consumer Products - Miscellaneous (1.31%)				Food - Miscellaneous/Diversified (0.45%)
Clorox Co				Kellogg Co
5.00%, 3/ 1/2013		4,250	3,897	5.13%, 12/ 3/2012	1,400	1,336
Diversified Banking Institutions (0.77%)				Gas - Distribution (0.55%)
Citigroup Inc				Sempra Energy
5.50%, 8/27/2012		2,500	2,313	4.75%, 5/15/2009	1,650	1,627
Diversified Financial Services (1.60%)				Industrial Gases (0.53%)
General Electric Capital Corp				Air Products & Chemicals Inc
5.72%, 8/22/2011		5,000	4,785	4.15%, 2/ 1/2013	1,750	1,583
Diversified Manufacturing Operations (0.77%)				Medical - Biomedical/Gene (1.56%)
Honeywell International Inc				Amgen Inc
4.25%, 3/ 1/2013		2,500	2,298	4.00%, 11/18/2009	4,725	4,654
Electric - Integrated (3.22%)				Medical - HMO (1.33%)
Pacific Gas & Electric Co				UnitedHealth Group Inc
3.60%, 3/ 1/2009		1,650	1,635	4.88%, 2/15/2013	4,250	3,965
Texas-New Mexico Power Co
6.25%, 1/15/2009		2,750	2,741	Mortgage Backed Securities (33.84%)
Virginia Electric and Power Co				Banc of America Funding Corp
5.10%, 11/30/2012		5,750	5,242	5.00%, 6/25/2035 (b)	5,000	4,776
			9,618	5.75%, 3/25/2036	4,458	4,133
				Banc of America Mortgage Securities Inc
Federal & Federally Sponsored Credit (4.03%)				4.75%, 8/25/2033	4,000	3,909
Federal Farm Credit Bank				Bear Stearns Commercial Mortgage Securities
3.45%, 1/11/2010		12,000	12,036	Inc
				5.82%, 5/14/2016 (a)	5,500	5,571
Finance (0.03%)				Chase Mortgage Finance Corp
Green Tree Financial Corp				5.50%, 5/25/2035	2,878	2,840
7.70%, 9/15/2026		120	85

See accompanying notes

348

Schedule of Investments
Short-Term Income Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Real Estate Operator & Developer (continued)
Countrywide Home Loan Mortgage Pass				ERP Operating LP
Through Trust				5.50%, 10/ 1/2012	$ 4,000 $		3,381
5.50%, 10/25/2035	$ 7,496 $		7,478				6,558
CS First Boston Mortgage Securities Corp
6.00%, 12/25/2033		1,489	1,373	Regional Banks (1.31%)
Fannie Mae				Wells Fargo & Co
6.00%, 2/25/2031		10,000	10,154	4.38%, 1/31/2013		4,250	3,924
5.00%, 11/25/2035		2,789	2,772
				REITS - Healthcare (1.51%)
Freddie Mac
				Nationwide Health Properties Inc
5.50%, 4/15/2027		8,353	8,483
				6.50%, 7/15/2011		5,000	4,517
4.25%, 6/15/2027		135	135
5.50%, 10/15/2027		7,048	7,160	REITS - Single Tenant (1.33%)
6.00%, 9/15/2029		8,097	8,271	CPG Partners LP
4.50%, 5/15/2030		5,000	4,960	3.50%, 3/15/2009		4,000	3,958
6.00%, 6/15/2030		213	214
4.50%, 5/15/2032		1,026	1,013	Retail - Discount (0.15%)
Ginnie Mae				Target Corp
4.50%, 8/20/2032		1,322	1,301	5.13%, 1/15/2013		500	457
GSR Mortgage Loan Trust
6.00%, 2/25/2035		2,272	2,176	Retail - Drug Store (0.48%)
6.00%, 6/25/2036		3,662	3,583	CVS/Caremark Corp
				4.00%, 9/15/2009		1,500	1,446
Lehman Mortgage Trust
5.75%, 4/25/2036		8,141	7,940
				Savings & Loans - Thrifts (0.00%)
Residential Asset Securitization Trust
				Washington Mutual Bank/Henderson NV
6.00%, 5/25/2036		3,995	2,865
				0.00%, 1/15/2013 (c)		1,200	6
Residential Funding Mortgage Securities I
5.50%, 9/25/2036		4,900	4,556
				Steel - Producers (2.70%)
Structured Asset Securities Corp				Nucor Corp
5.50%, 12/25/2033		5,398	5,356	5.00%, 12/ 1/2012		8,300	8,073
			101,019
Multimedia (1.36%)				Telephone - Integrated (3.56%)
Walt Disney Co/The				AT&T Inc
4.70%, 12/ 1/2012		4,250	4,065	4.95%, 1/15/2013		4,250	3,935
				Koninklijke KPN NV
Networking Products (1.42%)				8.00%, 10/ 1/2010		7,000	6,703
Cisco Systems Inc							10,638
5.25%, 2/22/2011		4,250	4,254
				Textile - Home Furnishings (1.64%)
				Mohawk Industries Inc
Oil Company - Exploration & Production (2.90%)
				7.20%, 4/15/2012		4,750	4,911
Apache Corp
6.25%, 4/15/2012		8,750	8,645
				Transport - Rail (0.71%)
				Canadian National Railway Co
Property & Casualty Insurance (1.51%)
				4.25%, 8/ 1/2009		2,150	2,134
Fidelity National Financial Inc
7.30%, 8/15/2011		4,250	4,511
				Transport - Services (1.39%)
				United Parcel Service Inc
Quarrying (1.41%)
				4.50%, 1/15/2013		4,250	4,140
Vulcan Materials Co
5.60%, 11/30/2012		4,250	4,195
				Water (1.29%)
				Veolia Environnement
Real Estate Operator & Developer (2.20%)
				5.25%, 6/ 3/2013		4,250	3,844
Duke Realty LP
6.25%, 5/15/2013		4,000	3,177	TOTAL BONDS		$ 289,248

See accompanying notes

349

Schedule of Investments
Short-Term Income Fund
October 31, 2008
		Principal					Principal
		Amount	Value				Amount	Value
		(000's)	(000's)				(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				REPURCHASE AGREEMENTS (continued)
OBLIGATIONS (0.79%)				Money Center Banks (continued)
Federal Home Loan Mortgage Corporation				Investment in Joint Trading Account;
(FHLMC) (0.24%)				Morgan Stanley Repurchase Agreement;
9.50%, 8/ 1/2016	$ 10 $		11	0.15%; dated 10/31/2008 maturing
6.00%, 4/ 1/2017		228	229	11/03/2008 (collateralized by Sovereign
6.00%, 5/ 1/2017		427	432	Agency Issues; $782,000; 2.63% - 4.63%;
5.42%, 11/ 1/2021 (b)		32	33	dated 09/09/09 - 06/12/15)		$ 759$		759
			705					1,519
Federal National Mortgage Association (FNMA) (0.16%)				TOTAL REPURCHASE AGREEMENTS			$ 1,519
6.50%, 1/ 1/2012		98	100	Total Investments			$ 293,129
6.50%, 1/ 1/2014		106	109	Other Assets in Excess of Liabilities, Net - 1.82%				5,432
8.50%, 11/ 1/2017		18	20	TOTAL NET ASSETS - 100.00%			$ 298,561
5.97%, 1/ 1/2019 (b)		10	10
5.61%, 4/ 1/2019 (b)		8	8
10.00%, 5/ 1/2022		12	14	(a)	Security exempt from registration under Rule 144A of the Securities Act
					of 1933. These securities may be resold in transactions exempt from
5.05%, 11/ 1/2022 (b)		3	4
					registration, normally to qualified institutional buyers. Unless otherwise
6.35%, 11/ 1/2032 (b)		180	181		indicated, these securities are not considered illiquid. At the end of the
4.96%, 11/ 1/2035 (b)		31	31		period, the value of these securities totaled $13,070 or 4.38% of net
			477		assets.
				(b)	Variable Rate. Rate shown is in effect at October 31, 2008.
Government National Mortgage Association				(c)	Non-Income Producing Security
(GNMA) (0.05%)
				(d)	Security or a portion of the security was pledged to cover margin
8.00%, 3/15/2012		3	3
					requirements for futures contracts. At the end of the period, the value of
11.00%, 10/15/2015		21	24		these securities totaled $361 or 0.12% of net assets.
11.00%, 11/15/2015		3	4
11.00%, 11/15/2015		41	47	Unrealized Appreciation (Depreciation)
10.00%, 1/15/2019		60	69	The net federal income tax unrealized appreciation (depreciation) and federal tax cost
				of investments held by the fund as of the period end were as follows:
10.00%, 2/15/2019		1	1
11.00%, 8/15/2020		9	11
				Unrealized Appreciation			$ 772
9.00%, 4/20/2025		3	4
				Unrealized Depreciation				(14,725)
			163
				Net Unrealized Appreciation (Depreciation)				(13,953)
U.S. Treasury (0.34%)				Cost for federal income tax purposes				307,082
3.13%, 11/30/2009 (d)		1,000	1,017	All dollar amounts are shown in thousands (000's)
TOTAL U.S. GOVERNMENT & GOVERNMENT
AGENCY OBLIGATIONS		$ 2,362			Portfolio Summary (unaudited)
REPURCHASE AGREEMENTS (0.51%)				Sector				Percent
Money Center Banks (0.51%)				Mortgage Securities				34.29%
Investment in Joint Trading Account; Bank				Financial				16.24%
of America Repurchase Agreement;				Government				11.24%
0.15%; dated 10/31/2008 maturing				Consumer, Non-cyclical				8.78%
11/03/2008 (collateralized by Sovereign				Basic Materials				7.32%
				Communications				6.35%
Agency Issues; $782,000; 2.75% - 5.38%;
				Utilities				5.05%
dated 11/28/08 - 02/13/17)	$ 759$		760
				Industrial				3.53%
				Energy				2.90%
				Consumer, Cyclical				2.28%
				Asset Backed Securities				0.20%
				Other Assets in Excess of Liabilities, Net				1.82%
				TOTAL NET ASSETS				100.00%
					Other Assets Summary (unaudited)
				Asset Type				Percent
				Futures				7.59%

See accompanying notes

350

	Schedule of Investments
	Short-Term Income Fund
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
US 5 Year Note; December 2008	Sell	200	$ 22,378	$ 22,652	$ (274)
All dollar amounts are shown in thousands (000's)

See accompanying notes

351

Schedule of Investments
SmallCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.11%)			COMMON STOCKS (continued)
Advertising Services (0.09%)			Chemicals - Specialty (continued)
inVentiv Health Inc (a)	18,890 $	179	OM Group Inc (a)	44,986 $	960
			Sensient Technologies Corp	20,710	523
Aerospace & Defense (1.33%)			Terra Industries Inc	11,162	245
Esterline Technologies Corp (a)	33,069	1,192			1,937
Teledyne Technologies Inc (a)	7,557	344
			Circuit Boards (0.12%)
TransDigm Group Inc (a)	34,397	1,037
			TTM Technologies Inc (a)	31,360	225
		2,573
Aerospace & Defense Equipment (1.64%)			Commercial Banks (7.81%)
AAR Corp (a)	36,130	578	Banco Latinoamericano de Exportaciones SA	24,420	260
BE Aerospace Inc (a)	66,005	849	Bank of Hawaii Corp	38,392	1,947
Moog Inc (a)	16,790	590	Bank of the Ozarks Inc	31,890	969
Triumph Group Inc	26,400	1,158	City Bank/Lynnwood WA	35,190	363
		3,175	City Holding Co	18,973	794
			Community Bank System Inc	21,730	542
Alternative Waste Tech (0.18%)
Calgon Carbon Corp (a)	26,560	354	Cullen/Frost Bankers Inc	29,622	1,658
			CVB Financial Corp	26,370	334
Apparel Manufacturers (0.36%)			Green Bankshares Inc	19,466	384
G-III Apparel Group Ltd (a)	22,650	313	IBERIABANK Corp	12,428	633
True Religion Apparel Inc (a)	22,430	376	MainSource Financial Group Inc	15,450	276
		689	National Penn Bancshares Inc	57,990	982
			NBT Bancorp Inc	28,090	783
Applications Software (1.30%)
			Oriental Financial Group Inc	28,430	462
Progress Software Corp (a)	41,020	941
			Pacific Capital Bancorp NA	10,343	203
Quest Software Inc (a)	88,490	1,172
			Pinnacle Financial Partners Inc (a)	15,341	449
Verint Systems Inc (a)	38,328	393
			Prosperity Bancshares Inc	28,307	940
		2,506
			Renasant Corp	8,550	179
Auto/Truck Parts & Equipment - Original (0.19%)			S&T Bancorp Inc	24,440	833
Titan International Inc	31,080	359	SVB Financial Group (a)	26,467	1,362
			Tompkins Financial Corp	10,770	528
Auto/Truck Parts & Equipment - Replacement (0.35%)
			Vineyard National Bancorp - Warrants (a)(b)	2,369	-
ATC Technology Corp/IL (a)	30,905	678	(c)(d)
			Webster Financial Corp	10,960	203
Batteries & Battery Systems (0.46%)
					15,084
EnerSys (a)	67,660	894
			Commercial Services (0.61%)
Beverages - Wine & Spirits (0.36%)			Arbitron Inc	9,490	309
Central European Distribution Corp (a)	24,357	701	Steiner Leisure Ltd (a)	20,640	535
			TeleTech Holdings Inc (a)	36,230	327
Building & Construction - Miscellaneous (0.19%)
					1,171
Layne Christensen Co (a)	13,980	367
			Commercial Services - Finance (0.85%)
Casino Services (0.35%)			CBIZ Inc (a)	69,700	565
Bally Technologies Inc (a)	30,680	680	Morningstar Inc (a)	13,641	511
			Wright Express Corp (a)	41,815	572
Chemicals - Diversified (0.25%)					1,648
Innospec Inc	23,410	205
			Computer Aided Design (0.71%)
Rockwood Holdings Inc (a)	22,820	282
			Ansys Inc (a)	21,000	601
		487
			Aspen Technology Inc (a)	97,796	766
Chemicals - Specialty (1.00%)					1,367
ICO Inc (a)	46,690	209

See accompanying notes

352

Schedule of Investments
SmallCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Computer Services (0.95%)			Diversified Manufacturing Operations (1.39%)
CACI International Inc (a)	12,000 $	494	AZZ Inc (a)	3,790 $	111
Ciber Inc (a)	141,620	765	Barnes Group Inc	40,330	585
Ness Technologies Inc (a)	37,840	280	EnPro Industries Inc (a)	25,260	561
Syntel Inc	11,940	297	ESCO Technologies Inc (a)	11,340	391
		1,836	Koppers Holdings Inc	43,773	1,041
					2,689
Computer Software (0.53%)
Double-Take Software Inc (a)	35,640	264	Diversified Operations (0.20%)
Omniture Inc (a)	65,340	751	Compass Diversified Holdings	31,580	385
		1,015
			Electric - Integrated (2.12%)
Computers - Integrated Systems (0.29%)
			Avista Corp	64,260	1,276
MTS Systems Corp	12,120	394
			Empire District Electric Co/The	44,760	860
Radiant Systems Inc (a)	31,750	167
			NorthWestern Corp	13,250	259
		561
			Portland General Electric Co	37,758	775
Consulting Services (2.34%)			Westar Energy Inc	47,300	922
FTI Consulting Inc (a)	24,383	1,420			4,092
Gartner Inc (a)	85,110	1,566
			Electric Products - Miscellaneous (0.41%)
Huron Consulting Group Inc (a)	19,502	1,061
			GrafTech International Ltd (a)	97,634	792
Navigant Consulting Inc (a)	28,760	465
		4,512	Electronic Components - Miscellaneous (0.60%)
Consumer Products - Miscellaneous (0.87%)			Plexus Corp (a)	61,650	1,150
Jarden Corp (a)	32,140	572
			Electronic Components - Semiconductors (1.16%)
Tupperware Brands Corp	43,610	1,103
			Mellanox Technologies Ltd (a)	25,240	196
		1,675
			ON Semiconductor Corp (a)	175,750	898
Containers - Paper & Plastic (0.74%)			PMC - Sierra Inc (a)	106,260	497
Rock-Tenn Co	47,190	1,435	Silicon Laboratories Inc (a)	18,630	484
			Zoran Corp (a)	19,800	161
Cosmetics & Toiletries (0.80%)
					2,236
Chattem Inc (a)	20,318	1,537
			Electronic Measurement Instruments (0.56%)
Data Processing & Management (0.21%)			Analogic Corp	24,320	1,074
Commvault Systems Inc (a)	37,183	398
			E-Marketing & Information (0.20%)
Diagnostic Equipment (0.97%)			comScore Inc (a)	31,150	380
Cepheid Inc (a)	26,300	312
Immucor Inc (a)	58,403	1,551	Engineering - Research & Development Services (0.75%)
		1,863	EMCOR Group Inc (a)	81,883	1,455
Diagnostic Kits (0.58%)			Enterprise Software & Services (1.99%)
Meridian Bioscience Inc	45,741	1,124	Informatica Corp (a)	86,250	1,212
			JDA Software Group Inc (a)	70,270	1,003
Disposable Medical Products (0.40%)
			Omnicell Inc (a)	46,260	508
Merit Medical Systems Inc (a)	42,150	771
			SYNNEX Corp (a)	54,040	834
Distribution & Wholesale (1.41%)			Taleo Corp (a)	21,190	292
Fossil Inc (a)	51,840	941			3,849
Houston Wire & Cable Co	17,890	206	Entertainment Software (0.20%)
Tech Data Corp (a)	24,170	518	Take-Two Interactive Software Inc (a)	32,570	386
United Stationers Inc (a)	28,177	1,054
		2,719

See accompanying notes

353

Schedule of Investments
SmallCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Environmental Consulting & Engineering (0.28%)			Internet Brokers (0.46%)
Tetra Tech Inc (a)	24,810 $	546	thinkorswim Group Inc (a)	110,480 $	884
E-Services - Consulting (0.61%)			Internet Infrastructure Equipment (0.23%)
Websense Inc (a)	60,140	1,174	Avocent Corp (a)	29,970	450
Finance - Investment Banker & Broker (0.86%)			Intimate Apparel (0.58%)
Knight Capital Group Inc (a)	38,930	563	Warnaco Group Inc/The (a)	37,630	1,122
optionsXpress Holdings Inc	24,570	436
Stifel Financial Corp (a)	15,205	664	Investment Companies (1.04%)
		1,663	Ares Capital Corp	162,214	1,275
			Hercules Technology Growth Capital Inc	54,500	473
Finance - Leasing Company (0.36%)
			Prospect Capital Corp	20,793	262
Financial Federal Corp	30,362	703
					2,010
Finance - Other Services (0.05%)			Investment Management & Advisory Services (0.06%)
GFI Group Inc	32,720	105	Waddell & Reed Financial Inc	7,750	113
Food - Miscellaneous/Diversified (0.93%)			Lasers - Systems & Components (0.22%)
Ralcorp Holdings Inc (a)	26,640	1,803	Rofin-Sinar Technologies Inc (a)	19,450	434
Food - Retail (0.29%)			Leisure & Recreation Products (0.57%)
Ruddick Corp	19,290	553	WMS Industries Inc (a)	44,155	1,104
Food - Wholesale & Distribution (1.59%)			Life & Health Insurance (0.20%)
Fresh Del Monte Produce Inc (a)	42,040	887	Delphi Financial Group Inc	24,284	383
Spartan Stores Inc	80,617	2,176
		3,063	Machinery - Farm (0.28%)
			Alamo Group Inc	14,960	188
Footwear & Related Apparel (1.48%)
			Lindsay Corp	7,360	350
Deckers Outdoor Corp (a)	5,570	473
					538
Iconix Brand Group Inc (a)	62,820	684
Skechers U.S.A. Inc (a)	31,610	429	Machinery - General Industry (1.86%)
Wolverine World Wide Inc	54,000	1,269	Altra Holdings Inc (a)	41,510	371
		2,855	Chart Industries Inc (a)	42,000	572
			Middleby Corp (a)	24,480	989
Gas - Distribution (1.30%)
			Robbins & Myers Inc	44,667	911
Northwest Natural Gas Co	33,730	1,716
			Wabtec Corp	18,580	739
South Jersey Industries Inc	22,998	784
					3,582
		2,500
			Machinery - Material Handling (0.01%)
Independent Power Producer (0.10%)
			Key Technology Inc (a)	1,301	21
Ormat Technologies Inc	8,170	197
			Machinery Tools & Related Products (0.62%)
Instruments - Controls (0.60%)
			Kennametal Inc	56,220	1,193
Mettler Toledo International Inc (a)	15,148	1,159
			Medical - Biomedical/Gene (2.76%)
Instruments - Scientific (0.38%)
			Celera Corp (a)	103,880	1,175
Varian Inc (a)	20,001	737
			Cubist Pharmaceuticals Inc (a)	60,332	1,532
			Human Genome Sciences Inc (a)	75,720	245
Internet Application Software (0.80%)
eResearchTechnology Inc (a)	62,050	401	Incyte Corp (a)	158,400	657
S1 Corp (a)	124,810	783	Myriad Genetics Inc (a)	11,400	719
Vocus Inc (a)	20,880	351	Seattle Genetics Inc (a)	38,720	398
		1,535

See accompanying notes

354

Schedule of Investments
SmallCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Medical - Biomedical/Gene (continued)			Oil - Field Services (1.01%)
United Therapeutics Corp (a)	6,840 $	597	Basic Energy Services Inc (a)	19,470 $	266
		5,323	Matrix Service Co (a)	30,196	370
			Oil States International Inc (a)	17,930	415
Medical - Drugs (1.20%)
Indevus Pharmaceuticals Inc (a)	143,830	384	Superior Energy Services Inc (a)	25,444	542
Orexigen Therapeutics Inc (a)	32,570	155	Willbros Group Inc (a)	22,780	353
PharMerica Corp (a)	33,110	680			1,946
Progenics Pharmaceuticals Inc (a)	37,220	372	Oil Company - Exploration & Production (3.18%)
XenoPort Inc (a)	17,520	729	Arena Resources Inc (a)	14,150	431
		2,320	Berry Petroleum Co	29,070	677
			Brigham Exploration Co (a)	25,470	200
Medical - Generic Drugs (0.15%)
Perrigo Co	8,350	284	Callon Petroleum Co (a)	27,220	281
			Concho Resources Inc/Midland TX (a)	19,720	419
Medical - Nursing Homes (0.54%)			Mariner Energy Inc (a)	50,160	722
Ensign Group Inc/The	32,154	527	Penn Virginia Corp	27,670	1,028
Skilled Healthcare Group Inc (a)	42,430	521	Petroquest Energy Inc (a)	66,984	666
		1,048	Rosetta Resources Inc (a)	42,914	453
			St Mary Land & Exploration Co	34,190	851
Medical - Outpatient & Home Medical Care (1.32%)
			Swift Energy Co (a)	12,830	412
Amedisys Inc (a)	24,497	1,382
					6,140
LHC Group Inc (a)	25,330	894
Res-Care Inc (a)	17,520	270	Oil Field Machinery & Equipment (0.25%)
		2,546	Complete Production Services Inc (a)	21,250	263
			Flotek Industries Inc (a)	22,780	113
Medical Imaging Systems (0.11%)
			Mitcham Industries Inc (a)	19,960	109
IRIS International Inc (a)	19,190	214
					485
Medical Instruments (0.55%)			Paper & Related Products (0.35%)
Genomic Health Inc (a)	25,350	467	Buckeye Technologies Inc (a)	115,984	683
Kensey Nash Corp (a)	23,470	596
		1,063	Patient Monitoring Equipment (0.13%)
			Masimo Corp (a)	7,840	251
Medical Laboratory & Testing Service (0.59%)
Icon PLC ADR (a)	44,516	1,129
			Pharmacy Services (0.36%)
			Catalyst Health Solutions Inc (a)	41,260	696
Medical Products (0.92%)
American Medical Systems Holdings Inc (a)	32,570	352
			Physical Therapy & Rehabilitation Centers (0.35%)
Exactech Inc (a)	13,420	271
			Psychiatric Solutions Inc (a)	20,390	679
Zoll Medical Corp (a)	47,655	1,148
		1,771	Physician Practice Management (0.31%)
Metal Processors & Fabrication (0.18%)			Pediatrix Medical Group Inc (a)	15,510	599
RBC Bearings Inc (a)	14,410	342
			Printing - Commercial (0.06%)
Miscellaneous Manufacturers (0.53%)			Consolidated Graphics Inc (a)	9,410	122
Aptargroup Inc	33,887	1,027
			Private Corrections (0.39%)
Networking Products (0.37%)			Cornell Cos Inc (a)	33,444	762
Anixter International Inc (a)	21,192	712
			Property & Casualty Insurance (1.59%)
Non-Hazardous Waste Disposal (0.14%)			American Physicians Capital Inc	23,766	972
Waste Services Inc (a)	45,520	272	Amerisafe Inc (a)	24,850	428
			Amtrust Financial Services Inc	48,518	477
			CNA Surety Corp (a)	23,370	324

See accompanying notes

355

Schedule of Investments
SmallCap Blend Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Property & Casualty Insurance (continued)			Retail - Apparel & Shoe (1.05%)
Tower Group Inc	41,420 $	871	Aeropostale Inc (a)	34,020 $	823
		3,072	Gymboree Corp (a)	25,470	659
			Wet Seal Inc/The (a)	187,351	551
Publicly Traded Investment Fund (0.35%)
SPDR KBW Regional Banking ETF	20,690	672			2,033
			Retail - Fabric Store (0.31%)
Recreational Centers (0.24%)			Jo-Ann Stores Inc (a)	31,320	600
Life Time Fitness Inc (a)	24,550	467
			Retail - Restaurants (0.62%)
Reinsurance (2.09%)			Einstein Noah Restaurant Group Inc (a)	40,310	323
Aspen Insurance Holdings Ltd	70,380	1,616	Jack in the Box Inc (a)	42,990	864
IPC Holdings Ltd	24,400	674			1,187
Max Capital Group Ltd	50,240	801
			Retail - Sporting Goods (0.51%)
Platinum Underwriters Holdings Ltd	29,770	945
			Hibbett Sports Inc (a)	55,536	989
		4,036
REITS - Diversified (1.85%)			Savings & Loans - Thrifts (1.44%)
Entertainment Properties Trust	43,760	1,639	Dime Community Bancshares	24,650	412
Investors Real Estate Trust	36,590	361	ESSA Bancorp Inc	22,980	318
Washington Real Estate Investment Trust	48,300	1,448	Flushing Financial Corp	23,300	362
Winthrop Realty Trust	49,050	126	Provident Financial Services Inc	39,420	578
		3,574	United Financial Bancorp Inc	18,070	253
			Washington Federal Inc	28,020	494
REITS - Healthcare (0.94%)
Senior Housing Properties Trust	94,850	1,818	WSFS Financial Corp	7,630	365
					2,782
REITS - Hotels (0.19%)			Schools (0.89%)
LaSalle Hotel Properties	26,060	367	DeVry Inc	30,450	1,726
REITS - Mortgage (1.12%)			Seismic Data Collection (0.35%)
Anthracite Capital Inc	57,090	248	Dawson Geophysical Co (a)	15,839	388
Arbor Realty Trust Inc	24,611	88	ION Geophysical Corp (a)	44,957	295
Chimera Investment Corp	162,100	467			683
Gramercy Capital Corp/New York	59,203	157
			Semiconductor Component - Integrated Circuits (1.74%)
MFA Mortgage Investments Inc	217,930	1,199
			Emulex Corp (a)	106,180	1,009
		2,159
			Integrated Device Technology Inc (a)	62,800	399
REITS - Office Property (0.74%)			Pericom Semiconductor Corp (a)	53,730	419
BioMed Realty Trust Inc	77,182	1,084	Power Integrations Inc	42,900	901
Kilroy Realty Corp	10,850	349	Standard Microsystems Corp (a)	34,921	629
		1,433			3,357
REITS - Shopping Centers (0.88%)			Semiconductor Equipment (0.21%)
Inland Real Estate Corp	71,840	823	ATMI Inc (a)	22,250	271
Kite Realty Group Trust	16,681	102	Entegris Inc (a)	48,040	129
Saul Centers Inc	8,340	305			400
Urstadt Biddle Properties Inc	28,309	464
			Telecommunication Equipment (1.32%)
		1,694
			ADC Telecommunications Inc (a)	109,090	692
Rental - Auto & Equipment (0.26%)			Comtech Telecommunications Corp (a)	38,515	1,865
Rent-A-Center Inc/TX (a)	34,290	501			2,557
Research & Development (0.38%)			Telecommunication Equipment - Fiber Optics (0.20%)
Parexel International Corp (a)	70,580	734	Harmonic Inc (a)	53,920	383

See accompanying notes

356

Schedule of Investments
SmallCap Blend Fund
October 31, 2008
						Principal
	Shares	Value				Amount	Value
	Held	(000's)				(000's)	(000's)
COMMON STOCKS (continued)			SHORT TERM INVESTMENTS (4.34%)
Telecommunication Services (0.92%)			Commercial Paper (4.34%)
Consolidated Communications Holdings Inc	59,800 $	616	Investment in Joint Trading Account; HSBC
Premiere Global Services Inc (a)	116,640	1,161	Funding
			0.25%, 11/ 3/2008		$ 4,187 $		4,187
		1,777
			Investment in Joint Trading Account;
Telephone - Integrated (0.09%)			Prudential Funding
Alaska Communications Systems Group Inc	18,379	172	0.30%, 11/ 3/2008			4,186	4,186
							8,373
Television (0.07%)
			TOTAL SHORT TERM INVESTMENTS			$ 8,373
Belo Corp	59,320	126
			REPURCHASE AGREEMENTS (0.15%)
Textile - Apparel (0.23%)			Money Center Banks (0.15%)
Perry Ellis International Inc (a)	45,330	444	Investment in Joint Trading Account; Bank
			of America Repurchase Agreement;
Therapeutics (1.05%)			0.15%; dated 10/31/2008 maturing
Allos Therapeutics Inc (a)	42,540	311	11/03/2008 (collateralized by Sovereign
			Agency Issues; $302,000; 2.75% - 5.38%;
BioMarin Pharmaceutical Inc (a)	35,680	654
			dated 11/28/08 - 02/13/17)		$ 293$		293
CV Therapeutics Inc (a)	72,490	676
			TOTAL REPURCHASE AGREEMENTS			$ 293
Vivus Inc (a)	62,200	379
			Total Investments			$ 192,270
		2,020
			Other Assets in Excess of Liabilities, Net - 0.40%				765
Tobacco (0.15%)
			TOTAL NET ASSETS - 100.00%			$ 193,035
Alliance One International Inc (a)	87,680	293
Toys (1.21%)			(a)	Non-Income Producing Security
Jakks Pacific Inc (a)	67,062	1,500	(b)	Market value is determined in accordance with procedures established in
Marvel Entertainment Inc (a)	26,130	841		good faith by the Board of Directors. At the end of the period, the value
		2,341		of these securities totaled $0 or 0.00% of net assets.
			(c)	Security is Illiquid
Transactional Software (0.33%)			(d)	Security exempt from registration under Rule 144A of the Securities Act
Solera Holdings Inc (a)	25,610	637		of 1933. These securities may be resold in transactions exempt from
				registration, normally to qualified institutional buyers. Unless otherwise
Transport - Marine (0.28%)				indicated, these securities are not considered illiquid. At the end of the
Eagle Bulk Shipping Inc	23,990	239		period, the value of these securities totaled $0 or 0.00% of net assets.
TBS International Ltd (a)	34,990	300
			Unrealized Appreciation (Depreciation)
		539
			The net federal income tax unrealized appreciation (depreciation) and federal tax cost
Transport - Services (0.84%)			of investments held by the fund as of the period end were as follows:
HUB Group Inc (a)	39,250	1,234
Pacer International Inc	33,820	382	Unrealized Appreciation			$ 9,324
		1,616	Unrealized Depreciation				(66,814)
			Net Unrealized Appreciation (Depreciation)				(57,490)
Wire & Cable Products (0.54%)			Cost for federal income tax purposes				249,760
Belden Inc	49,660	1,035	All dollar amounts are shown in thousands (000's)
Wireless Equipment (0.27%)
Viasat Inc (a)	28,537	520
Wound, Burn & Skin Care (0.25%)
Obagi Medical Products Inc (a)	57,160	476
X-Ray Equipment (0.28%)
Hologic Inc (a)	43,680	535
TOTAL COMMON STOCKS	$ 183,604

See accompanying notes

357

	Schedule of Investments
	SmallCap Blend Fund
	October 31, 2008
Portfolio Summary (unaudited)
Sector	Percent
Financial	25.72%
Consumer, Non-cyclical	23.58%
Industrial	15.14%
Technology	9.61%
Consumer, Cyclical	9.46%
Communications	5.62%
Energy	4.79%
Utilities	3.52%
Basic Materials	1.61%
Exchange Traded Funds	0.35%
Diversified	0.20%
Other Assets in Excess of Liabilities, Net	0.40%
TOTAL NET ASSETS	100.00%
Other Assets Summary (unaudited)
Asset Type	Percent
Futures	4.17%

See accompanying notes

358

	Schedule of Investments
	SmallCap Blend Fund
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
Russell 2000 Mini; December 2008	Buy	150	$ 8,173	$ 8,047	$ (126)
All dollar amounts are shown in thousands (000's)

See accompanying notes

359

Schedule of Investments
SmallCap Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (91.89%)			COMMON STOCKS (continued)
Advertising Services (0.36%)			Computer Aided Design (continued)
inVentiv Health Inc (a)	85,137 $	806	Aspen Technology Inc (a)	190,801 $	1,494
					3,022
Aerospace & Defense (1.94%)
			Computer Services (1.40%)
Esterline Technologies Corp (a)	39,854	1,437
			CACI International Inc (a)	38,000	1,565
Teledyne Technologies Inc (a)	28,405	1,294
			Syntel Inc	63,500	1,579
TransDigm Group Inc (a)	53,755	1,620
					3,144
		4,351
			Computer Software (0.58%)
Aerospace & Defense Equipment (1.72%)
			Omniture Inc (a)	112,355	1,292
AAR Corp (a)	62,108	993
BE Aerospace Inc (a)	70,584	908
			Computers - Integrated Systems (0.29%)
Triumph Group Inc	44,449	1,950	Micros Systems Inc (a)	37,507	639
		3,851
Alternative Waste Tech (0.30%)			Consulting Services (3.46%)
Darling International Inc (a)	87,925	663	FTI Consulting Inc (a)	34,510	2,010
			Gartner Inc (a)	99,077	1,823
Apparel Manufacturers (1.09%)			Huron Consulting Group Inc (a)	42,577	2,315
G-III Apparel Group Ltd (a)	131,974	1,823	Navigant Consulting Inc (a)	98,675	1,596
True Religion Apparel Inc (a)	37,017	620			7,744
		2,443
			Consumer Products - Miscellaneous (0.62%)
Auto/Truck Parts & Equipment - Original (0.24%)			Tupperware Brands Corp	54,800	1,386
Titan International Inc	47,238	546
			Cosmetics & Toiletries (1.13%)
Batteries & Battery Systems (0.45%)			Chattem Inc (a)	33,317	2,521
EnerSys (a)	75,859	1,003
			Data Processing & Management (0.65%)
Beverages - Wine & Spirits (0.58%)			Commvault Systems Inc (a)	135,430	1,449
Central European Distribution Corp (a)	45,376	1,306
			Diagnostic Equipment (1.39%)
Casino Services (0.61%)			Cepheid Inc (a)	71,973	854
Bally Technologies Inc (a)	62,036	1,374	Immucor Inc (a)	84,991	2,257
					3,111
Chemicals - Specialty (0.24%)
			Diagnostic Kits (1.25%)
Terra Industries Inc	24,400	537
			Inverness Medical Innovations Inc (a)	53,678	1,028
Commercial Banks (0.44%)			Meridian Bioscience Inc	71,869	1,766
Bank of the Ozarks Inc	20,742	631			2,794
City Bank/Lynnwood WA	34,960	360	Disposable Medical Products (0.67%)
		991	Merit Medical Systems Inc (a)	81,880	1,498
Commercial Services (1.04%)
			Distribution & Wholesale (1.41%)
Steiner Leisure Ltd (a)	49,133	1,272
			FGX International Holdings Ltd (a)	161,327	1,775
TeleTech Holdings Inc (a)	117,571	1,063
			Fossil Inc (a)	64,034	1,162
		2,335
			LKQ Corp (a)	20,000	229
Commercial Services - Finance (0.92%)					3,166
Morningstar Inc (a)	27,049	1,013
			Diversified Manufacturing Operations (1.85%)
Wright Express Corp (a)	76,744	1,050
			AZZ Inc (a)	40,730	1,189
		2,063
			Barnes Group Inc	79,149	1,148
Computer Aided Design (1.35%)			EnPro Industries Inc (a)	37,475	832
Ansys Inc (a)	53,386	1,528

See accompanying notes

360

Schedule of Investments
SmallCap Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Diversified Manufacturing Operations			Instruments - Scientific (0.12%)
(continued)			Varian Inc (a)	7,300 $	269
Koppers Holdings Inc	41,238 $	981
		4,150	Internet Application Software (0.81%)
Educational Software (0.57%)			eResearchTechnology Inc (a)	104,974	678
Blackboard Inc (a)	51,936	1,271	Vocus Inc (a)	67,478	1,136
					1,814
Electric Products - Miscellaneous (0.37%)
			Internet Brokers (0.74%)
GrafTech International Ltd (a)	102,838	834
			thinkorswim Group Inc (a)	206,072	1,649
Electronic Components - Semiconductors (2.23%)
			Intimate Apparel (0.51%)
Mellanox Technologies Ltd (a)	81,808	635
			Warnaco Group Inc/The (a)	38,257	1,140
ON Semiconductor Corp (a)	257,256	1,315
PMC - Sierra Inc (a)	185,760	869	Investment Companies (0.40%)
Silicon Laboratories Inc (a)	58,260	1,512	Ares Capital Corp	114,410	899
Zoran Corp (a)	82,278	670
		5,001	Investment Management & Advisory Services (0.24%)
			Waddell & Reed Financial Inc	37,265	541
Electronic Measurement Instruments (0.32%)
Itron Inc (a)	14,623	709	Lasers - Systems & Components (0.51%)
			Rofin-Sinar Technologies Inc (a)	51,529	1,149
E-Marketing & Information (0.52%)
comScore Inc (a)	94,686	1,155	Leisure & Recreation Products (0.61%)
			WMS Industries Inc (a)	54,813	1,370
Engineering - Research & Development Services (0.72%)
EMCOR Group Inc (a)	90,277	1,604	Machinery - Farm (0.36%)
			Lindsay Corp	16,900	804
Enterprise Software & Services (3.65%)
Ariba Inc (a)	104,974	1,123	Machinery - General Industry (2.78%)
Concur Technologies Inc (a)	50,450	1,273	Altra Holdings Inc (a)	108,123	967
Informatica Corp (a)	128,162	1,801	Chart Industries Inc (a)	48,335	658
Omnicell Inc (a)	129,107	1,418	Middleby Corp (a)	43,747	1,767
Sybase Inc (a)	51,542	1,372	Robbins & Myers Inc	42,829	874
Taleo Corp (a)	86,393	1,192	Wabtec Corp	49,474	1,967
		8,179			6,233
Entertainment Software (0.39%)			Medical - Biomedical/Gene (5.29%)
Take-Two Interactive Software Inc (a)	73,500	872	Bio-Rad Laboratories Inc (a)	16,406	1,401
			Celera Corp (a)	156,737	1,773
E-Services - Consulting (0.86%)
			Cubist Pharmaceuticals Inc (a)	108,399	2,752
Websense Inc (a)	98,516	1,923
			Exelixis Inc (a)	215,880	743
Finance - Investment Banker & Broker (0.59%)			Human Genome Sciences Inc (a)	244,901	791
Knight Capital Group Inc (a)	91,034	1,316	Incyte Corp (a)	243,763	1,012
			Myriad Genetics Inc (a)	15,000	946
Food - Miscellaneous/Diversified (0.20%)			Seattle Genetics Inc (a)	87,919	904
Ralcorp Holdings Inc (a)	6,628	449	United Therapeutics Corp (a)	17,441	1,521
					11,843
Food - Retail (0.69%)
Ruddick Corp	54,271	1,554	Medical - Drugs (1.93%)
			Array Biopharma Inc (a)	178,090	876
Footwear & Related Apparel (0.70%)			Orexigen Therapeutics Inc (a)	80,854	384
Wolverine World Wide Inc	66,600	1,565	PharMerica Corp (a)	55,636	1,142
			Progenics Pharmaceuticals Inc (a)	69,953	700
See accompanying notes		361

Schedule of Investments
SmallCap Growth Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Medical - Drugs (continued)			Oil & Gas Drilling (0.22%)
XenoPort Inc (a)	29,497 $	1,228	Atwood Oceanics Inc (a)	17,832 $	490
		4,330
			Oil Company - Exploration & Production (5.24%)
Medical - Generic Drugs (0.42%)
			Arena Resources Inc (a)	58,260	1,776
Perrigo Co	27,500	935
			Brigham Exploration Co (a)	104,974	823
			Carrizo Oil & Gas Inc (a)	36,179	846
Medical - Nursing Homes (0.57%)
Skilled Healthcare Group Inc (a)	104,068	1,278	Comstock Resources Inc (a)	35,166	1,738
			Concho Resources Inc/Midland TX (a)	68,110	1,447
Medical - Outpatient & Home Medical Care (2.23%)			Mariner Energy Inc (a)	56,266	810
Amedisys Inc (a)	46,992	2,651	Petroquest Energy Inc (a)	108,057	1,075
LHC Group Inc (a)	66,036	2,330	Rosetta Resources Inc (a)	110,654	1,167
		4,981	St Mary Land & Exploration Co	52,073	1,296
			Swift Energy Co (a)	23,018	739
Medical Imaging Systems (0.39%)
					11,717
IRIS International Inc (a)	78,036	870
			Oil Field Machinery & Equipment (0.90%)
Medical Information Systems (0.71%)			Complete Production Services Inc (a)	74,006	917
Phase Forward Inc (a)	111,853	1,596	Dril-Quip Inc (a)	24,692	610
			Flotek Industries Inc (a)	96,576	478
Medical Instruments (2.46%)
					2,005
Genomic Health Inc (a)	93,809	1,729
Integra LifeSciences Holdings Corp (a)	58,528	2,197	Pharmacy Services (0.53%)
Kensey Nash Corp (a)	35,276	895	Catalyst Health Solutions Inc (a)	70,256	1,185
Symmetry Medical Inc (a)	53,000	685
			Physician Practice Management (0.55%)
		5,506
			Pediatrix Medical Group Inc (a)	31,681	1,224
Medical Laboratory & Testing Service (0.80%)
Icon PLC ADR (a)	70,160	1,780	Private Corrections (0.60%)
			Geo Group Inc/The (a)	75,592	1,335
Medical Products (1.05%)
Zoll Medical Corp (a)	97,913	2,358	Property & Casualty Insurance (0.38%)
			Amtrust Financial Services Inc	85,695	842
Metal - Aluminum (0.49%)
Kaiser Aluminum Corp	32,690	1,097	Recreational Centers (0.55%)
			Life Time Fitness Inc (a)	65,188	1,241
Metal Processors & Fabrication (1.49%)
Haynes International Inc (a)	27,006	683	REITS - Diversified (2.25%)
Ladish Co Inc (a)	69,413	1,182	Digital Realty Trust Inc	56,407	1,889
RBC Bearings Inc (a)	61,506	1,460	Entertainment Properties Trust	49,370	1,849
		3,325	Washington Real Estate Investment Trust	42,934	1,287
					5,025
Miscellaneous Manufacturers (0.37%)
Aptargroup Inc	27,293	828	REITS - Mortgage (0.33%)
			Chimera Investment Corp	260,000	749
Networking Products (0.53%)
Anixter International Inc (a)	35,088	1,179	REITS - Office Property (0.32%)
			Kilroy Realty Corp	22,234	715
Oil - Field Services (0.74%)
Matrix Service Co (a)	75,373	923	Research & Development (0.49%)
Willbros Group Inc (a)	47,028	729	Parexel International Corp (a)	104,647	1,088
		1,652
			Retail - Apparel & Shoe (0.79%)
			Aeropostale Inc (a)	27,558	667

See accompanying notes

362

Schedule of Investments
SmallCap Growth Fund
October 31, 2008
	Shares	Value				Shares	Value
	Held	(000's)				Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Apparel & Shoe (continued)			Transport - Marine (0.43%)
Gymboree Corp (a)	42,513 $	1,100	Eagle Bulk Shipping Inc			55,636 $	555
		1,767	TBS International Ltd (a)			46,923	401
							956
Retail - Restaurants (0.62%)
Jack in the Box Inc (a)	69,493	1,397	Transport - Services (0.20%)
			HUB Group Inc (a)			14,000	440
Retail - Sporting Goods (0.65%)
Hibbett Sports Inc (a)	81,390	1,450	Transport - Truck (0.41%)
			Old Dominion Freight Line Inc (a)			30,442	924
Schools (1.08%)
DeVry Inc	42,701	2,421	Wire & Cable Products (0.95%)
			Belden Inc			82,263	1,714
Seismic Data Collection (0.69%)			General Cable Corp (a)			23,571	403
Dawson Geophysical Co (a)	28,043	688					2,117
ION Geophysical Corp (a)	129,175	847
			Wireless Equipment (0.76%)
		1,535
			Viasat Inc (a)			92,870	1,692
Semiconductor Component - Integrated Circuits (1.89%)
Emulex Corp (a)	135,884	1,291	X-Ray Equipment (0.56%)
Integrated Device Technology Inc (a)	186,854	1,188	Hologic Inc (a)			103,231	1,264
Power Integrations Inc	83,285	1,748	TOTAL COMMON STOCKS			$ 205,633
		4,227				Principal
Semiconductor Equipment (0.37%)						Amount	Value
ATMI Inc (a)	68,158	829				(000's)	(000's)
			SHORT TERM INVESTMENTS (4.28%)
Steel Pipe & Tube (0.39%)			Commercial Paper (4.28%)
Valmont Industries Inc	15,956	874	Investment in Joint Trading Account; HSBC
			Funding
Telecommunication Equipment (0.29%)			0.25%, 11/ 3/2008		$ 4,791 $		4,791
CommScope Inc (a)	43,960	647	Investment in Joint Trading Account;
			Prudential Funding
Telecommunication Equipment - Fiber Optics (0.75%)			0.30%, 11/ 3/2008			4,791	4,791
Harmonic Inc (a)	237,242	1,687					9,582
			TOTAL SHORT TERM INVESTMENTS			$ 9,582
Telecommunication Services (1.31%)
NTELOS Holdings Corp	68,023	1,768	REPURCHASE AGREEMENTS (4.04%)
Premiere Global Services Inc (a)	117,046	1,165	Money Center Banks (4.04%)
		2,933	Investment in Joint Trading Account; Bank
			of America Repurchase Agreement;
Therapeutics (1.71%)			0.15%; dated 10/31/2008 maturing
Allos Therapeutics Inc (a)	143,068	1,046	11/03/2008 (collateralized by Sovereign
BioMarin Pharmaceutical Inc (a)	71,047	1,301	Agency Issues; $9,305,000; 2.75% -
			5.38%; dated 11/28/08 - 02/13/17)		$ 9,034$		9,034
Vivus Inc (a)	241,528	1,471
			TOTAL REPURCHASE AGREEMENTS			$ 9,034
		3,818
			Total Investments			$ 224,249
Toys (1.24%)
			Liabilities in Excess of Other Assets, Net - (0.21)%				(475)
Jakks Pacific Inc (a)	75,686	1,693
			TOTAL NET ASSETS - 100.00%			$ 223,774
Marvel Entertainment Inc (a)	33,745	1,086
		2,779
Transactional Software (0.10%)			(a)	Non-Income Producing Security
Solera Holdings Inc (a)	8,712	217

See accompanying notes

363

Schedule of Investments
SmallCap Growth Fund
October 31, 2008

Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation	$ 7,916
Unrealized Depreciation		(96,841)
Net Unrealized Appreciation (Depreciation)		(88,925)
Cost for federal income tax purposes		313,174
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Consumer, Non-cyclical		32.61%
Industrial		15.68%
Technology		14.18%
Financial		13.27%
Consumer, Cyclical		9.04%
Energy		7.78%
Communications		6.92%
Basic Materials		0.73%
Liabilities in Excess of Other Assets, Net		(0.21%)
TOTAL NET ASSETS		100.00%

See accompanying notes

364

Schedule of Investments
SmallCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (96.00%)			COMMON STOCKS (continued)
Advertising Services (0.17%)			Commercial Services (1.22%)
inVentiv Health Inc (a)	61,425 $	582	Arbitron Inc	56,465 $	1,839
			Healthcare Services Group	74,650	1,236
Aerospace & Defense Equipment (0.70%)			TeleTech Holdings Inc (a)	128,500	1,162
AAR Corp (a)	121,178	1,937			4,237
Kaman Corp	19,180	490
			Computer Aided Design (0.88%)
		2,427
			Ansys Inc (a)	107,572	3,080
Airlines (0.34%)
Allegiant Travel Co (a)	30,041	1,197	Computer Services (0.11%)
			iGate Corp (a)	54,183	368
Alternative Waste Tech (0.52%)
Darling International Inc (a)	238,333	1,797	Computers - Integrated Systems (1.24%)
			Brocade Communications Systems Inc (a)	178,400	673
Apparel Manufacturers (0.22%)			Micros Systems Inc (a)	112,215	1,911
True Religion Apparel Inc (a)	45,090	755	Netscout Systems Inc (a)	45,227	435
			Stratasys Inc (a)	107,700	1,301
Applications Software (2.43%)
					4,320
Ebix Inc (a)	57,514	1,463
EPIQ Systems Inc (a)	39,525	537	Computers - Memory Devices (0.19%)
Nuance Communications Inc (a)	382,733	3,502	Data Domain Inc (a)	36,549	675
Progress Software Corp (a)	96,223	2,207
			Computers - Peripheral Equipment (0.32%)
Verint Systems Inc (a)	74,733	766
			Compellent Technologies Inc (a)	69,300	755
		8,475
			Icad Inc (a)	145,428	370
Auto/Truck Parts & Equipment - Original (0.48%)					1,125
Titan International Inc	117,500	1,358
			Consulting Services (0.41%)
Wonder Auto Technology Inc (a)	74,723	298
			CRA International Inc (a)	21,586	584
		1,656
			FTI Consulting Inc (a)	14,488	844
Auto/Truck Parts & Equipment - Replacement (0.06%)					1,428
Exide Technologies (a)	43,439	206
			Consumer Products - Miscellaneous (0.16%)
Batteries & Battery Systems (0.59%)			Helen of Troy Ltd (a)	29,998	540
EnerSys (a)	118,400	1,565
			Containers - Metal & Glass (0.47%)
Greatbatch Inc (a)	21,869	476
			Greif Inc	40,690	1,651
		2,041
Building & Construction - Miscellaneous (0.23%)			Containers - Paper & Plastic (0.75%)
Layne Christensen Co (a)	15,946	419	Rock-Tenn Co	86,261	2,623
MYR Group Inc/Delaware (a)	40,289	383
		802	Cosmetics & Toiletries (1.10%)
			Chattem Inc (a)	50,800	3,844
Coal (0.20%)
James River Coal Co (a)	35,832	689	Data Processing & Management (0.30%)
			FalconStor Software Inc (a)	345,868	1,041
Commercial Banks (2.36%)
PrivateBancorp Inc	63,118	2,273	Decision Support Software (0.18%)
Prosperity Bancshares Inc	44,662	1,483	DemandTec Inc (a)	40,330	291
SVB Financial Group (a)	36,991	1,903	Interactive Intelligence Inc (a)	47,494	349
Texas Capital Bancshares Inc (a)	110,844	1,978			640
Wilshire Bancorp Inc	54,270	599
			Diagnostic Equipment (1.04%)
		8,236
			Cepheid Inc (a)	25,700	305
			Gen-Probe Inc (a)	10,944	515

See accompanying notes

365

Schedule of Investments
SmallCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Diagnostic Equipment (continued)			Engineering - Research & Development Services (1.43%)
Hansen Medical Inc (a)	72,400 $	674	EMCOR Group Inc (a)	119,422 $	2,122
Immucor Inc (a)	80,246	2,131	Stanley Inc (a)	69,700	2,388
		3,625	VSE Corp	14,258	468
					4,978
Diagnostic Kits (0.08%)
Medtox Scientific Inc (a)	26,380	260	Enterprise Software & Services (1.61%)
			Advent Software Inc (a)	35,521	666
Distribution & Wholesale (0.82%)			Concur Technologies Inc (a)	18,411	464
Chindex International Inc (a)	46,415	389	Omnicell Inc (a)	154,700	1,699
LKQ Corp (a)	214,546	2,454	SYNNEX Corp (a)	9,648	149
		2,843	Ultimate Software Group Inc (a)	196,799	2,623
Diversified Manufacturing Operations (1.40%)					5,601
Actuant Corp	33,090	593	E-Services - Consulting (0.62%)
Ameron International Corp	4,429	208	GSI Commerce Inc (a)	210,016	2,174
Colfax Corp (a)	27,600	235
ESCO Technologies Inc (a)	76,999	2,657	Finance - Consumer Loans (0.16%)
Koppers Holdings Inc	49,941	1,188	Portfolio Recovery Associates Inc (a)	15,132	543
		4,881
			Firearms & Ammunition (0.06%)
E-Commerce - Products (0.12%)
			Smith & Wesson Holding Corp (a)	89,302	205
1-800-FLOWERS.COM Inc (a)	79,471	425
			Food - Miscellaneous/Diversified (1.33%)
Educational Software (0.97%)
			Chiquita Brands International Inc (a)	187,272	2,556
Blackboard Inc (a)	113,316	2,774
			Diamond Foods Inc	70,600	2,064
SkillSoft PLC ADR (a)	80,640	621
					4,620
		3,395
			Footwear & Related Apparel (0.86%)
Electronic Components - Miscellaneous (0.29%)
			Iconix Brand Group Inc (a)	228,444	2,488
Daktronics Inc	27,480	274
			Steven Madden Ltd (a)	22,606	492
Technitrol Inc	129,400	746
					2,980
		1,020
			Hazardous Waste Disposal (1.17%)
Electronic Components - Semiconductors (2.75%)
			American Ecology Corp	40,458	710
Advanced Analogic Technologies Inc (a)	92,767	279
			Clean Harbors Inc (a)	41,300	2,708
Cavium Networks Inc (a)	100,743	1,283
			EnergySolutions Inc	149,500	674
Diodes Inc (a)	88,500	874
					4,092
Emcore Corp (a)	65,506	233
Microsemi Corp (a)	287,973	6,261	Health Care Cost Containment (0.16%)
Monolithic Power Systems Inc (a)	37,942	645	Transcend Services Inc (a)	48,624	549
		9,575
			Housewares (0.05%)
Electronic Measurement Instruments (1.46%)			Lifetime Brands Inc	35,518	174
Axsys Technologies Inc (a)	22,224	1,467
Flir Systems Inc (a)	84,942	2,727	Human Resources (0.27%)
Itron Inc (a)	11,605	562	Kenexa Corp (a)	25,109	224
LeCroy Corp (a)	68,342	340	SuccessFactors Inc (a)	91,612	732
		5,096			956
Energy - Alternate Sources (0.24%)			Identification Systems - Development (0.08%)
FuelCell Energy Inc (a)	84,456	404	L-1 Identity Solutions Inc (a)	33,285	273
Headwaters Inc (a)	39,739	421
		825	Industrial Automation & Robots (0.10%)
			Cognex Corp	22,635	363

See accompanying notes

366

Schedule of Investments
SmallCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Industrial Gases (0.78%)			Medical - Biomedical/Gene (continued)
Airgas Inc	70,873 $	2,719	Illumina Inc (a)	80,238 $	2,474
			Incyte Corp (a)	120,900	502
Instruments - Scientific (0.19%)			Martek Biosciences Corp (a)	59,840	1,785
FEI Co (a)	31,300	658	Myriad Genetics Inc (a)	20,071	1,266
			OSI Pharmaceuticals Inc (a)	26,067	989
Internet Application Software (0.14%)
			Regeneron Pharmaceuticals Inc (a)	58,400	1,127
Cybersource Corp (a)	40,131	488
			Sangamo Biosciences Inc (a)	119,706	935
Internet Content - Entertainment (0.17%)			Seattle Genetics Inc (a)	102,200	1,051
Shanda Interactive Entertainment Ltd ADR (a)	21,469	594	Sequenom Inc (a)	114,210	2,056
			United Therapeutics Corp (a)	19,161	1,671
Internet Content - Information & News (0.15%)					20,572
TheStreet.com Inc	131,662	519
			Medical - Drugs (0.51%)
			Array Biopharma Inc (a)	124,300	612
Internet Incubators (0.26%)
			Auxilium Pharmaceuticals Inc (a)	35,000	688
Internet Capital Group Inc (a)	159,730	914
			Rigel Pharmaceuticals Inc (a)	55,600	484
Internet Infrastructure Software (1.08%)					1,784
AsiaInfo Holdings Inc (a)	75,469	829	Medical - Generic Drugs (0.97%)
F5 Networks Inc (a)	118,400	2,939	Perrigo Co	99,050	3,368
		3,768
			Medical - Outpatient & Home Medical Care (0.34%)
Internet Security (0.37%)
			Res-Care Inc (a)	77,000	1,187
Blue Coat Systems Inc (a)	96,100	1,297
			Medical Information Systems (1.68%)
Internet Telephony (0.17%)
			Eclipsys Corp (a)	97,797	1,452
j2 Global Communications Inc (a)	36,530	589
			Phase Forward Inc (a)	307,213	4,384
Lasers - Systems & Components (0.87%)					5,836
II-VI Inc (a)	108,392	3,045	Medical Instruments (4.61%)
			Arthrocare Corp (a)	22,178	461
Machinery - Construction & Mining (0.12%)
			Bruker BioSciences Corp (a)	48,439	198
Bucyrus International Inc	16,823	406
			Conmed Corp (a)	62,400	1,635
			CryoLife Inc (a)	28,501	382
Machinery - General Industry (1.46%)
DXP Enterprises Inc (a)	33,380	466	Genomic Health Inc (a)	58,100	1,071
Middleby Corp (a)	47,242	1,908	Integra LifeSciences Holdings Corp (a)	70,100	2,631
Wabtec Corp	68,665	2,730	Natus Medical Inc (a)	130,400	1,995
		5,104	NuVasive Inc (a)	26,627	1,254
			Thoratec Corp (a)	158,663	3,906
Machinery - Print Trade (0.12%)			Trans1 Inc (a)	38,386	244
Presstek Inc (a)	96,154	402
			Volcano Corp (a)	147,907	2,300
					16,077
Machinery Tools & Related Products (0.62%)
Kennametal Inc	74,120	1,573	Medical Laboratory & Testing Service (1.27%)
Thermadyne Holdings Corp (a)	66,466	599	Bio-Reference Labs Inc (a)	84,442	2,076
		2,172	Icon PLC ADR (a)	93,200	2,365
					4,441
Medical - Biomedical/Gene (5.90%)
Alexion Pharmaceuticals Inc (a)	75,982	3,096	Medical Laser Systems (0.07%)
Bio-Rad Laboratories Inc (a)	11,874	1,014	Biolase Technology Inc (a)	147,990	258
Celera Corp (a)	118,431	1,340
Emergent Biosolutions Inc (a)	33,726	607	Medical Products (1.68%)
Halozyme Therapeutics Inc (a)	137,600	659	BioMimetic Therapeutics Inc (a)	87,861	719

See accompanying notes

367

Schedule of Investments
SmallCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Medical Products (continued)			Patient Monitoring Equipment (0.74%)
Cyberonics Inc (a)	29,858 $	380	Masimo Corp (a)	66,238 $	2,119
Haemonetics Corp (a)	35,410	2,091	Somanetics Corp (a)	24,135	452
Luminex Corp (a)	97,915	1,826			2,571
Wright Medical Group Inc (a)	36,578	848
			Pharmacy Services (0.14%)
		5,864	BioScrip Inc (a)	167,433	502
Medical Sterilization Products (0.56%)
STERIS Corp	57,800	1,968	Physical Therapy & Rehabilitation Centers (1.78%)
			Psychiatric Solutions Inc (a)	167,925	5,590
Metal Processors & Fabrication (0.31%)			RehabCare Group Inc (a)	36,534	626
CIRCOR International Inc	9,855	302			6,216
Hawk Corp (a)	24,709	357
			Physician Practice Management (0.99%)
Kaydon Corp	12,990	434	Pediatrix Medical Group Inc (a)	89,401	3,455
		1,093
Miscellaneous Manufacturers (0.18%)			Power Converter & Supply Equipment (0.56%)
American Railcar Industries Inc	15,634	174	A-Power Energy Generation Systems Ltd (a)	35,791	203
FreightCar America Inc	17,817	465	Energy Conversion Devices Inc (a)	43,640	1,490
		639	Powell Industries Inc (a)	14,106	261
					1,954
Multimedia (0.82%)
Factset Research Systems Inc	73,359	2,846	Printing - Commercial (0.09%)
			VistaPrint Ltd (a)	17,480	298
Networking Products (0.56%)
Atheros Communications Inc (a)	33,676	605	Property & Casualty Insurance (0.47%)
Ixia (a)	201,660	1,343	Navigators Group Inc (a)	26,077	1,317
		1,948	PMA Capital Corp (a)	66,857	309
					1,626
Non-Hazardous Waste Disposal (0.60%)
Waste Connections Inc (a)	61,580	2,084	Quarrying (0.28%)
			Compass Minerals International Inc	17,635	969
Oil - Field Services (0.83%)
Core Laboratories NV	18,122	1,336	Reinsurance (0.20%)
Hornbeck Offshore Services Inc (a)	37,123	883	Argo Group International Holdings Ltd (a)	21,742	694
Tetra Technologies Inc (a)	96,167	669
			REITS - Healthcare (0.85%)
		2,888
			Ventas Inc	82,312	2,968
Oil Company - Exploration & Production (3.74%)
Arena Resources Inc (a)	92,015	2,805	REITS - Office Property (0.25%)
Atlas Energy Resources LLC	24,975	552	BioMed Realty Trust Inc	61,294	861
Carrizo Oil & Gas Inc (a)	38,025	889
Comstock Resources Inc (a)	13,410	663	REITS - Single Tenant (0.49%)
			National Retail Properties Inc	95,540	1,703
EXCO Resources Inc (a)	54,477	501
GMX Resources Inc (a)	43,606	1,646
			Research & Development (1.08%)
Mariner Energy Inc (a)	81,409	1,171
			Kendle International Inc (a)	138,591	2,504
Penn Virginia Corp	38,043	1,414
			Parexel International Corp (a)	121,168	1,260
PetroHawk Energy Corp (a)	52,180	989
					3,764
Whiting Petroleum Corp (a)	46,210	2,402
		13,032	Respiratory Products (0.37%)
			Resmed Inc (a)	37,788	1,295
Oil Field Machinery & Equipment (0.93%)
Complete Production Services Inc (a)	121,170	1,501	Retail - Apparel & Shoe (3.58%)
T-3 Energy Services Inc (a)	71,906	1,734	Aeropostale Inc (a)	139,020	3,365
		3,235	Childrens Place Retail Stores Inc/The (a)	73,469	2,456

See accompanying notes

368

Schedule of Investments
SmallCap Growth Fund II
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Retail - Apparel & Shoe (continued)			Superconductor Production & Systems (0.11%)
Finish Line	64,361 $	616	American Superconductor Corp (a)	30,899 $	387
Gymboree Corp (a)	67,200	1,738
Phillips-Van Heusen Corp	109,302	2,679	Telecommunication Equipment (1.88%)
Wet Seal Inc/The (a)	554,037	1,629	Applied Signal Technology Inc	35,074	629
		12,483	Comtech Telecommunications Corp (a)	52,300	2,532
			Nice Systems Ltd ADR (a)	151,717	3,392
Retail - Discount (0.49%)
					6,553
99 Cents Only Stores (a)	141,152	1,722
			Telecommunication Equipment - Fiber Optics (0.40%)
Retail - Home Furnishings (0.03%)			Harmonic Inc (a)	194,885	1,386
Pier 1 Imports Inc (a)	74,235	102
			Telecommunication Services (1.38%)
Retail - Perfume & Cosmetics (0.37%)			NeuStar Inc (a)	51,518	1,015
Ulta Salon Cosmetics & Fragrance Inc (a)	145,975	1,288	Neutral Tandem Inc (a)	218,444	3,805
					4,820
Retail - Restaurants (2.31%)
			Therapeutics (2.01%)
BJ's Restaurants Inc (a)	107,925	959
			Allos Therapeutics Inc (a)	141,800	1,037
California Pizza Kitchen Inc (a)	68,414	668
			BioMarin Pharmaceutical Inc (a)	156,411	2,865
CKE Restaurants Inc	223,032	1,894
			Isis Pharmaceuticals Inc (a)	86,786	1,220
Panera Bread Co (a)	65,300	2,946
			Medarex Inc (a)	137,677	968
Texas Roadhouse Inc (a)	224,000	1,573
			Onyx Pharmaceuticals Inc (a)	34,359	927
		8,040
					7,017
Retail - Sporting Goods (0.51%)
			Toys (1.04%)
Hibbett Sports Inc (a)	99,800	1,777
			Marvel Entertainment Inc (a)	112,760	3,630
Schools (0.71%)
			Transactional Software (0.40%)
Capella Education Co (a)	16,760	794
			Innerworkings Inc (a)	198,900	1,382
Corinthian Colleges Inc (a)	73,925	1,056
K12 Inc (a)	23,093	635
			Transport - Marine (0.06%)
		2,485	Genco Shipping & Trading Ltd	9,639	201
Seismic Data Collection (0.43%)
ION Geophysical Corp (a)	227,900	1,495	Transport - Services (1.54%)
			HUB Group Inc (a)	170,654	5,367
Semiconductor Component - Integrated Circuits (1.04%)
Anadigics Inc (a)	22,924	41	Transport - Truck (1.14%)
Hittite Microwave Corp (a)	60,700	1,989	Landstar System Inc	75,790	2,925
Power Integrations Inc	75,894	1,593	Old Dominion Freight Line Inc (a)	34,600	1,050
		3,623			3,975
Semiconductor Equipment (0.39%)			Veterinary Diagnostics (0.67%)
Amtech Systems Inc (a)	46,364	297	Neogen Corp (a)	25,789	760
BTU International Inc (a)	36,734	182	VCA Antech Inc (a)	86,577	1,567
Varian Semiconductor Equipment					2,327
Associates Inc (a)	32,271	633	Web Hosting & Design (0.17%)
Veeco Instruments Inc (a)	31,690	246	NaviSite Inc (a)	128,683	64
		1,358	NIC Inc	100,009	537
Software Tools (0.20%)					601
ArcSight Inc (a)	120,000	709
			Web Portals (0.16%)
			United Online Inc	76,453	566
Steel - Producers (0.30%)
Steel Dynamics Inc	88,612	1,056

See accompanying notes

369

Schedule of Investments
SmallCap Growth Fund II

October 31, 2008

			Shares	Value
			Held	(000's)
COMMON STOCKS (continued)
Wireless Equipment (1.63%)
Ceragon Networks Ltd (a)			148,300 $	838
Globecomm Systems Inc (a)			74,021	583
SBA Communications Corp (a)			116,579	2,447
Viasat Inc (a)			99,661	1,816
				5,684
TOTAL COMMON STOCKS			$ 334,593
			Principal
			Amount	Value
			(000's)	(000's)
SHORT TERM INVESTMENTS (1.47%)
Commercial Paper (1.47%)
Investment in Joint Trading Account; HSBC
Funding
0.25%, 11/ 3/2008		$ 2,559 $		2,559
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008			2,559	2,559
				5,118
TOTAL SHORT TERM INVESTMENTS			$ 5,118
Total Investments			$ 339,711
Other Assets in Excess of Liabilities, Net - 2.53%				8,818
TOTAL NET ASSETS - 100.00%			$ 348,529
(a)	Non-Income Producing Security
Unrealized Appreciation (Depreciation)
The net federal income tax unrealized appreciation (depreciation) and federal tax cost
of investments held by the fund as of the period end were as follows:
Unrealized Appreciation			$ 21,260
Unrealized Depreciation				(124,591)
Net Unrealized Appreciation (Depreciation)				(103,331)
Cost for federal income tax purposes				443,042
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector				Percent
Consumer, Non-cyclical				30.27%
Industrial				17.14%
Technology				14.69%
Consumer, Cyclical				11.15%
Communications				10.26%
Energy				6.36%
Financial				6.24%
Basic Materials				1.36%
Other Assets in Excess of Liabilities, Net				2.53%
TOTAL NET ASSETS				100.00%
Other Assets Summary (unaudited)
Asset Type				Percent
Futures				4.20%

See accompanying notes

370

	Schedule of Investments
	SmallCap Growth Fund II
	October 31, 2008
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
Russell 2000 Mini; December 2008	Buy	273	$ 14,167	$ 14,646	$ 479
All dollar amounts are shown in thousands (000's)

See accompanying notes

371

Schedule of Investments
SmallCap Value Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (95.59%)			COMMON STOCKS (continued)
Advertising Services (0.32%)			Commercial Banks (continued)
inVentiv Health Inc (a)	148,920 $	1,410	Southwest Bancorp Inc/Stillwater OK	164,670 $	2,385
			Sterling Bancshares Inc/TX	450,180	3,584
Aerospace & Defense (1.15%)			Susquehanna Bancshares Inc	105,340	1,632
Esterline Technologies Corp (a)	87,690	3,161	SVB Financial Group (a)	86,790	4,465
Spirit Aerosystems Holdings Inc (a)	120,690	1,947			62,058
		5,108
			Computer Services (0.41%)
Aerospace & Defense Equipment (2.03%)			Ness Technologies Inc (a)	243,290	1,798
BE Aerospace Inc (a)	131,450	1,692
Moog Inc (a)	97,860	3,437	Computer Software (0.73%)
Triumph Group Inc	88,380	3,876	Double-Take Software Inc (a)	233,250	1,726
		9,005	Omniture Inc (a)	131,390	1,511
					3,237
Airlines (0.99%)
Republic Airways Holdings Inc (a)	293,370	4,386	Computers - Integrated Systems (0.60%)
			NCI Inc (a)	112,070	2,667
Apparel Manufacturers (1.03%)
G-III Apparel Group Ltd (a)	185,780	2,566	Consulting Services (0.60%)
Volcom Inc (a)	154,230	1,994	FTI Consulting Inc (a)	45,380	2,643
		4,560
			Consumer Products - Miscellaneous (0.85%)
Applications Software (1.31%)
			Jarden Corp (a)	210,360	3,744
Progress Software Corp (a)	109,360	2,509
Quest Software Inc (a)	247,670	3,281	Containers - Paper & Plastic (0.85%)
		5,790	Rock-Tenn Co	123,980	3,770
Auto/Truck Parts & Equipment - Replacement (0.46%)
			Diagnostic Kits (0.80%)
ATC Technology Corp/IL (a)	92,647	2,032
			Inverness Medical Innovations Inc (a)	102,130	1,956
Building - Heavy Construction (0.49%)			Meridian Bioscience Inc	63,670	1,565
Perini Corp (a)	114,570	2,179			3,521
			Distribution & Wholesale (0.61%)
Chemicals - Diversified (0.31%)
			Fossil Inc (a)	148,220	2,690
Rockwood Holdings Inc (a)	110,940	1,370
			Diversified Manufacturing Operations (2.52%)
Chemicals - Specialty (1.24%)
			Ameron International Corp	30,670	1,441
Arch Chemicals Inc	83,530	2,370
			AZZ Inc (a)	89,150	2,601
Sensient Technologies Corp	124,080	3,130
			Barnes Group Inc	133,780	1,941
		5,500
			EnPro Industries Inc (a)	98,990	2,199
Commercial Banks (14.01%)			Koppers Holdings Inc	126,090	3,000
Bancfirst Corp	91,160	4,595			11,182
Bank of the Ozarks Inc	123,911	3,767
			Electric - Integrated (3.76%)
City Holding Co	110,354	4,617
			Avista Corp	162,830	3,234
Community Trust Bancorp Inc	111,981	3,738
			Empire District Electric Co/The	183,060	3,517
CVB Financial Corp	205,560	2,602
			Portland General Electric Co	145,392	2,983
First Financial Bankshares Inc	90,590	4,909
			UIL Holdings Corp	121,440	4,007
First Midwest Bancorp Inc/IL	114,590	2,545
			Westar Energy Inc	150,270	2,929
FirstMerit Corp	188,680	4,400
					16,670
Integra Bank Corp	236,170	1,424
MainSource Financial Group Inc	246,990	4,411	Electric Products - Miscellaneous (0.36%)
National Penn Bancshares Inc	320,370	5,427	GrafTech International Ltd (a)	199,180	1,615
S&T Bancorp Inc	125,140	4,267
SCBT Financial Corp	97,089	3,290

See accompanying notes

372

Schedule of Investments
SmallCap Value Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Electronic Components - Miscellaneous (1.72%)			Instruments - Controls (0.63%)
Daktronics Inc	148,140 $	1,476	Watts Water Technologies Inc	104,730 $	2,768
Gentex Corp	162,620	1,560
Methode Electronics Inc	300,940	2,284	Internet Application Software (0.47%)
Plexus Corp (a)	123,920	2,312	RealNetworks Inc (a)	488,460	2,091
		7,632
			Internet Infrastructure Equipment (0.63%)
Electronic Components - Semiconductors (0.45%)			Avocent Corp (a)	185,650	2,789
PMC - Sierra Inc (a)	421,640	1,973
			Intimate Apparel (0.39%)
Electronic Measurement Instruments (0.52%)			Warnaco Group Inc/The (a)	58,210	1,735
Analogic Corp	51,970	2,295
			Investment Companies (0.46%)
Engineering - Research & Development Services (0.61%)			Apollo Investment Corp	154,350	2,034
EMCOR Group Inc (a)	151,100	2,685
			Leisure & Recreation Products (0.58%)
Engines - Internal Combustion (0.58%)			WMS Industries Inc (a)	101,845	2,546
Briggs & Stratton Corp	162,520	2,561
			Life & Health Insurance (0.31%)
Enterprise Software & Services (2.19%)			Protective Life Corp	164,910	1,377
JDA Software Group Inc (a)	149,850	2,140
Lawson Software Inc (a)	367,570	1,955	Machinery - General Industry (0.41%)
Mantech International Corp (a)	50,837	2,742	Robbins & Myers Inc	89,290	1,822
SYNNEX Corp (a)	186,890	2,884
		9,721	Medical - Biomedical/Gene (1.18%)
			Celera Corp (a)	320,660	3,627
Finance - Investment Banker & Broker (1.55%)			Incyte Corp (a)	381,510	1,583
Investment Technology Group Inc (a)	101,310	2,068			5,210
Stifel Financial Corp (a)	109,660	4,786
		6,854	Medical - Drugs (0.45%)
			Viropharma Inc (a)	157,890	1,980
Food - Canned (0.88%)
TreeHouse Foods Inc (a)	128,310	3,883	Medical - Nursing Homes (0.63%)
			Skilled Healthcare Group Inc (a)	228,890	2,811
Food - Miscellaneous/Diversified (0.99%)
Ralcorp Holdings Inc (a)	64,790	4,385	Medical - Outpatient & Home Medical Care (0.86%)
			LHC Group Inc (a)	108,430	3,825
Food - Retail (0.77%)
Ruddick Corp	119,730	3,429	Medical Products (0.75%)
			Zoll Medical Corp (a)	138,730	3,341
Food - Wholesale & Distribution (1.82%)
Fresh Del Monte Produce Inc (a)	182,590	3,854	Metal - Aluminum (0.46%)
Spartan Stores Inc	156,240	4,217	Kaiser Aluminum Corp	60,640	2,035
		8,071
			Miscellaneous Manufacturers (0.48%)
Footwear & Related Apparel (1.23%)
			Aptargroup Inc	69,520	2,108
Iconix Brand Group Inc (a)	299,830	3,265
Skechers U.S.A. Inc (a)	162,240	2,203	Multi-Line Insurance (0.43%)
		5,468	United Fire & Casualty Co	82,943	1,922
Gas - Distribution (2.73%)
Nicor Inc	71,170	3,289	Networking Products (0.46%)
			Anixter International Inc (a)	60,180	2,023
Northwest Natural Gas Co	86,680	4,410
South Jersey Industries Inc	129,380	4,408
			Oil - Field Services (1.63%)
		12,107
			Hornbeck Offshore Services Inc (a)	87,540	2,084

See accompanying notes

373

Schedule of Investments
SmallCap Value Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Oil - Field Services (continued)			Research & Development (0.31%)
Newpark Resources (a)	582,290 $	3,348	Parexel International Corp (a)	133,270 $	1,386
Oil States International Inc (a)	77,530	1,793
		7,225	Retail - Apparel & Shoe (1.01%)
			Dress Barn Inc (a)	291,800	2,790
Oil & Gas Drilling (0.56%)
			JOS A Bank Clothiers Inc (a)	66,490	1,693
Atwood Oceanics Inc (a)	90,470	2,486
					4,483
Oil Company - Exploration & Production (2.19%)			Retail - Fabric Store (0.69%)
Berry Petroleum Co	57,130	1,331	Jo-Ann Stores Inc (a)	159,600	3,058
Brigham Exploration Co (a)	237,480	1,862
Mariner Energy Inc (a)	164,930	2,373	Retail - Gardening Products (0.49%)
Petroquest Energy Inc (a)	179,800	1,789	Tractor Supply Co (a)	51,850	2,155
St Mary Land & Exploration Co	94,800	2,360
			Retail - Restaurants (1.43%)
		9,715
			Buffalo Wild Wings Inc (a)	64,800	1,832
Private Corrections (0.71%)			Jack in the Box Inc (a)	166,870	3,354
Cornell Cos Inc (a)	137,110	3,122	Red Robin Gourmet Burgers Inc (a)	75,810	1,152
					6,338
Property & Casualty Insurance (3.87%)
American Physicians Capital Inc	112,355	4,596	Retail - Sporting Goods (0.43%)
Amerisafe Inc (a)	278,970	4,809	Dick's Sporting Goods Inc (a)	124,730	1,911
First Mercury Financial Corp (a)	192,814	2,081
			Savings & Loans - Thrifts (2.03%)
Harleysville Group Inc	76,009	2,400
			Dime Community Bancshares	225,670	3,768
Navigators Group Inc (a)	64,100	3,238
			Flushing Financial Corp	242,631	3,773
		17,124
			Investors Bancorp Inc (a)	99,700	1,432
Reinsurance (1.04%)					8,973
IPC Holdings Ltd	167,360	4,621
			Semiconductor Component - Integrated Circuits (1.63%)
REITS - Apartments (0.50%)			Emulex Corp (a)	298,060	2,831
Post Properties Inc	99,850	2,229	Pericom Semiconductor Corp (a)	272,400	2,125
			Standard Microsystems Corp (a)	126,130	2,272
REITS - Diversified (0.97%)					7,228
Entertainment Properties Trust	114,223	4,278
			Semiconductor Equipment (0.38%)
			ATMI Inc (a)	137,290	1,670
REITS - Healthcare (1.98%)
Nationwide Health Properties Inc	147,250	4,394
			Steel - Producers (0.34%)
Senior Housing Properties Trust	228,780	4,386	Schnitzer Steel Industries Inc	56,070	1,510
		8,780
REITS - Office Property (1.65%)			Steel - Specialty (0.56%)
BioMed Realty Trust Inc	187,960	2,641	Universal Stainless & Alloy (a)	135,717	2,501
Corporate Office Properties Trust SBI MD	150,460	4,678
			Steel Pipe & Tube (0.95%)
		7,319
			Northwest Pipe Co (a)	75,560	2,171
REITS - Regional Malls (0.60%)			Valmont Industries Inc	36,850	2,019
Taubman Centers Inc	80,350	2,669			4,190
REITS - Shopping Centers (2.26%)			Telecommunication Equipment (1.11%)
Inland Real Estate Corp	431,800	4,949	ADC Telecommunications Inc (a)	315,150	1,998
Urstadt Biddle Properties Inc	309,109	5,063	Comtech Telecommunications Corp (a)	59,835	2,897
		10,012			4,895

See accompanying notes

374

Schedule of Investments
SmallCap Value Fund
October 31, 2008
					Unrealized Appreciation (Depreciation)
					The net federal income tax unrealized appreciation (depreciation) and federal tax cost
			Shares	Value	of investments held by the fund as of the period end were as follows:
			Held	(000's)
COMMON STOCKS (continued)					Unrealized Appreciation	$ 18,854
Telecommunication Equipment - Fiber Optics (0.61%)					Unrealized Depreciation		(125,437)
Harmonic Inc (a)			379,540 $	2,699	Net Unrealized Appreciation (Depreciation)		(106,583)
					Cost for federal income tax purposes		551,140
Telephone - Integrated (0.81%)					All dollar amounts are shown in thousands (000's)
Alaska Communications Systems Group Inc			383,583	3,583
					Portfolio Summary (unaudited)
Toys (0.62%)					Sector		Percent
Jakks Pacific Inc (a)			123,110	2,754
					Financial		36.44%
					Industrial		15.71%
Transport - Marine (0.39%)					Consumer, Non-cyclical		11.59%
Eagle Bulk Shipping Inc			171,180	1,707	Consumer, Cyclical		9.96%
					Technology		7.70%
Transport - Services (0.66%)					Utilities		7.26%
					Communications		4.40%
HUB Group Inc (a)			93,240	2,932	Energy		4.39%
					Basic Materials		2.92%
Transport - Truck (0.79%)					Liabilities in Excess of Other Assets, Net		(0.37%)
Old Dominion Freight Line Inc (a)			115,800	3,513	TOTAL NET ASSETS		100.00%
Water (0.77%)
American Water Works Co Inc			167,760	3,402
Wire & Cable Products (0.57%)
Belden Inc			120,690	2,515
TOTAL COMMON STOCKS			$ 423,399
			Principal
			Amount	Value
			(000's)	(000's)
SHORT TERM INVESTMENTS (4.30%)
Commercial Paper (4.30%)
Investment in Joint Trading Account; HSBC
Funding
0.25%, 11/ 3/2008		$ 9,512 $		9,512
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008			9,512	9,512
				19,024
TOTAL SHORT TERM INVESTMENTS			$ 19,024
REPURCHASE AGREEMENTS (0.48%)
Money Center Banks (0.48%)
Investment in Joint Trading Account; Bank
of America Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $2,198,000; 2.75% -
5.38%; dated 11/28/08 - 02/13/17)		$ 2,134$		2,134
TOTAL REPURCHASE AGREEMENTS			$ 2,134
Total Investments			$ 444,557
Liabilities in Excess of Other Assets, Net - (0.37)%				(1,627)
TOTAL NET ASSETS - 100.00%			$ 442,930
(a)	Non-Income Producing Security

See accompanying notes

375

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
TAX-EXEMPT BONDS (102.89%)				TAX-EXEMPT BONDS (continued)
Alabama (1.72%)				California (continued)
Auburn University				Golden State Tobacco Securitization Corp/CA
5.00%, 6/ 1/2038	$ 1,500 $		1,343	(continued)
Birmingham Baptist Medical Centers Special				5.75%, 6/ 1/2047	$ 2,000 $		1,309
Care Facilities Financing Authority				Hesperia Public Financing Authority/CA XLCA
5.00%, 11/15/2030		1,000	716	5.00%, 9/ 1/2031		1,000	820
Health Care Authority ASSURED GTY				Jurupa Unified School District FGIC
12.50%, 11/15/2037		2,000	2,000	5.13%, 8/ 1/2022		2,700	2,685
			4,059	Morongo Band of Mission Indians
				6.50%, 3/ 1/2028 (b)(c)		500	414
Alaska (4.07%)
				Quechan Indian Tribe of Fort Yuma
City of Anchorage AK				7.00%, 12/ 1/2027		300	240
6.38%, 1/ 1/2020		2,000	2,125
				Rancho Mirage Joint Powers Financing
City of Anchorage AK MBIA				Authority/CA
6.50%, 12/ 1/2013		1,235	1,379	5.00%, 7/ 1/2047 (d)		1,000	737
Northern TOB Securitization Corp/AK				San Diego Redevelopment Agency/CA XLCA
4.63%, 6/ 1/2023		910	736	5.00%, 9/ 1/2023		1,775	1,640
5.00%, 6/ 1/2046		1,000	529	San Joaquin Hills Transportation Corridor
State of Alaska AMBAC				Agency/CA MBIA
5.25%, 10/ 1/2027		4,500	4,841	0.00%, 1/15/2034 (a)		7,000	1,254
			9,610	State of California
				5.25%, 11/ 1/2025		2,000	1,941
Arizona (2.45%)
				Tobacco Securitization Authority of Northern
Arizona State Transportation Board				California/CA
5.00%, 7/ 1/2026		1,500	1,484	5.38%, 6/ 1/2038		1,000	634
Arizona State University/AZ AMBAC				Tobacco Securitization Authority of Southern
5.25%, 9/ 1/2024		1,090	1,052	California/CA
Goodyear McDowell Road Commercial				5.00%, 6/ 1/2037		1,000	598
Corridor Agency AMBAC							16,773
5.25%, 1/ 1/2032		750	672
Maricopa County AZ				Colorado (2.15%)
5.00%, 4/ 1/2035		1,000	989	City of Colorado Springs CO FSA
Pima County Industrial Development Authority				5.25%, 12/15/2022		3,000	2,895
6.25%, 6/ 1/2026		160	129	Colorado Health Facilities Authority
6.00%, 6/ 1/2036		160	112	5.00%, 12/ 1/2035		1,250	839
5.75%, 7/ 1/2036		100	70	Colorado Health Facilities Authority FSA
				5.20%, 3/ 1/2031		1,000	934
6.55%, 12/ 1/2037		300	219
				Lincoln Park Metropolitan District/CO
University Medical Center Corp/AZ GO of
Corp				6.20%, 12/ 1/2037		500	423
5.00%, 7/ 1/2035		1,500	1,066				5,091
			5,793	Connecticut (0.51%)
California (7.10%)				State of Connecticut ACA
California State Public Works Board				6.60%, 7/ 1/2024		1,500	1,214
5.00%, 4/ 1/2030		1,175	1,039
California Statewide Communities				District of Columbia (1.86%)
Development Authority				District of Columbia MBIA
5.00%, 3/ 1/2035		1,000	778	8.83%, 9/15/2029		2,000	2,000
Foothill Eastern Transportation Corridor				District of Columbia Water & Sewer Authority
Agency/CA MBIA				FSA
0.00%, 1/15/2018 (a)		2,000	1,003	5.50%, 10/ 1/2017		500	531
Fremont Unified School District/Alameda				5.50%, 10/ 1/2041		2,000	1,876
County CA FGIC							4,407
5.00%, 8/ 1/2025		1,000	964
				Florida (6.50%)
Golden State Tobacco Securitization Corp/CA
5.00%, 6/ 1/2045		1,000	717	Amelia Walk Community Development District
				5.50%, 5/ 1/2037		100	62

See accompanying notes

376

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
TAX-EXEMPT BONDS (continued)			TAX-EXEMPT BONDS (continued)
Florida (continued)			Idaho (3.24%)
Bay Laurel Center Community Development			Idaho Health Facilities Authority/ID
District			6.65%, 2/15/2021 (b)	$ 2,000 $		2,340
5.45%, 5/ 1/2037	$ 485 $	320	Idaho Health Facilities Authority/ID RADIAN
County of Alachua FL			5.25%, 9/ 1/2025		2,000	1,610
5.88%, 11/15/2042	150	99	Idaho Housing & Finance Association/ID
County of Miami-Dade FL ASSURED GTY			5.90%, 1/ 1/2015		220	221
5.25%, 10/ 1/2033	2,000	1,566	5.85%, 7/ 1/2036		1,000	843
Escambia County Health Facilities Authority			4.90%, 7/ 1/2038		3,750	2,642
AMBAC
						7,656
5.95%, 7/ 1/2020	110	111
Florida Higher Educational Facilities Financial			Illinois (11.54%)
Authority			Chicago O'Hare International Airport/IL
1.20%, 1/ 1/2019	800	800	AGC-ICC MBIA
Florida Housing Finance Agency AMBAC			5.25%, 1/ 1/2025 (e)		2,250	2,250
6.50%, 7/ 1/2036	900	828	Chicago O'Hare International Airport/IL
Florida State Board of Education FGIC			AMBAC
5.25%, 7/ 1/2017	800	816	5.50%, 1/ 1/2017		965	980
Highlands County Health Facilities Authority			Chicago O'Hare International Airport/IL FSA
5.00%, 11/15/2031	1,180	899	5.75%, 1/ 1/2020 (e)		10,000	9,290
Hillsborough County Port District MBIA			City of Chicago IL
5.38%, 6/ 1/2027	1,000	831	7.46%, 2/15/2026		250	227
Miami-Dade County School Board/FL			City of Chicago IL ASSURED GTY
ASSURED GTY			5.25%, 1/ 1/2025		2,000	1,968
5.25%, 5/ 1/2028	2,000	1,915	City of Chicago IL GNMA/FNMA/FHLMC
Orange County Housing Finance Authority			6.30%, 9/ 1/2029		445	453
7.00%, 10/ 1/2025 (b)	500	510	City of Yorkville IL
Orlando Utilities Commission			5.75%, 3/ 1/2028		500	360
6.00%, 10/ 1/2010	5,000	5,291	6.00%, 3/ 1/2036		622	432
Port St Lucie FL MBIA			Gilberts Special Service Area No 19
5.00%, 7/ 1/2033	500	417	5.38%, 3/ 1/2016		500	303
Seminole Indian Tribe of Florida			Huntley Special Service Area No 10/IL
5.75%, 10/ 1/2022 (b)(c)	250	211	ASSURED GTY
Tolomato Community Development District			5.10%, 3/ 1/2029		1,000	932
6.55%, 5/ 1/2027	300	250	Illinois Finance Authority
6.65%, 5/ 1/2040	300	241	6.00%, 5/15/2025		500	375
Wentworth Estates Community Development			5.00%, 8/15/2026		160	104
District			5.10%, 8/15/2031		505	315
5.63%, 5/ 1/2037	155	96	5.50%, 8/ 1/2037		1,000	687
West Villages Improvement District			5.75%, 11/15/2037		1,500	1,190
5.50%, 5/ 1/2037	160	101
			Illinois Finance Authority AMBAC
		15,364	6.25%, 2/ 1/2033		250	230
Georgia (2.58%)			Illinois Health Facilities Authority
Monroe County Development Authority/GA			7.00%, 2/15/2009		55	56
MBIA			7.00%, 2/15/2018		720	827
6.70%, 1/ 1/2009	2,500	2,520	Metropolitan Pier & Exposition Authority/IL
6.75%, 1/ 1/2010	3,410	3,570	FGIC
		6,090	0.00%, 6/15/2009 (a)		5,055	4,987
			Pingree Grove Special Service Area No 7
Hawaii (0.92%)			6.00%, 3/ 1/2036		142	104
City & County of Honolulu HI			Village of Bartlett IL
6.00%, 1/ 1/2012	1,270	1,371	5.60%, 1/ 1/2023		300	235
6.00%, 1/ 1/2012	730	795	Village of Bolingbrook IL
		2,166	6.25%, 1/ 1/2024 (a)(f)		500	421

See accompanying notes

377

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
TAX-EXEMPT BONDS (continued)			TAX-EXEMPT BONDS (continued)
Illinois (continued)			Kentucky (continued)
Village of Pingree Grove IL			Louisville & Jefferson County Metropolitan
5.25%, 3/ 1/2015	$ 400 $	357	Government
Volo Village Special Service Area No 3			5.25%, 10/ 1/2036 (e)	$ 855 $		587
6.00%, 3/ 1/2036	250	182				2,272
		27,265	Louisiana (0.35%)
Indiana (4.02%)			Louisiana Public Facilities Authority
County of St Joseph IN			0.00%, 12/ 1/2019 (a)		1,500	828
6.00%, 5/15/2026	230	171
6.00%, 5/15/2038	100	68	Maryland (2.53%)
Hendricks County Building Facilities Corp			City of Baltimore MD
5.50%, 7/15/2020	2,500	2,572	6.50%, 10/ 1/2011		2,000	2,003
Indiana Finance Authority			County of Howard MD
5.38%, 11/ 1/2032	1,000	863	5.25%, 4/ 1/2037		500	294
Indiana Housing Finance Authority			County of Prince Georges MD
GNMA/FNMA			5.20%, 7/ 1/2034		500	334
3.60%, 1/ 1/2032	400	344	Maryland Community Development
Indiana Municipal Power Agency/IN MBIA			Administration
6.13%, 1/ 1/2013	5,145	5,478	5.05%, 9/ 1/2032 (d)		1,000	768
		9,496	Maryland Health & Higher Educational
			Facilities Authority
Iowa (0.97%)			5.25%, 1/ 1/2027		250	166
Altoona IA			5.50%, 8/15/2033		1,500	1,194
5.75%, 6/ 1/2031	1,200	1,047	5.75%, 1/ 1/2038		250	188
City of Sibley IA			Maryland Health & Higher Educational
6.00%, 12/ 1/2037	125	87	Facilities Authority MBIA
Iowa Finance Authority			4.75%, 7/ 1/2036		1,500	1,033
5.75%, 11/15/2024	400	293				5,980
Pottawattamie County IA
			Massachusetts (1.96%)
5.75%, 5/15/2026	385	269
			Massachusetts Bay Transportation Authority
Tobacco Settlement Authority of Iowa/IA			5.25%, 7/ 1/2028		2,000	2,037
5.50%, 6/ 1/2042	1,000	585
			Massachusetts Development Finance Agency
		2,281	6.38%, 7/ 1/2029		800	613
Kansas (3.09%)			5.75%, 11/15/2042		500	311
City of Topeka KS XLCA			Massachusetts Health & Educational Facilities
5.25%, 8/ 1/2035	5,490	4,637	Authority
Lenexa KS			6.00%, 7/ 1/2031		200	219
5.50%, 5/15/2039	1,000	660	6.00%, 7/ 1/2031		800	737
Manhattan KS			5.00%, 7/ 1/2033		1,100	718
5.00%, 5/15/2024	500	336				4,635
5.00%, 5/15/2036	300	177
			Michigan (3.20%)
Sedgwick & Shawnee Counties KS
			Kent Hospital Finance Authority/MI
GNMA/FNMA
5.65%, 6/ 1/2037	1,690	1,483	5.25%, 7/ 1/2030		1,000	688
		7,293	5.50%, 1/15/2047		500	500
			Michigan Strategic Fund
Kentucky (0.96%)			5.45%, 9/ 1/2029		2,000	1,841
City of Murray KY			Michigan Strategic Fund XLCA
5.13%, 8/ 1/2037	1,000	720	5.45%, 12/15/2032		1,000	798
Kentucky Economic Development Finance			Michigan Tobacco Settlement Finance Authority
Authority/KY ASSURED GTY			6.00%, 6/ 1/2048		4,000	2,591
6.00%, 12/ 1/2033	1,000	965
			State of Michigan FSA
			5.25%, 10/ 1/2021		1,000	1,008

See accompanying notes

378

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
TAX-EXEMPT BONDS (continued)				TAX-EXEMPT BONDS (continued)
Michigan (continued)				Nebraska (1.30%)
Summit Academy North				Omaha Public Power District
5.00%, 11/ 1/2015	$ 160 $		140	6.15%, 2/ 1/2012	$ 2,000 $		2,115
			7,566	5.50%, 2/ 1/2039 (d)		1,000	964
							3,079
Minnesota (0.49%)
City of North Oaks MN				Nevada (1.30%)
6.00%, 10/ 1/2027		100	76	County of Clark NV
6.00%, 10/ 1/2033		200	143	5.90%, 11/ 1/2032		160	108
6.13%, 10/ 1/2039		100	70	Nevada Housing Division/NV
City of Pine City MN				GNMA/FNMA/FHLMC
6.25%, 5/ 1/2035		100	77	5.88%, 4/ 1/2038		1,000	842
Dakota County Community Development				Reno NV
Agency				5.25%, 6/ 1/2037 (e)		1,760	1,355
5.00%, 5/ 1/2042		750	426	5.25%, 6/ 1/2041		1,000	757
Inver Grove Heights MN							3,062
5.50%, 10/ 1/2033		500	355
				New Hampshire (0.83%)
			1,147
				New Hampshire Health & Education Facilities
Mississippi (0.44%)				Authority FSA
Biloxi Housing Authority/MS HUD SECT 8				5.50%, 8/ 1/2027		2,000	1,965
6.25%, 9/ 1/2031		50	39
State of Mississippi FSA				New Jersey (3.35%)
5.75%, 12/ 1/2013		170	172	Bergen County Improvement Authority CNTY
				GTD SCH BD RES FD
5.75%, 12/ 1/2013		115	116
				5.00%, 4/ 1/2032		2,000	1,905
5.75%, 12/ 1/2013		195	198
				New Jersey Economic Development Authority
5.75%, 12/ 1/2014		180	182	5.63%, 6/15/2019		500	427
5.75%, 12/ 1/2014		120	121	5.13%, 7/ 1/2025		160	103
5.75%, 12/ 1/2014		205	207	5.75%, 4/ 1/2031		1,000	722
			1,035	5.50%, 6/15/2031		1,000	737
Missouri (1.69%)				New Jersey Health Care Facilities Financing
Cape Girardeau County Industrial Development				Authority
Authority/MO				5.75%, 7/ 1/2037		1,750	1,351
5.63%, 6/ 1/2027		160	133	New Jersey St Housing & Mortgage Finance
Carthage MO				Agency
5.88%, 4/ 1/2030		160	111	6.38%, 10/ 1/2028 (d)		1,000	1,016
6.00%, 4/ 1/2038		750	505	Tobacco Settlement Financing Corp/NJ
				4.75%, 6/ 1/2034		1,000	548
City of Fenton MO
7.00%, 10/ 1/2021		575	644	5.00%, 6/ 1/2041		2,045	1,099
City of Kansas City MO							7,908
5.25%, 3/ 1/2018 (a)		200	171	New York (3.64%)
5.40%, 6/ 1/2024		120	91	East Rochester Housing Authority/NY
City of Maryland Heights MO				5.50%, 8/ 1/2033		160	105
5.50%, 9/ 1/2018		240	206	Metropolitan Transportation Authority/NY
Missouri Housing Development Commission				4.75%, 7/ 1/2019		1,265	1,295
GNMA/FNMA				Metropolitan Transportation Authority/NY
5.05%, 9/ 1/2024		505	424	FGIC
Missouri Joint Municipal Electric Utility				5.25%, 11/15/2031		1,500	1,348
Commission MBIA				New York City Industrial Development Agency
5.00%, 1/ 1/2024		1,500	1,334	6.25%, 3/ 1/2015		1,000	835
St Louis Industrial Development Authority/MO				6.50%, 3/ 1/2035		160	110
6.38%, 12/ 1/2030		500	374
				New York Mortgage Agency/NY
			3,993	5.65%, 4/ 1/2030		470	453

See accompanying notes

379

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
TAX-EXEMPT BONDS (continued)				TAX-EXEMPT BONDS (continued)
New York (continued)				Rhode Island (0.17%)
New York State Dormitory Authority				Providence Housing Authority/RI
5.50%, 7/ 1/2026	$ 1,000 $		864	0.95%, 9/ 1/2017	$ 410 $		410
New York State Dormitory Authority MBIA
5.25%, 10/ 1/2023		1,500	1,486	South Carolina (1.20%)
Tobacco Settlement Financing Authority/NY				Lexington One School Facilities Corp
AMBAC				5.25%, 12/ 1/2029		1,000	926
5.25%, 6/ 1/2021		2,200	2,112	South Carolina Jobs-Economic Development
			8,608	Authority AMBAC
				5.20%, 11/ 1/2027		1,000	948
Ohio (3.07%)
				Tobacco Settlement Revenue Management
Adams County Hospital				Authority/SC
6.25%, 9/ 1/2020		1,000	755	5.00%, 6/ 1/2018		1,000	954
Buckeye Tobacco Settlement Financing							2,828
Authority
5.75%, 6/ 1/2034		500	331	South Dakota (0.44%)
5.88%, 6/ 1/2047		4,500	2,800	South Dakota Health & Educational Facilities
County of Cuyahoga OH				Authority/SD
7.50%, 1/ 1/2030		1,000	1,017	5.25%, 11/ 1/2034		1,250	1,050
County of Franklin OH
				Tennessee (3.02%)
5.13%, 7/ 1/2035		800	572
				Chattanooga Health Educational & Housing
Ohio Housing Finance Agency/OH
				Facility Board/TN
GNMA/FNMA/FHLMC
				5.50%, 10/ 1/2020		510	410
5.30%, 9/ 1/2028		365	303
				Johnson City Health & Educational Facilities
5.40%, 3/ 1/2033		640	517
				Board
Ohio State University				7.50%, 7/ 1/2033		1,000	1,171
5.13%, 12/ 1/2031		1,000	949	5.50%, 7/ 1/2036		375	263
			7,244	Shelby County Health Educational & Housing
Oklahoma (0.11%)				Facilities Board
				5.63%, 9/ 1/2026		500	368
Oklahoma Housing Finance Agency GNMA
8.00%, 8/ 1/2018		130	134	Shelby County Health, Educational & Housing
				Facility Board FSA
Weatherford Hospital Authority
				5.25%, 9/ 1/2027		1,000	974
6.00%, 5/ 1/2025		160	119
				Tennessee Housing Development Agency/TN
			253	GO of AGY
Oregon (1.52%)				5.70%, 7/ 1/2031		355	351
City of Portland OR AMBAC				4.85%, 1/ 1/2032		4,915	3,593
5.75%, 6/15/2016		1,000	1,019				7,130
City of Portland OR FSA				Texas (6.67%)
5.25%, 6/ 1/2020		2,000	2,043
				Austin TX Convention Enterprises Inc/TX
Oregon State Housing & Community Services				5.75%, 1/ 1/2034 (c)		500	346
Department/OR
5.65%, 7/ 1/2028		520	519	City of Houston TX AMBAC
				5.75%, 9/ 1/2015		1,000	1,028
			3,581
				City of Houston TX FSA
Pennsylvania (1.69%)				5.75%, 3/ 1/2015		85	89
Allegheny County Hospital Development				Dallas County Flood Control District
Authority				6.75%, 4/ 1/2016		245	242
5.00%, 11/15/2028		500	286	Dallas-Fort Worth International Airport
City of Philadelphia PA FSA				BHAC-CR FGIC
5.25%, 7/ 1/2029		2,500	2,585	5.50%, 11/ 1/2031		1,500	1,330
Fulton County Industrial Development Authority				Dallas-Fort Worth International Airport
5.90%, 7/ 1/2040		160	109	Facilities Improvement Corp MBIA
Philadelphia Redevelopment Authority FGIC				6.00%, 11/ 1/2023		500	454
5.50%, 4/15/2017		1,000	1,010
			3,990

See accompanying notes

380

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008
	Principal					Principal
	Amount	Value				Amount	Value
	(000's)	(000's)				(000's)	(000's)
TAX-EXEMPT BONDS (continued)			TAX-EXEMPT BONDS (continued)
Texas (continued)			Washington (continued)
El Paso County Hospital District/TX			State of Washington
ASSURED GTY			6.40%, 6/ 1/2017		$ 3,000 $		3,330
5.00%, 8/15/2037	$ 1,000 $	881	Washington Health Care Facilities Authority
Harris County Health Facilities Development			FSA
AMBAC			5.50%, 8/15/2038			1,000	943
13.50%, 11/15/2047	750	750					10,661
Lufkin Health Facilities Development Corp/TX
5.50%, 2/15/2032	500	388	West Virginia (1.14%)
Metro Health Facilities Development Corp/TX			Harrison County County Commission MBIA
7.20%, 1/ 1/2021	1,100	1,000	6.88%, 4/15/2022			2,500	2,504
North Central Texas Health Facility			Ohio County Commission Sewage System
Development Corp			5.85%, 6/ 1/2034			250	192
5.13%, 5/15/2029	1,000	861					2,696
North Central Texas Health Facility			Wisconsin (2.56%)
Development Corp AMBAC
5.25%, 8/15/2032	1,000	878	County of Milwaukee WI FSA
			5.25%, 12/ 1/2025			4,000	3,333
North Texas Health Facilities Development
Corp/TX FSA			Wisconsin Health & Educational Facilities
5.00%, 9/ 1/2024	1,000	953	Authority
			6.00%, 8/15/2019			600	493
5.00%, 9/ 1/2032	2,000	1,787
			Wisconsin Health & Educational Facilities
North Texas Tollway Authority			Authority FSA
5.63%, 1/ 1/2033	1,000	895	5.00%, 8/ 1/2034 (e)			1,750	1,518
5.75%, 1/ 1/2033	1,000	861	Wisconsin Housing & Economic Development
Sea Breeze Public Facility Corp			Authority/WI GO OF AUTH
6.50%, 1/ 1/2046	100	72	4.75%, 9/ 1/2033			1,000	705
Texas State Department Of Housing &							6,049
Community Affairs GNMA
5.70%, 1/ 1/2033	1,245	1,176	TOTAL TAX-EXEMPT BONDS			$ 243,116
Texas Tech University MBIA			Total Investments				243,116
5.00%, 8/15/2025	1,000	1,061
			LIABILITY FOR FLOATING RATE NOTES ISSUED IN
Tyler Health Facilities Development Corp/TX			CONJUNCTION WITH SECURITIES HELD (-5.46%)
5.38%, 11/ 1/2037	1,000	718	Notes with interest rates ranging from 1.99%
		15,770	to 4.65% at October 31, 2008 and
			contractual maturity of collateral from
Utah (1.64%)			2022-2039. (g)			(12,903)	(12,903)
Utah Housing Corp
5.75%, 7/ 1/2036	1,000	831	Total Net Investments			$ 230,213
5.25%, 1/ 1/2039 (e)	4,000	3,057	Other Assets in Excess of Liabilities, Net - 2.57%				6,067
		3,888
			TOTAL NET ASSETS - 100.00%			$ 236,280
Virginia (0.39%)
Lexington Industrial Development Authority
5.38%, 1/ 1/2028	750	499	(a)	Non-Income Producing Security
White Oak Village Shops Community			(b)	Security is Illiquid
Development Authority			(c)	Security exempt from registration under Rule 144A of the Securities Act
5.30%, 3/ 1/2017	500	431		of 1933. These securities may be resold in transactions exempt from
		930		registration, normally to qualified institutional buyers. Unless otherwise
				indicated, these securities are not considered illiquid. At the end of the
Washington (4.51%)				period, the value of these securities totaled $971 or 0.41% of net assets.
Franklin County School District No 1			(d)	Security purchased on a when-issued basis.
Pasco/WA FSA			(e)	Security or portion of underlying security related to Inverse Floaters
5.25%, 12/ 1/2019	5,000	5,102		entered into by the Fund. See notes.
King County School District No 415 Kent/WA			(f)	Variable Rate. Rate shown is in effect at October 31, 2008.
6.30%, 12/ 1/2008	1,065	1,069	(g)	Floating rate securities. The interest rate(s) shown reflect the rates in
Skagit County Public Hospital District No 1/WA				effect at October 31, 2008.
5.75%, 12/ 1/2032	300	217

See accompanying notes

381

Schedule of Investments
Tax-Exempt Bond Fund
October 31, 2008

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 4,247
Unrealized Depreciation		(35,348)
Net Unrealized Appreciation (Depreciation)		(31,101)
Cost for federal income tax purposes		261,243
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Insured		46.13%
Revenue		36.12%
Prerefunded		13.27%
General Obligation		4.78%
Revenue - Special Tax		1.77%
Tax Allocation		0.82%
Liability for Floating Rate Notes Issued		(5.46%)
Other Assets in Excess of Liabilities, Net		2.57%
TOTAL NET ASSETS		100.00%

See accompanying notes

382

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (69.01%)			BONDS (continued)
Agricultural Operations (0.30%)			Asset Backed Securities (continued)
Cargill Inc			Sail Net Interest Margin Notes
5.67%, 1/21/2011 (a)(b)	$ 500 $	499	5.50%, 6/27/2035 (b)(d)	$ 136 $		-
			SLC Student Loan Trust
Airlines (0.30%)			3.42%, 9/15/2013 (a)		823	806
American Airlines Inc			Swift Master Auto Receivables Trust
7.25%, 2/ 5/2009	250	246	4.66%, 6/15/2012 (a)		310	271
Delta Air Lines Inc						7,494
6.62%, 3/18/2011	286	246
			Auto/Truck Parts & Equipment - Original (0.08%)
		492
			Tenneco Inc
Appliances (0.15%)			10.25%, 7/15/2013		155	132
Whirlpool Corp
3.32%, 6/15/2009 (a)	250	249	Automobile Sequential (2.03%)
			Capital Auto Receivables Asset Trust
Asset Backed Securities (4.54%)			4.59%, 10/15/2009 (a)		157	156
Ameriquest Mortgage Securities Inc			5.34%, 1/15/2010 (a)(b)		226	224
3.96%, 7/25/2035 (a)	1,000	192	6.01%, 10/15/2012 (a)		525	487
Caterpillar Financial Asset Trust			Capital One Auto Finance Trust
4.09%, 12/27/2010	250	248	4.57%, 7/15/2011 (a)		266	256
Chase Funding Mortgage Loan Asset-Backed			CPS Auto Trust
Certificates			5.44%, 11/15/2010 (b)		399	396
3.34%, 5/25/2026	50	50
			Ford Credit Auto Owner Trust
CNH Equipment Trust			4.38%, 1/15/2010 (a)		105	104
5.41%, 9/15/2010 (a)	97	97
			Honda Auto Receivables Owner Trust
5.76%, 4/15/2011 (a)	1,500	1,482	5.46%, 5/23/2011		750	747
Countrywide Asset-Backed Certificates			Hyundai Auto Receivables Trust
4.38%, 12/25/2032 (a)	233	174	4.96%, 1/17/2012 (a)		500	482
4.64%, 12/25/2032 (a)	465	240	Nissan Auto Lease Trust
5.43%, 5/25/2033 (a)	147	77	4.27%, 12/15/2010		500	488
4.26%, 6/25/2035 (a)	1,000	219				3,340
3.91%, 11/25/2035 (a)	1,000	179
			Building Products - Cement & Aggregate (0.25%)
3.92%, 12/25/2035 (a)	875	481
			Martin Marietta Materials Inc
6.50%, 1/25/2036 (c)	185	1	3.62%, 4/30/2010 (a)		435	420
3.76%, 2/25/2037 (a)	500	45
4.16%, 11/25/2037 (a)	1,000	79	Building Products - Wood (0.33%)
Fannie Mae Grantor Trust			Masco Corp
5.41%, 9/26/2033 (a)	715	636	3.12%, 3/12/2010 (a)		585	551
First Horizon Asset Backed Trust
3.39%, 10/25/2026 (a)	377	259	Cable TV (0.28%)
Ford Credit Floorplan Master Owner Trust			DirecTV Holdings LLC/DirecTV Financing Co
5.01%, 6/15/2011 (a)	450	428	8.38%, 3/15/2013		500	469
JP Morgan Mortgage Acquisition Corp
3.34%, 3/25/2037 (a)	170	158	Cellular Telecommunications (0.45%)
Lehman XS Trust			Vodafone Group PLC
3.67%, 11/25/2035 (a)	507	306	3.16%, 6/15/2011 (a)		500	417
4.16%, 6/25/2046 (a)	2,003	71	3.09%, 2/27/2012 (a)		400	320
Long Beach Asset Holdings Corp						737
5.93%, 10/25/2046 (b)(c)(d)	599	-
			Chemicals - Diversified (0.18%)
Long Beach Mortgage Loan Trust
			Huntsman LLC
3.76%, 2/25/2035 (a)	1,000	810
			11.50%, 7/15/2012		300	299
Nomura Asset Acceptance Corp
3.48%, 1/25/2036 (a)(b)	612	185

See accompanying notes

383

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Commercial Banks (0.92%)				Electronic Components - Miscellaneous (0.68%)
Colonial Bank/Montgomery AL				Koninklijke Philips Electronics NV
8.00%, 3/15/2009 (e)	$ 500 $		471	3.97%, 3/11/2011 (a)	$ 1,000 $		995
HSBC America Capital Trust I				Sanmina-SCI Corp
7.81%, 12/15/2026 (b)		750	658	5.57%, 6/15/2010 (a)(b)		147	132
M&I Marshall & Ilsley Bank							1,127
3.08%, 12/ 4/2012 (a)		500	391
				Fiduciary Banks (0.30%)
			1,520
				Bank of New York Mellon Corp/The
Computer Services (0.06%)				3.19%, 2/ 5/2010 (a)(f)		500	490
Sungard Data Systems Inc
3.75%, 1/15/2009		100	98	Finance - Auto Loans (0.34%)
				Ford Motor Credit Co LLC
Credit Card Asset Backed Securities (1.54%)				7.57%, 1/13/2012 (a)		500	303
American Express Credit Account Master Trust				GMAC LLC
4.84%, 3/15/2012 (a)		850	815	4.05%, 5/15/2009 (a)		300	261
Cabela's Master Credit Card Trust							564
5.41%, 12/16/2013 (a)(b)		500	454
				Finance - Commercial (0.72%)
Chase Issuance Trust
5.01%, 1/15/2012 (a)		500	476	Caterpillar Financial Services Corp
				3.25%, 2/ 8/2010 (a)(g)		750	734
Citibank Credit Card Issuance Trust
2.89%, 11/22/2010 (a)		330	329	CIT Group Inc
				3.88%, 11/ 3/2008		325	325
Discover Card Master Trust I
4.80%, 5/15/2012 (a)		500	462	3.05%, 2/13/2012 (a)		250	133
			2,536				1,192
				Finance - Consumer Loans (0.28%)
Diversified Banking Institutions (0.24%)
Goldman Sachs Group Inc/The				John Deere Capital Corp
3.25%, 12/23/2008 (a)		400	397	5.20%, 1/18/2011 (a)		500	468
				Finance - Investment Banker & Broker (0.78%)
Diversified Manufacturing Operations (0.32%)
				Bear Stearns Cos LLC/The
Tyco International Finance SA
				4.91%, 7/16/2009 (a)		360	360
6.13%, 1/15/2009		525	524
				3.00%, 11/28/2011 (a)		500	438
Diversified Operations (0.12%)				Merrill Lynch & Co Inc
Capmark Financial Group Inc				3.04%, 6/ 5/2012 (a)		600	489
3.45%, 5/10/2010 (a)		475	190				1,287
				Finance - Leasing Company (0.43%)
Electric - Generation (0.01%)
				International Lease Finance Corp
CE Casecnan Water & Energy				4.84%, 4/20/2009 (a)		750	708
11.95%, 11/15/2010		29	26
				Finance - Mortgage Loan/Banker (6.79%)
Electric - Integrated (1.23%)
				Countrywide Financial Corp
Entergy Gulf States Inc				3.42%, 3/24/2009 (a)		725	711
3.57%, 12/ 8/2008 (a)(b)		100	100
				Fannie Mae
3.21%, 12/ 1/2009 (a)		405	402	3.38%, 12/15/2008		2,000	2,001
Georgia Power Co				4.25%, 5/15/2009		1,000	1,008
3.37%, 3/17/2010 (a)		500	498
				Freddie Mac
Pepco Holdings Inc				3.88%, 1/12/2009		2,500	2,506
3.44%, 6/ 1/2010 (a)		225	222
				3.38%, 4/15/2009		4,000	4,013
Public Service Electric & Gas Co
3.69%, 3/12/2010 (a)		500	497	SLM Student Loan Trust
				4.21%, 7/25/2013 (a)		953	954
TECO Energy Inc
4.80%, 5/ 1/2010 (a)		325	311				11,193
			2,030

See accompanying notes

384

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008
	Principal				Principal
	Amount	Value			Amount	Value
	(000's)	(000's)			(000's)	(000's)
BONDS (continued)			BONDS (continued)
Food - Miscellaneous/Diversified (0.21%)			Medical - Wholesale Drug Distribution (0.15%)
Kraft Foods Inc			Cardinal Health Inc
3.30%, 8/11/2010 (a)	$ 375 $	343	4.32%, 10/ 2/2009 (a)	$ 250 $		247
Food - Retail (0.36%)			Medical Products (0.38%)
Safeway Inc			Angiotech Pharmaceuticals Inc
4.12%, 3/27/2009 (a)	625	602	6.56%, 12/ 1/2013 (a)		225	137
			Hospira Inc
Home Equity - Other (1.14%)			4.24%, 3/30/2010 (a)		500	487
Asset Backed Funding Corp NIM Trust						624
5.90%, 7/26/2035 (b)(d)	56	-
			Metal Processors & Fabrication (0.15%)
Countrywide Asset-Backed Certificates
4.93%, 5/25/2032 (a)	226	183	Timken Co
			5.75%, 2/15/2010		250	245
First NLC Trust
4.01%, 9/25/2035 (a)	1,000	105
			Mortgage Backed Securities (29.52%)
GSAA Trust
			ACT Depositors Corp
5.69%, 4/25/2034	309	306
			4.86%, 9/22/2041 (a)(c)		353	106
JP Morgan Mortgage Acquisition Corp NIM
			American Home Mortgage Assets
5.80%, 4/25/2036 (b)(c)(d)	158	-
			5.87%, 11/25/2035 (a)		264	150
Mastr Asset Backed NIM Trust
			American Home Mortgage Investment Trust
4.75%, 5/26/2035 (c)(d)	40	-
			4.83%, 9/25/2045 (a)		397	229
Mastr Asset Backed Securities Trust
			Banc of America Alternative Loan Trust
3.91%, 10/25/2035 (a)	475	81
			3.66%, 6/25/2036 (a)		1,337	1,288
New Century Home Equity Loan Trust
			Banc of America Commercial Mortgage Inc
3.96%, 7/25/2035 (a)	1,000	245
			7.33%, 11/15/2031		360	359
Option One Mortgage Loan Trust
3.93%, 8/25/2035 (a)	1,000	157	1.02%, 11/10/2038 (a)		9,666	183
4.06%, 6/25/2037 (a)	1,000	52	0.25%, 7/10/2042		63,464	487
			0.68%, 7/10/2042 (a)		20,012	284
Residential Asset Securities Corp
3.94%, 4/25/2035 (a)	692	298	0.12%, 7/10/2043 (a)(b)		6,165	54
4.01%, 7/25/2035 (a)	1,000	453	0.06%, 10/10/2045		16,944	49
		1,880	0.40%, 7/10/2046 (a)		7,383	113
			Banc of America Mortgage Securities Inc
Home Equity - Sequential (0.38%)			4.08%, 3/25/2034 (a)		343	286
Argent Securities Inc			4.71%, 8/25/2034 (a)		317	287
4.60%, 1/25/2034 (a)	342	339
			Bank of America-First Union NB Commercial
BNC Mortgage Loan Trust			Mortgage
3.43%, 7/25/2037 (a)	455	281	1.77%, 4/11/2037 (a)(b)		9,400	1
Merrill Lynch Mortgage Investors NIM Trust			Bear Stearns Adjustable Rate Mortgage Trust
4.50%, 1/25/2035 (b)(c)(d)(f)	1,313	-	6.42%, 4/25/2034 (a)		109	73
		620	Bear Stearns Alt-A Trust
Investment Companies (0.60%)			5.87%, 5/25/2035 (a)		250	185
Xstrata Finance Dubai Ltd			3.91%, 7/25/2035 (a)		1,000	406
3.15%, 11/13/2009 (a)(b)	1,000	982	3.91%, 8/25/2035 (a)		1,002	70
			Bear Stearns Mortgage Funding Trust
Life & Health Insurance (0.14%)			3.47%, 7/25/2036 (a)		1,009	631
Unum Group			Chase Mortgage Finance Corp
5.86%, 5/15/2009	230	226	5.80%, 3/25/2037 (a)		621	217
			5.01%, 7/25/2037 (a)		234	215
Machinery - Farm (0.19%)			Citicorp Mortgage Securities Inc
Case New Holland Inc			5.50%, 12/25/2033		965	935
6.00%, 6/ 1/2009	325	310	Citigroup Commercial Mortgage Trust
			0.44%, 5/15/2043 (b)		33,800	417

See accompanying notes

385

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008
		Principal			Principal
		Amount	Value		Amount	Value
		(000's)	(000's)		(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Mortgage Backed Securities (continued)
Citigroup/Deutsche Bank Commercial				GMAC Commercial Mortgage Securities Inc
Mortgage Trust				0.72%, 5/10/2043 (a)	$ 14,441 $	197
0.43%, 10/15/2048 (a)	$ 11,011 $		188	Greenwich Capital Commercial Funding Corp
0.38%, 12/11/2049 (a)(b)		15,460	266	0.11%, 4/10/2037 (b)	26,051	82
Countrywide Alternative Loan Trust				0.76%, 8/10/2042 (a)(b)	49,278	798
4.36%, 10/25/2034 (a)		625	63	0.30%, 12/10/2049 (a)(b)	17,223	226
4.31%, 2/25/2035 (a)		1,000	811	GS Mortgage Securities Corp II
4.11%, 7/25/2035 (a)		983	225	0.70%, 7/10/2039 (a)(b)	6,822	127
4.02%, 8/25/2035 (a)		2,116	1,122	GSC Capital Corp Mortgage Trust
3.68%, 12/25/2035 (a)		1,381	739	3.52%, 2/25/2036 (a)	228	143
3.61%, 5/25/2036 (a)		976	655	GSR Mortgage Loan Trust
3.66%, 5/25/2036 (a)		1,494	714	4.62%, 9/25/2035 (a)	554	466
6.00%, 5/25/2036		228	223	Heller Financial Commercial Mortgage Asset
				8.22%, 1/17/2034 (a)	600	603
4.59%, 3/20/2046 (a)		1,155	454
				Homebanc Mortgage Trust
Countrywide Asset-Backed NIM Certificates
				3.93%, 7/25/2035 (a)	1,000	354
6.00%, 11/ 8/2036 (b)(d)		491	-
				3.59%, 10/25/2035 (a)	1,897	897
Countrywide Home Loan Mortgage Pass
Through Trust				3.60%, 1/25/2036 (a)	1,745	1,259
4.12%, 7/25/2034 (a)		553	502	Impac CMB Trust
3.56%, 3/25/2035 (a)		288	158	5.46%, 9/25/2034 (a)	116	42
5.53%, 3/20/2036 (a)		420	384	4.24%, 10/25/2034 (a)	623	415
CS First Boston Mortgage Securities Corp				4.81%, 10/25/2034 (a)	292	135
6.38%, 12/16/2035		177	173	4.00%, 11/25/2034 (a)	80	59
0.49%, 7/15/2036 (a)(b)		4,450	66	4.02%, 1/25/2035 (a)	30	20
0.44%, 8/15/2036 (a)(b)		5,554	46	3.57%, 4/25/2035 (a)	779	326
0.50%, 11/15/2036 (a)(b)		10,508	349	3.77%, 8/25/2035 (a)	144	51
0.93%, 1/15/2037 (a)(b)		5,105	98	3.80%, 8/25/2035 (a)	160	51
0.66%, 7/15/2037 (b)		23,304	394	Impac Secured Assets CMN Owner Trust
Downey Savings & Loan Association Mortgage				3.66%, 11/25/2034 (a)	70	42
Loan Trust				Indymac Index Mortgage Loan Trust
4.54%, 4/19/2047 (a)		1,484	558	6.05%, 3/25/2035 (a)	438	239
First Republic Mortgage Loan Trust				5.46%, 5/25/2035 (a)	639	255
4.86%, 8/15/2032 (a)		230	208	5.23%, 6/25/2035 (a)	1,052	688
First Union National Bank Commercial				0.80%, 7/25/2035 (a)	16,923	11
Mortgage
				JP Morgan Alternative Loan Trust
0.90%, 1/12/2043 (a)(b)		25,935	432
				5.40%, 12/25/2036	184	177
First Union National Bank Commercial
Mortgage Securities Inc				JP Morgan Chase Commercial Mortgage
7.84%, 5/17/2032		238	239	Securities Corp
				0.45%, 10/12/2035 (a)(b)	29,654	827
Freddie Mac
				6.04%, 11/15/2035	477	469
4.99%, 7/15/2023 (a)		781	747
				0.22%, 7/12/2037 (b)	69,622	306
6.00%, 3/15/2026		473	481
				0.54%, 10/12/2037 (a)(b)	6,251	206
6.00%, 6/15/2031		393	395
				0.54%, 7/15/2042 (a)	19,965	295
G-Force LLC
3.56%, 12/25/2039 (a)(b)		1,000	712	5.30%, 5/15/2047 (a)	300	265
Ginnie Mae				0.33%, 2/12/2051 (a)	40,587	498
1.57%, 10/16/2012 (a)		6,032	199	JP Morgan Mortgage Trust
4.51%, 10/16/2028 (a)		421	420	4.89%, 4/25/2035 (a)	285	270
3.96%, 6/16/2031		1,079	1,066	6.04%, 10/25/2036 (a)	278	236
1.08%, 2/16/2047 (a)		9,248	422	LB-UBS Commercial Mortgage Trust
				1.25%, 7/15/2035 (b)	17,097	135
0.82%, 3/16/2047 (a)		3,493	169
				1.03%, 2/15/2037 (a)(b)	16,091	245
				0.74%, 7/15/2040 (a)	20,569	412

See accompanying notes

386

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008
		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Mortgage Backed Securities (continued)				Mortgage Backed Securities (continued)
Lehman XS Trust				Washington Mutual Alternative Mortgage
3.63%, 5/25/2046 (a)	$ 1,500 $		350	Pass-Through Certificates
3.79%, 5/25/2046 (a)		1,415	80	3.66%, 7/25/2046 (a)	$ 1,641 $		846
Mastr Seasoned Securities Trust				Wells Fargo Mortgage Backed Securities Trust
5.21%, 10/25/2032 (a)		102	90	5.24%, 4/25/2036 (a)		1,508	876
Merrill Lynch Mortgage Investors Inc							48,673
3.61%, 8/25/2036 (a)		982	444	Mortgage Securities (0.28%)
Merrill Lynch Mortgage Trust				Residential Accredit Loans Inc
5.80%, 5/12/2039 (a)		275	258	3.76%, 2/25/2036 (a)		646	468
0.56%, 5/12/2043		9,997	181
Merrill Lynch/Countrywide Commercial				Multimedia (0.63%)
Mortgage Trust				Time Warner Inc
0.11%, 7/12/2046 (a)(b)		12,973	146	3.03%, 11/13/2009 (a)		500	470
0.12%, 12/12/2049 (a)(b)		38,701	409	Viacom Inc
0.63%, 12/12/2049 (a)		24,349	587	3.17%, 6/16/2009 (a)		600	567
MLCC Mortgage Investors Inc							1,037
3.75%, 7/25/2029 (a)		763	737
				Office Automation & Equipment (0.36%)
Morgan Stanley Capital I
0.94%, 1/13/2041 (a)(b)		18,133	450	Xerox Corp
				3.63%, 12/18/2009 (a)		650	593
3.64%, 8/25/2046 (a)(c)		1,000	250
4.88%, 12/20/2046 (a)(b)		200	26
				Oil Company - Exploration & Production (0.50%)
Residential Funding Mortgage Securities I				Pemex Project Funding Master Trust
3.86%, 7/25/2036 (a)		1,541	1,457	6.55%, 10/15/2009 (a)(b)		500	490
Structured Adjustable Rate Mortgage Loan Trust				4.12%, 6/15/2010 (a)(b)		350	329
3.96%, 8/25/2034 (a)		657	283
							819
Structured Asset Mortgage Investments Inc
3.84%, 8/25/2035 (a)		885	441	Pipelines (0.27%)
6.05%, 8/25/2035 (a)		166	116	Rockies Express Pipeline LLC
3.57%, 2/25/2036 (a)		742	300	5.10%, 8/20/2009 (a)(b)		200	200
3.48%, 5/25/2036 (a)		686	385	Williams Cos Inc
				5.88%, 10/ 1/2010 (a)(b)		250	246
5.26%, 5/25/2036 (a)		134	100
							446
5.29%, 5/25/2036 (a)		524	359
3.94%, 5/25/2045 (a)		786	510	Quarrying (0.18%)
Wachovia Bank Commercial Mortgage Trust				Vulcan Materials Co
0.41%, 6/15/2035 (b)		9,095	218	4.07%, 12/15/2010 (a)		300	298
0.25%, 3/15/2042 (a)(b)		2,902	21
0.64%, 5/15/2044 (a)(b)		19,057	298	Regional Banks (1.46%)
6.05%, 2/15/2051 (a)		300	268	BAC Capital Trust XIII
				3.22%, 3/15/2043 (a)		250	90
WAMU Commercial Mortgage Securities Trust
3.83%, 1/25/2035 (b)		289	272	Capital One Financial Corp
				3.10%, 9/10/2009 (a)		250	232
WaMu Mortgage Pass Through Certificates
3.90%, 12/25/2027 (a)		1,070	933	First Union Institutional Capital I
				8.04%, 12/ 1/2026		400	299
4.92%, 8/25/2035 (a)		436	390
				Fleet Capital Trust II
4.83%, 9/25/2035 (a)		530	472	7.92%, 12/11/2026		577	446
5.93%, 9/25/2036 (a)		1,131	1,031	NB Capital Trust II
4.07%, 4/25/2044 (a)		461	314	7.83%, 12/15/2026		750	578
3.93%, 7/25/2045 (a)		772	237	US Bancorp
3.51%, 11/25/2045 (a)		73	67	3.19%, 2/ 4/2010 (a)(f)		270	267
3.81%, 1/25/2046 (a)		996	504	Wells Fargo & Co
3.50%, 11/25/2046 (a)		1,421	580	3.94%, 1/29/2010 (a)		500	491
3.44%, 5/25/2047 (a)		1,796	857				2,403

See accompanying notes

387

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008

		Principal				Principal
		Amount	Value			Amount	Value
		(000's)	(000's)			(000's)	(000's)
BONDS (continued)				BONDS (continued)
Reinsurance (0.30%)				Telecommunication Services (0.10%)
Berkshire Hathaway Finance Corp				Qwest Corp
5.12%, 1/11/2011 (a)	$ 500 $		488	5.63%, 11/15/2008	$ 170 $		170
REITS - Mortgage (0.37%)				Telephone - Integrated (0.46%)
iStar Financial Inc				Telecom Italia Capital SA
3.37%, 3/16/2009 (a)		375	214	3.28%, 2/ 1/2011 (a)		160	128
3.16%, 9/15/2009 (a)		400	226	5.11%, 7/18/2011 (a)		600	475
3.16%, 3/ 9/2010 (a)		300	168	Telefonica Emisiones SAU
			608	3.12%, 2/ 4/2013 (a)(f)(h)		200	150
							753
REITS - Office Property (0.28%)
HRPT Properties Trust				Tobacco (0.18%)
3.42%, 3/16/2011 (a)		500	456	Reynolds American Inc
				3.52%, 6/15/2011 (a)		350	291
REITS - Warehouse & Industrial (0.30%)
Prologis				Transport - Rail (0.13%)
3.06%, 8/24/2009 (a)		500	487	CSX Corp
				4.88%, 11/ 1/2009		225	214
Rental - Auto & Equipment (0.58%)				TOTAL BONDS		$ 113,769
Erac USA Finance Co
3.71%, 4/30/2009 (a)(b)		500	462	SENIOR FLOATING RATE INTERESTS (0.48%)
3.06%, 8/28/2009 (a)(b)		500	499	Cellular Telecommunications (0.17%)
				Alltel Holdings Corp, Term Loan B
			961
				5.93%, 5/31/2015 (a)		297	282
Retail - Drug Store (0.25%)
CVS/Caremark Corp				Publishing - Periodicals (0.08%)
3.11%, 6/ 1/2010 (a)		450	407	Dex Media East LLC, Term Loan B
				7.02%, 10/17/2014 (a)		245	123
Retail - Regional Department Store (0.14%)
Macys Retail Holdings Inc				Retail - Building Products (0.14%)
4.80%, 7/15/2009		250	237	HD Supply Inc, Term Loan B
				3.89%, 8/30/2012 (a)		317	238
Rubber - Tires (0.14%)
Goodyear Tire & Rubber Co/The				Satellite Telecommunications (0.09%)
6.68%, 12/ 1/2009 (a)		250	229	Telesat Canada Inc, Term Loan B
				8.09%, 9/ 1/2014 (a)		183	139
Sovereign Agency (4.27%)				Telesat Canada Inc, Term Loan DD
Fannie Mae				6.26%, 10/31/2014 (a)		16	12
3.25%, 2/15/2009		5,000	5,009				151
5.38%, 8/15/2009		2,000	2,039
				TOTAL SENIOR FLOATING RATE INTERESTS		$ 794
			7,048
				U.S. GOVERNMENT & GOVERNMENT AGENCY
Special Purpose Entity (0.66%)
				OBLIGATIONS (20.78%)
Allstate Life Global Funding II				Federal Home Loan Mortgage Corporation
3.41%, 2/26/2010 (a)		750	685	(FHLMC) (0.39%)
Williams Cos Inc Credit Linked Certificate				5.21%, 7/ 1/2033 (a)		180	184
Trust/The				5.20%, 10/ 1/2033 (a)		78	80
6.05%, 5/ 1/2009 (a)(b)		400	397
				5.96%, 12/ 1/2034 (a)		371	380
			1,082
							644
Steel - Producers (0.30%)
				Federal National Mortgage Association (FNMA) (7.47%)
Ispat Inland ULC
				5.69%, 2/ 1/2021 (a)		519	527
9.75%, 4/ 1/2014		500	490
				4.49%, 6/ 1/2032 (a)		415	418
				4.79%, 6/ 1/2032 (a)		157	157
				7.00%, 8/ 1/2032 (a)		425	433

See accompanying notes

388

Schedule of Investments
Ultra Short Bond Fund
October 31, 2008
		Principal					Principal
		Amount	Value				Amount	Value
		(000's)	(000's)				(000's)	(000's)
U.S. GOVERNMENT & GOVERNMENT AGENCY				REPURCHASE AGREEMENTS (1.49%)
OBLIGATIONS (continued)				Money Center Banks (1.49%)
Federal National Mortgage Association (FNMA)				BNP Paribas Securities Corporation
(continued)				Repurchase Agreement; 0.20% dated
5.12%, 9/ 1/2032 (a)	$ 400 $		408	10/31/08 maturing 11/03/08 (collateralized
4.14%, 5/ 1/2033 (a)		654	653	by U.S. Government Agency Issues;
3.73%, 6/ 1/2033 (a)		420	420	$489,000; 0.00% - 6.25%; dated 12/23/08
5.06%, 10/ 1/2033 (a)		100	102	- 07/13/37) (i)		$ 485$		485
6.75%, 10/ 1/2033 (a)		77	79	Investment in Joint Trading Account; Bank
				of America Repurchase Agreement;
6.09%, 1/ 1/2034 (a)		242	245	0.15%; dated 10/31/2008 maturing
6.10%, 2/ 1/2034 (a)		153	154	11/03/2008 (collateralized by Sovereign
4.69%, 3/ 1/2034 (a)		701	706	Agency Issues; $2,026,000; 2.75% -
5.33%, 3/ 1/2034 (a)		348	354	5.38%; dated 11/28/08 - 02/13/17)			1,967	1,967
								2,452
5.43%, 3/ 1/2034 (a)		466	466
4.52%, 4/ 1/2034 (a)		343	344	TOTAL REPURCHASE AGREEMENTS			$ 2,452
4.68%, 7/ 1/2034 (a)		739	738	Total Investments			$ 163,690
5.61%, 12/ 1/2034 (a)		315	316	Other Assets in Excess of Liabilities, Net - 0.71%				1,177
6.04%, 12/ 1/2034 (a)		451	465
				TOTAL NET ASSETS - 100.00%			$ 164,867
6.28%, 1/ 1/2035 (a)		64	65
5.46%, 2/ 1/2035 (a)		345	353
5.80%, 2/ 1/2035 (a)		63	63	(a)	Variable Rate. Rate shown is in effect at October 31, 2008.
5.91%, 2/ 1/2035 (a)		664	682	(b)	Security exempt from registration under Rule 144A of the Securities Act
4.37%, 5/ 1/2035 (a)		406	409		of 1933. These securities may be resold in transactions exempt from
					registration, normally to qualified institutional buyers. Unless otherwise
3.48%, 6/ 1/2035 (a)		412	414
					indicated, these securities are not considered illiquid. At the end of the
4.35%, 7/ 1/2035 (a)		1,445	1,451		period, the value of these securities totaled $13,880 or 8.42% of net
4.71%, 7/ 1/2035 (a)		1,045	1,064		assets.
4.94%, 9/ 1/2035 (a)		640	643	(c)	Market value is determined in accordance with procedures established in
					good faith by the Board of Directors. At the end of the period, the value
6.65%, 1/ 1/2036 (a)		181	182
					of these securities totaled $357 or 0.22% of net assets.
			12,311	(d)	Security is Illiquid
U.S. Treasury (12.92%)				(e)	Security or a portion of the security was on loan at the end of the period.
4.75%, 11/15/2008		2,000	2,002	(f)	Non-Income Producing Security
3.00%, 2/15/2009		2,000	2,012	(g)	Security or a portion of the security was pledged to cover margin
					requirements for futures contracts. At the end of the period, the value of
2.63%, 3/15/2009		4,000	4,026
					these securities totaled $162 or 0.10% of net assets.
4.50%, 4/30/2009		5,000	5,084	(h)	Security purchased on a when-issued basis.
4.88%, 5/15/2009		5,000	5,097	(i)	Security was purchased with the cash proceeds from securities loans.
4.88%, 8/15/2009		3,000	3,081
			21,302	Unrealized Appreciation (Depreciation)
				The net federal income tax unrealized appreciation (depreciation) and federal tax cost
TOTAL U.S. GOVERNMENT & GOVERNMENT				of investments held by the fund as of the period end were as follows:
AGENCY OBLIGATIONS		$ 34,257
SHORT TERM INVESTMENTS (7.53%)				Unrealized Appreciation			$ 299
Commercial Paper (7.53%)				Unrealized Depreciation				(46,787)
Fortune Brands Inc				Net Unrealized Appreciation (Depreciation)				(46,488)
5.50%, 11/ 5/2008	$ 5,000 $		4,996	Cost for federal income tax purposes				210,178
Investment in Joint Trading Account; HSBC				All dollar amounts are shown in thousands (000's)
Funding
0.25%, 11/ 3/2008		3,711	3,711
Investment in Joint Trading Account;
Prudential Funding
0.30%, 11/ 3/2008		3,711	3,711
			12,418
TOTAL SHORT TERM INVESTMENTS		$ 12,418

See accompanying notes

389

	Schedule of Investments
	Ultra Short Bond Fund
	October 31, 2008
Portfolio Summary (unaudited)
Sector	Percent
Mortgage Securities	38.05%
Government	22.97%
Financial	14.52%
Asset Backed Securities	9.82%
Consumer, Non-cyclical	5.19%
Communications	2.26%
Industrial	2.06%
Utilities	1.25%
Consumer, Cyclical	1.20%
Energy	0.77%
Basic Materials	0.66%
Technology	0.42%
Diversified	0.12%
Other Assets in Excess of Liabilities, Net	0.71%
TOTAL NET ASSETS	100.00%
Other Assets Summary (unaudited)
Asset Type	Percent
Futures	10.29%
	Futures Contracts
				Current	Unrealized
			Original	Market	Appreciation/
Type	Buy/Sell	Contracts	Value	Value	(Depreciation)
US 2 Year Note; December 2008	Sell	79	$ 16,801	$ 16,972	$ (171)
All dollar amounts are shown in thousands (000's)

See accompanying notes

390

Schedule of Investments
West Coast Equity Fund
October 31, 2008

	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (96.42%)			COMMON STOCKS (continued)
Advanced Materials & Products (0.05%)			Building & Construction Products -
Ceradyne Inc (a)	20,200 $	475	Miscellaneous (0.73%)
			Simpson Manufacturing Co Inc	288,230 $	6,641
Aerospace & Defense (2.55%)
Boeing Co	267,983	14,007	Chemicals - Specialty (0.00%)
			Symyx Technologies (a)	7,416	33
Northrop Grumman Corp	106,500	4,994
Teledyne Technologies Inc (a)	88,500	4,033
			Commercial Banks (1.31%)
		23,034
			Banner Corp	21,197	271
Agricultural Chemicals (0.14%)			Cascade Bancorp	11,000	105
Potash Corp of Saskatchewan	15,075	1,285	City National Corp/CA	131,500	7,039
			East West Bancorp Inc	120,709	2,094
Agricultural Operations (0.18%)			SVB Financial Group (a)	14,600	751
Archer-Daniels-Midland Co	80,600	1,671	Umpqua Holdings Corp	40,327	687
			Westamerica Bancorporation	15,319	877
Airlines (0.77%)
					11,824
Alaska Air Group Inc (a)	142,560	3,521
Cathay Pacific Airways Ltd ADR (a)	580,000	3,422	Commercial Services - Finance (0.33%)
		6,943	Visa Inc	54,100	2,994
Apparel Manufacturers (0.28%)			Computer Aided Design (0.11%)
Columbia Sportswear Co	67,850	2,502	Autodesk Inc (a)	46,000	980
Applications Software (4.00%)			Computers (2.11%)
Actuate Corp (a)	640,090	1,818	Apple Inc (a)	43,050	4,632
Microsoft Corp	1,376,422	30,735	Hewlett-Packard Co	376,800	14,424
Quest Software Inc (a)	269,100	3,566			19,056
		36,119
			Computers - Integrated Systems (0.12%)
Athletic Footwear (1.80%)			Echelon Corp (a)	132,900	1,080
Nike Inc	282,472	16,279
			Computers - Memory Devices (0.02%)
Auto - Car & Light Trucks (0.84%)			NetApp Inc (a)	12,200	165
Toyota Motor Corp ADR	99,550	7,575
			Consumer Products - Miscellaneous (1.72%)
Auto - Medium & Heavy Duty Trucks (1.33%)			Clorox Co	248,030	15,083
Paccar Inc	409,745	11,981	WD-40 Co	15,966	464
					15,547
Auto/Truck Parts & Equipment - Original (0.13%)
Johnson Controls Inc	67,700	1,200	Cosmetics & Toiletries (1.73%)
			Bare Escentuals Inc (a)	73,301	306
Beverages - Non-Alcoholic (0.59%)			Colgate-Palmolive Co	37,560	2,357
Hansen Natural Corp (a)	19,900	504	Estee Lauder Cos Inc/The	70,500	2,541
PepsiCo Inc	85,111	4,852	Procter & Gamble Co	161,200	10,404
		5,356			15,608
Beverages - Wine & Spirits (0.06%)			Diagnostic Kits (0.05%)
Brown-Forman Corp	12,998	590	OraSure Technologies Inc (a)	103,414	477
Building - Mobile Home & Manufactured Housing (0.14%)			Dialysis Centers (0.80%)
Monaco Coach Corp	558,323	1,228	DaVita Inc (a)	127,300	7,224
Building - Residential & Commercial (0.10%)			Disposable Medical Products (0.29%)
KB Home	57,000	951	CR Bard Inc	29,400	2,595

See accompanying notes

391

Schedule of Investments
West Coast Equity Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Distribution & Wholesale (0.00%)			Fiduciary Banks (0.64%)
Building Materials Holding Corp	264 $	-	Northern Trust Corp	103,221 $	5,812
Diversified Banking Institutions (0.34%)			Finance - Investment Banker & Broker (2.59%)
Goldman Sachs Group Inc/The	19,000	1,758	Charles Schwab Corp/The	1,225,837	23,438
JP Morgan Chase & Co	32,850	1,355
		3,113	Food - Miscellaneous/Diversified (0.67%)
			General Mills Inc	48,406	3,279
E-Commerce - Products (0.57%)
			Ralcorp Holdings Inc (a)	41,200	2,788
Amazon.com Inc (a)	63,250	3,621
					6,067
Blue Nile Inc (a)	49,258	1,506
		5,127	Food - Retail (1.49%)
			Dairy Farm International Holdings Ltd ADR	207,803	4,125
E-Commerce - Services (0.02%)
			Kroger Co/The	182,900	5,022
eBay Inc (a)	10,700	163
			Safeway Inc	204,600	4,352
					13,499
Electric - Integrated (0.99%)
Edison International	118,150	4,205	Forestry (1.78%)
PG&E Corp	128,900	4,727	Plum Creek Timber Co Inc	146,700	5,469
		8,932	Weyerhaeuser Co	278,800	10,656
					16,125
Electronic Components - Semiconductors (1.69%)
Intel Corp	586,800	9,389	Gas - Distribution (1.07%)
Lattice Semiconductor Corp (a)	9,468	18	Sempra Energy	227,300	9,681
LSI Corp (a)	243,700	938
Nvidia Corp (a)	97,900	857	Health Care Cost Containment (1.09%)
QLogic Corp (a)	228,100	2,742	McKesson Corp	267,817	9,853
Supertex Inc (a)	54,296	1,310
			Hotels & Motels (0.27%)
		15,254
			Red Lion Hotels Corp (a)(b)	877,885	2,432
Electronic Design Automation (0.06%)
Mentor Graphics Corp (a)	78,200	574	Human Resources (0.85%)
			AMN Healthcare Services Inc (a)	187,923	1,689
Electronic Forms (1.59%)			Resources Connection Inc (a)	169,279	2,935
Adobe Systems Inc (a)	538,900	14,356	Robert Half International Inc	108,300	2,044
			TrueBlue Inc (a)	119,100	992
Electronic Measurement Instruments (0.83%)
					7,660
Flir Systems Inc (a)	28,000	899
Itron Inc (a)	78,750	3,818	Industrial Automation & Robots (0.03%)
Trimble Navigation Ltd (a)	134,398	2,764	Intermec Inc (a)	20,200	262
		7,481
			Instruments - Scientific (2.49%)
Engineering - Research & Development Services (1.11%)			Applied Biosystems Inc	168,200	5,186
Jacobs Engineering Group Inc (a)	275,672	10,043	Dionex Corp (a)	195,388	10,518
			FEI Co (a)	279,125	5,864
Enterprise Software & Services (1.48%)
			Waters Corp (a)	21,600	946
Informatica Corp (a)	166,700	2,342
					22,514
Omnicell Inc (a)	29,327	322
Oracle Corp (a)	437,900	8,009	Internet Application Software (0.21%)
Sybase Inc (a)	100,300	2,671	Art Technology Group Inc (a)	954,419	1,861
		13,344
			Internet Security (0.09%)
Entertainment Software (0.03%)			VeriSign Inc (a)	37,800	801
Electronic Arts Inc (a)	11,423	260

See accompanying notes

392

Schedule of Investments
West Coast Equity Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
Investment Management & Advisory Services (1.79%)			Networking Products (2.01%)
Franklin Resources Inc	237,725 $	16,165	Cisco Systems Inc (a)	909,000 $	16,153
			Polycom Inc (a)	97,100	2,040
Lasers - Systems & Components (0.14%)					18,193
Electro Scientific Industries Inc (a)	148,142	1,240
			Non-Hazardous Waste Disposal (0.75%)
Life & Health Insurance (1.46%)			Waste Connections Inc (a)	199,300	6,746
StanCorp Financial Group Inc	386,600	13,175
			Office Supplies & Forms (0.02%)
Machinery - Material Handling (0.22%)			Avery Dennison Corp	5,400	189
Cascade Corp	60,330	1,992
			Oil - Field Services (0.11%)
Medical - Biomedical/Gene (3.77%)			Schlumberger Ltd	19,350	999
Amgen Inc (a)	167,039	10,004
			Oil & Gas Drilling (0.15%)
Amylin Pharmaceuticals Inc (a)	34,800	355
			Nabors Industries Ltd (a)	93,876	1,350
Dendreon Corp (a)	186,141	916
Genentech Inc (a)	115,090	9,546
			Oil Company - Exploration & Production (5.85%)
Gilead Sciences Inc (a)	203,994	9,353	Apache Corp	110,725	9,116
Invitrogen Corp (a)	13,000	374	Berry Petroleum Co	436,500	10,171
Martek Biosciences Corp (a)	117,599	3,508	EOG Resources Inc	64,550	5,223
		34,056	Occidental Petroleum Corp	510,000	28,325
Medical - Drugs (2.55%)					52,835
Abbott Laboratories	134,415	7,413
			Oil Company - Integrated (3.76%)
Allergan Inc/United States	393,350	15,604	Chevron Corp	397,901	29,683
		23,017	Exxon Mobil Corp	57,700	4,277
Medical - Generic Drugs (0.40%)					33,960
Watson Pharmaceuticals Inc (a)	137,900	3,609
			Power Converter & Supply Equipment (0.05%)
			Sunpower Corp - Class B (a)	16,628	492
Medical - HMO (0.11%)
Health Net Inc (a)	75,760	976
			Property & Casualty Insurance (0.40%)
			Mercury General Corp	71,105	3,653
Medical - Nursing Homes (0.12%)
Sun Healthcare Group Inc (a)	96,430	1,107
			Publicly Traded Investment Fund (0.18%)
			iShares Russell 3000 Index Fund	29,000	1,621
Medical Instruments (0.77%)
Beckman Coulter Inc	65,327	3,261
			Regional Banks (4.89%)
Techne Corp	53,895	3,720	US Bancorp	306,950	9,150
		6,981	Wells Fargo & Co	1,028,368	35,016
Medical Products (2.09%)					44,166
Johnson & Johnson	70,400	4,318
			REITS - Apartments (0.41%)
Mentor Corp	109,500	1,851	Essex Property Trust Inc	38,300	3,727
Stryker Corp	13,900	743
Varian Medical Systems Inc (a)	263,800	12,006	REITS - Healthcare (1.25%)
		18,918	HCP Inc	287,685	8,611
Metal Processors & Fabrication (0.68%)			Nationwide Health Properties Inc	89,288	2,664
Precision Castparts Corp	94,871	6,149			11,275
			REITS - Office Property (0.10%)
Multimedia (1.56%)			Alexandria Real Estate Equities Inc	13,200	918
Walt Disney Co/The	543,110	14,067

See accompanying notes

393

Schedule of Investments
West Coast Equity Fund
October 31, 2008
	Shares	Value		Shares	Value
	Held	(000's)		Held	(000's)
COMMON STOCKS (continued)			COMMON STOCKS (continued)
REITS - Warehouse & Industrial (0.34%)			Transport - Equipment & Leasing (0.18%)
AMB Property Corp	128,815 $	3,095	Greenbrier Cos Inc	198,800 $	1,640
Respiratory Products (0.45%)			Transport - Rail (0.08%)
Resmed Inc (a)	118,500	4,060	Union Pacific Corp	10,525	703
Retail - Apparel & Shoe (0.94%)			Transport - Services (1.61%)
Nordstrom Inc	285,700	5,168	Expeditors International of Washington Inc	446,740	14,586
Ross Stores Inc	101,000	3,302
		8,470	Transport - Truck (0.24%)
			Con-way Inc	64,903	2,209
Retail - Automobile (0.76%)
Copart Inc (a)	197,400	6,889	Travel Services (0.20%)
			Ambassadors Group Inc	176,697	1,845
Retail - Discount (2.78%)
Costco Wholesale Corp	440,190	25,095	Ultra Sound Imaging Systems (0.65%)
			SonoSite Inc (a)	277,955	5,857
Retail - Drug Store (0.29%)
CVS/Caremark Corp	85,765	2,629	Veterinary Diagnostics (0.53%)
			VCA Antech Inc (a)	266,600	4,825
Retail - Restaurants (1.22%)
Jack in the Box Inc (a)	109,100	2,193	Water (0.46%)
Starbucks Corp (a)	674,100	8,851	California Water Service Group	111,900	4,203
		11,044
			Water Treatment Systems (0.01%)
Savings & Loans - Thrifts (1.70%)
			Energy Recovery Inc (a)	16,600	96
Washington Federal Inc	869,892	15,328
			Web Portals (1.25%)
Semiconductor Component - Integrated Circuits (0.45%)
			Google Inc (a)	28,050	10,080
Cypress Semiconductor Corp (a)	115,600	579
			Yahoo! Inc (a)	93,200	1,195
Exar Corp (a)	27,000	180
					11,275
Linear Technology Corp	144,300	3,273
		4,032	Wireless Equipment (0.36%)
			Qualcomm Inc	84,000	3,214
Semiconductor Equipment (0.51%)
Applied Materials Inc	160,400	2,071
			Wound, Burn & Skin Care (0.05%)
Kla-Tencor Corp	67,000	1,557	Obagi Medical Products Inc (a)	51,543	429
Novellus Systems Inc (a)	64,300	1,016
			TOTAL COMMON STOCKS	$ 871,438
		4,644
				Principal
Steel - Producers (0.99%)				Amount	Value
Reliance Steel & Aluminum Co	92,400	2,314		(000's)	(000's)
Schnitzer Steel Industries Inc	247,433	6,663	REPURCHASE AGREEMENTS (4.02%)
		8,977	Money Center Banks (4.02%)
Steel Pipe & Tube (0.15%)			Investment in Joint Trading Account; Bank
Northwest Pipe Co (a)	46,925	1,348	of America Repurchase Agreement;
			0.15%; dated 10/31/2008 maturing
			11/03/2008 (collateralized by Sovereign
Therapeutics (0.13%)			Agency Issues; $18,687,000; 2.75% -
CV Therapeutics Inc (a)	123,423	1,152	5.38%; dated 11/28/08 - 02/13/17)	$ 18,143$	18,143
Toys (0.24%)
Mattel Inc	143,300	2,152

See accompanying notes

394

Schedule of Investments
West Coast Equity Fund
October 31, 2008

		Principal
		Amount	Value
		(000's)	(000's)
REPURCHASE AGREEMENTS (continued)
Money Center Banks (continued)
Investment in Joint Trading Account;
Morgan Stanley Repurchase Agreement;
0.15%; dated 10/31/2008 maturing
11/03/2008 (collateralized by Sovereign
Agency Issues; $18,687,000; 2.63% -
4.63%; dated 09/09/09 - 06/12/15)	$ 18,143$		18,143
			36,286
TOTAL REPURCHASE AGREEMENTS		$ 36,286
Total Investments		$ 907,724
Liabilities in Excess of Other Assets, Net - (0.44)%			(3,933)
TOTAL NET ASSETS - 100.00%		$ 903,791

(a)	Non-Income Producing Security
(b)	As of October 31, 2008, no longer an affiliated security due to decrease in shares held.

Unrealized Appreciation (Depreciation)

The net federal income tax unrealized appreciation (depreciation) and federal tax cost of investments held by the fund as of the period end were as follows:

Unrealized Appreciation	$ 262,838
Unrealized Depreciation		(87,960)
Net Unrealized Appreciation (Depreciation)		174,878
Cost for federal income tax purposes		732,846
All dollar amounts are shown in thousands (000's)
Portfolio Summary (unaudited)
Sector		Percent
Consumer, Non-cyclical		21.50%
Financial		21.24%
Technology		12.16%
Consumer, Cyclical		12.09%
Industrial		11.91%
Energy		9.86%
Communications		6.05%
Basic Materials		2.92%
Utilities		2.53%
Exchange Traded Funds		0.18%
Liabilities in Excess of Other Assets, Net		(0.44%)
TOTAL NET ASSETS		100.00%

See accompanying notes

395

Schedule of Investments
West Coast Equity Fund
October 31, 2008
Affiliated Securities
	October 31, 2007		Purchases			Sales			October 31, 2008
	Shares	Cost (000)	Shares	Cost (000)		Shares	Proceeds (000)		Shares	Cost (000)
Red Lion Hotels Corp	1,206,085 $	9,864	-	$ -		328,200	$ 2,777		877,885 $	6,360
	$ 9,864			$ -			$ 2,777		$ 6,360
					Realized Gain/Loss			Realized Gain/Loss from
		Dividends			on Investments			Other Investment Companies
		(000's)			(000's)				(000's)
Red Lion Hotels Corp	$ -			$ (727)				$ -
	$ -			$ (727)				$ -

See accompanying notes

396

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
BOND & MORTGAGE SECURITIES FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.50	$ 10.67	$ 10.63	$ 10.90
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.50	0.53	0.47	0.15
Net Realized and Unrealized Gain (Loss) on Investments	(2.00)	(0.17)	0.04	(0.27)
Total From Investment Operations	(1.50)	0.36	0.51	(0 .12)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.48)	(0.53)	(0.47)	(0.15)
Total Dividends and Distributions	(0.48)	(0.53)	(0.47)	(0 .15)
Net Asset Value, End of Period	$ 8.52	$ 10.50	$ 10.67	$ 10.63
Total Return(c)	(14.83)%	3.42%	4.93%	(1 .09)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 116,109	$ 162,637	$ 168,767	$ 172,274
Ratio of Expenses to Average Net Assets(e)	0.94%	0.94%	0.94%	0.94%(f)
Ratio of Expenses to Average Net Assets (Excluding Reverse
Repurchase Agreement Expense)(e),(g)	N/A	N/A	0.94%	0.94%(f)
Ratio of Net Investment Income to Average Net Assets	5.01%	4.98%	4.42%	3.95%(f)
Portfolio Turnover Rate	302.6%	259.1%	274.5%	202.1%(f),(h)
	2008	2007	2006	2005(a)
BOND & MORTGAGE SECURITIES FUND
Class B shares
Net Asset Value, Beginning of Period	$ 10.50	$ 10.67	$ 10.64	$ 10.90
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.43	0.46	0.40	0.12
Net Realized and Unrealized Gain (Loss) on Investments	(2.00)	(0.17)	0.03	(0 .26)
Total From Investment Operations	(1.57)	0.29	0.43	(0 .14)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.41)	(0.46)	(0.40)	(0.12)
Total Dividends and Distributions	(0.41)	(0.46)	(0.40)	(0 .12)
Net Asset Value, End of Period	$ 8.52	$ 10.50	$ 10.67	$ 10.64
Total Return(c)	(15.41)%	2.74%	4.15%	(1 .27)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 14,841	$ 22,624	$ 25,384	$ 28,559
Ratio of Expenses to Average Net Assets(e)	1.60%	1.60%	1.60%	1.60%(f)
Ratio of Expenses to Average Net Assets (Excluding Reverse
Repurchase Agreement Expense)(e),(g)	N/A	N/A	1.60%	1.60%(f)
Ratio of Net Investment Income to Average Net Assets	4.35%	4.32%	3.76%	3.30%(f)
Portfolio Turnover Rate	302.6%	259.1%	274.5%	202 .1%(f),(h)
	2008	2007(i)
BOND & MORTGAGE SECURITIES FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.50	$ 10.66
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.41	0.35
Net Realized and Unrealized Gain (Loss) on Investments	(2.00)	(0.15)
Total From Investment Operations	(1.59)	0.20
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.40)	(0.36)
Total Dividends and Distributions	(0.40)	(0.36)
Net Asset Value, End of Period	$ 8.51	$ 10.50
Total Return(c)	(15.62)%	1.92%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,263	$ 2,445
Ratio of Expenses to Average Net Assets(e)	1.75%	1.75%(f)
Ratio of Net Investment Income to Average Net Assets	4.20%	4.26%(f)
Portfolio Turnover Rate	302.6%	259.1%

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Excludes interest expense paid on borrowings through reverse repurchase agreements.

^(h) Portfolio turnover rate excludes approximately $213,484,000 of securities from the acquisition of Principal Bond Fund, Inc.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares recognized $.01 of net investment income per share and incurred a net realized unrealized loss of $.03 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

397

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
		2008		2007	2006	2005	2004
CALIFORNIA MUNICIPAL FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.74		$ 11.32		$ 11.24	$ 11.42	$ 11.22
Income from Investment Operations:
Net Investment Income (Operating Loss)		0.47(a)		0.47(a)	0.48	0.48	0.49
Net Realized and Unrealized Gain (Loss) on Investments		(1.95)		(0.51)	0.22	(0 .15)	0.20
Total From Investment Operations		(1.48)		(0.04)	0.70	0.33	0.69
Less Dividends and Distributions:
Dividends from Net Investment Income		(0.47)		(0.47)	(0.48)	(0.48)	(0.49)
Distributions from Realized Gains		–		(0.07)	(0.14)	(0 .03)	–
Total Dividends and Distributions		(0.47)		(0.54)	(0.62)	(0 .51)	(0.49)
Net Asset Value, End of Period	$ 8.79		$ 10.74		$ 11.32	$ 11.24	$ 11.42
Total Return(b)	(14.26)%		(0.37)%		6.45%	2.90%	6.25%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 250,177		$ 273,618		$ 264,924	$ 241,879	$ 232,239
Ratio of Expenses to Average Net Assets		1.07%		1.18%	0.84%	0.84%	0.85%
Ratio of Expenses to Average Net Assets (Excluding Interest
Expense and Fees)(c)		0.83%		0.82%	N/A	N/A	N/A
Ratio of Gross Expenses to Average Net Assets(d)		1.08%		1.18%	0.84%	0.84%	0.85%
Ratio of Net Investment Income to Average Net Assets		4.67%		4.30%	4.26%	4.19%	4.32%
Portfolio Turnover Rate		41.7%		63.7%	29.0%	26.0%	27.0%
		2008		2007	2006	2005	2004
CALIFORNIA MUNICIPAL FUND
Class B shares
Net Asset Value, Beginning of Period	$ 10.74		$ 11.32		$ 11.24	$ 11.42	$ 11.22
Income from Investment Operations:
Net Investment Income (Operating Loss)		0.40(a)		0.39(a)	0.39	0.39	0.40
Net Realized and Unrealized Gain (Loss) on Investments		(1.96)		(0.51)	0.22	(0 .15)	0.20
Total From Investment Operations		(1.56)		(0.12)	0.61	0.24	0.60
Less Dividends and Distributions:
Dividends from Net Investment Income		(0.39)		(0.39)	(0.39)	(0.39)	(0.40)
Distributions from Realized Gains		–		(0.07)	(0.14)	(0 .03)	–
Total Dividends and Distributions		(0.39)		(0.46)	(0.53)	(0 .42)	(0.40)
Net Asset Value, End of Period	$ 8.79		$ 10.74		$ 11.32	$ 11.24	$ 11.42
Total Return(b)	(14.93)%		(1.12)%		5.66%	2.13%	5.47%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 61,118		$ 84,070		$ 132,364	$ 162,534	$ 195,930
Ratio of Expenses to Average Net Assets		1.85%		1.92%	1.58%	1.59%	1.59%
Ratio of Expenses to Average Net Assets (Excluding Interest
Expense and Fees)(c)		1.61%		1.58%	N/A	N/A	N/A
Ratio of Gross Expenses to Average Net Assets(d)		1.85%		1.92%	1.58%	1.59%	1.59%
Ratio of Net Investment Income to Average Net Assets		3.88%		3.53%	3.52%	3.44%	3.58%
Portfolio Turnover Rate		41.7%		63.7%	29.0%	26.0%	27.0%
		2008		2007	2006	2005	2004
CALIFORNIA MUNICIPAL FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.74		$ 11.32		$ 11.24	$ 11.42	$ 11.22
Income from Investment Operations:
Net Investment Income (Operating Loss)		0.38(a)		0.39(a)	0.39	0.39	0.40
Net Realized and Unrealized Gain (Loss) on Investments		(1.95)		(0.51)	0.22	(0 .15)	0.20
Total From Investment Operations		(1.57)		(0.12)	0.61	0.24	0.60
Less Dividends and Distributions:
Dividends from Net Investment Income		(0.38)		(0.39)	(0.39)	(0.39)	(0.40)
Distributions from Realized Gains		–		(0.07)	(0.14)	(0 .03)	–
Total Dividends and Distributions		(0.38)		(0.46)	(0.53)	(0 .42)	(0.40)
Net Asset Value, End of Period	$ 8.79		$ 10.74		$ 11.32	$ 11.24	$ 11.42
Total Return(b)		(15.01)%		(1.14)%	5.65%	2.13%	5.46%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 8,010		$ 5,127		$ 4,413	$ 4,641	$ 5,275
Ratio of Expenses to Average Net Assets		1.95%		1.95%	1.59%	1.59%	1.60%
Ratio of Expenses to Average Net Assets (Excluding Interest Expense
and Fees)(c)		1.71%		1.59%	N/A	N/A	N/A
Ratio of Gross Expenses to Average Net Assets(d)		2.07%		2.49%	1.59%	1.59%	1.60%
Ratio of Net Investment Income to Average Net Assets		3.81%		3.53%	3.52%	3.44%	3.57%
Portfolio Turnover Rate		41.7%		63.7%	29.0%	26.0%	27.0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Excludes interest expense and fees paid through inverse floater agreements. See "Operating Policies" in notes to financial statements.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

398

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
DISCIPLINED LARGECAP BLEND FUND
Class A shares
Net Asset Value, Beginning of Period	$ 17.85	$ 16.07		$ 14.35	$ 14.08
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.14		0.12	0.11	0.02
Net Realized and Unrealized Gain (Loss) on Investments	(6.01)		2.13	1.86	0.25
Total From Investment Operations	(5.87)		2.25	1.97	0.27
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.13)		(0.09)	(0.05)	–
Distributions from Realized Gains	(1.92)		(0.38)	(0.20)	–
Total Dividends and Distributions	(2.05)		(0.47)	(0.25)	–
Net Asset Value, End of Period	$ 9.93	$ 17.85		$ 16.07	$ 14.35
Total Return(c)	(36.96)%	14.31%		13.86%	1.92%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 218,451	$ 690,007		$ 95,018	$ 88,400
Ratio of Expenses to Average Net Assets(e)	1.00%		0.89%	1.20%	1.11%(f)
Ratio of Net Investment Income to Average Net Assets	1.03%		0.74%	0.70%	0.40%(f)
Portfolio Turnover Rate	121.7%	101.4%(g)		92.4%	86 .7%(f),(h)
	2008		2007	2006	2005(a)
DISCIPLINED LARGECAP BLEND FUND
Class B shares
Net Asset Value, Beginning of Period	$ 17.62	$ 15.94		$ 14.32	$ 14.08
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	–		(0.05)	(0.03)	(0 .01)
Net Realized and Unrealized Gain (Loss) on Investments	(5.93)		2.11	1.85	0.25
Total From Investment Operations	(5.93)		2.06	1.82	0.24
Less Dividends and Distributions:
Distributions from Realized Gains	(1.92)		(0.38)	(0.20)	–
Total Dividends and Distributions	(1.92)		(0.38)	(0.20)	–
Net Asset Value, End of Period	$ 9.77	$ 17.62		$ 15.94	$ 14.32
Total Return(c)	(37.61)%		13.14%	12.82%	1.70%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 25,190	$ 61,799		$ 13,117	$ 14,390
Ratio of Expenses to Average Net Assets(e)	2.04%		1.91%	2.14%	1.78%(f)
Ratio of Net Investment Income to Average Net Assets	(0.03)%	(0.27)%		(0.22)%	(0 .27)%(f)
Portfolio Turnover Rate	121.7%	101.4%(g)		92.4%	86 .7%(f),(h)
	2008		2007(i)
DISCIPLINED LARGECAP BLEND FUND
Class C shares
Net Asset Value, Beginning of Period	$ 17.71	$ 16.26
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.02		(0.03)
Net Realized and Unrealized Gain (Loss) on Investments	(5.96)		1.48
Total From Investment Operations	(5.94)		1.45
Less Dividends and Distributions:
Distributions from Realized Gains	(1.92)		–
Total Dividends and Distributions	(1.92)		–
Net Asset Value, End of Period	$ 9.85	$ 17.71
Total Return(c)	(37.46)%		8.92%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,526	$ 2,480
Ratio of Expenses to Average Net Assets(e)	1.82%		1.82%(f)
Ratio of Net Investment Income to Average Net Assets	0.17%	(0.21)%(f)
Portfolio Turnover Rate	121.7%	101.4%(g)

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of WM Growth & Income Fund.

^(h) Portfolio turnover rate excludes approximately $102,898,000 of securities from the acquisition of Principal Balanced Fund, Inc.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.09 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

399

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
DIVERSIFIED INTERNATIONAL FUND
Class A shares
Net Asset Value, Beginning of Period	$ 17.33	$ 14.33	$ 11.43	$ 10.35
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.16	0.15	0.11	0.01
Net Realized and Unrealized Gain (Loss) on Investments	(7.97)	4.26	3.28	1.07
Total From Investment Operations	(7.81)	4.41	3.39	1.08
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.12)	(0.14)	(0.03)	–
Distributions from Realized Gains	(1.97)	(1.27)	(0.46)	–
Total Dividends and Distributions	(2.09)	(1.41)	(0.49)	–
Net Asset Value, End of Period	$ 7.43	$ 17.33	$ 14.33	$ 11.43
Total Return(c)	(50.60)%	33.39%	30.57%	10.43%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 257,621	$ 699,188	$ 366,675	$ 291,878
Ratio of Expenses to Average Net Assets(e)	1.39%	1.30%	1.41%	1.38%(f)
Ratio of Net Investment Income to Average Net Assets	1.30%	0.99%	0.84%	0.13%(f)
Portfolio Turnover Rate	101.5%	111.3%(g)	107.5%	202.7%(f),(h)
	2008	2007	2006	2005(a)
DIVERSIFIED INTERNATIONAL FUND
Class B shares
Net Asset Value, Beginning of Period	$ 17.21	$ 14.26	$ 11.41	$ 10.35
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.05	–	0.02	(0 .02)
Net Realized and Unrealized Gain (Loss) on Investments	(7.92)	4.25	3.29	1.08
Total From Investment Operations	(7.87)	4.25	3.31	1.06
Less Dividends and Distributions:
Dividends from Net Investment Income	–	(0.03)	–	–
Distributions from Realized Gains	(1.97)	(1.27)	(0.46)	–
Total Dividends and Distributions	(1.97)	(1.30)	(0.46)	–
Net Asset Value, End of Period	$ 7.37	$ 17.21	$ 14.26	$ 11.41
Total Return(c)	(51.01)%	32.17%	29.88%	10.24%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 27,621	$ 74,783	$ 48,040	$ 43,285
Ratio of Expenses to Average Net Assets(e)	2.34%	2.26%	2.10%	1.99%(f)
Ratio of Net Investment Income to Average Net Assets	0.41%	0.01%	0.14%	(0 .48)%(f)
Portfolio Turnover Rate	101.5%	111.3%(g)	107.5%	202 .7%(f),(h)
	2008	2007(i)
DIVERSIFIED INTERNATIONAL FUND
Class C shares
Net Asset Value, Beginning of Period	$ 17.22	$ 13.71
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.09	0.03
Net Realized and Unrealized Gain (Loss) on Investments	(7.95)	3.48
Total From Investment Operations	(7.86)	3.51
Less Dividends and Distributions:
Distributions from Realized Gains	(1.97)	–
Total Dividends and Distributions	(1.97)	–
Net Asset Value, End of Period	$ 7.39	$ 17.22
Total Return(c)	(50.91)%	25.60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 11,322	$ 22,837
Ratio of Expenses to Average Net Assets(e)	2.08%	2.08%(f)
Ratio of Net Investment Income to Average Net Assets	0.73%	0.24%(f)
Portfolio Turnover Rate	101.5%	111.3%(g)

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of WM International Growth Fund.

^(h) Portfolio turnover rate excludes approximately $279,644,000 of securities from the acquisition of Principal International Fund, Inc. and Principal International SmallCap Fund, Inc. and $19,133,000 from portfolio realignment.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.05 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

400

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005	2004
EQUITY INCOME FUND(a)
Class A shares
Net Asset Value, Beginning of Period	$ 23.81	$ 22.43	$ 20.07	$ 17.79	$ 15.46
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.39	0.37	0.33	0.41	0.29
Net Realized and Unrealized Gain (Loss) on Investments	(7.96)	2.54	3.00	2.25	2.33
Total From Investment Operations	(7.57)	2.91	3.33	2.66	2.62
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.39)	(0.33)	(0.34)	(0.38)	(0.29)
Distributions from Realized Gains	(2.04)	(1.20)	(0.63)	–	–
Total Dividends and Distributions	(2.43)	(1.53)	(0.97)	(0 .38)	(0.29)
Net Asset Value, End of Period	$ 13.81	$ 23.81	$ 22.43	$ 20.07	$ 17.79
Total Return(c)	(35.04)%	13.59%	17.16%	15.06%	17.06%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 712,089	$ 1,894,426	$ 1,514,188	$ 887,828	$ 438,776
Ratio of Expenses to Average Net Assets	0.94%	0.84%	0.87%	0.90%	0.91%
Ratio of Gross Expenses to Average Net Assets(d)	–	0.84%	0.87%	0.90%	0.91%
Ratio of Net Investment Income to Average Net Assets	2.06%	1.60%	1.56%	2.13%	1.74%
Portfolio Turnover Rate	75.8%	85.6%(e)	81.0%	32.0%	20.0%
	2008	2007	2006	2005	2004
EQUITY INCOME FUND(a)
Class B shares
Net Asset Value, Beginning of Period	$ 23.62	$ 22.26	$ 19.93	$ 17.67	$ 15.36
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.23	0.17	0.15	0.24	0.14
Net Realized and Unrealized Gain (Loss) on Investments	(7.89)	2.53	2.98	2.24	2.30
Total From Investment Operations	(7.66)	2.70	3.13	2.48	2.44
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.24)	(0.14)	(0.17)	(0.22)	(0.13)
Distributions from Realized Gains	(2.04)	(1.20)	(0.63)	–	–
Total Dividends and Distributions	(2.28)	(1.34)	(0.80)	(0 .22)	(0.13)
Net Asset Value, End of Period	$ 13.68	$ 23.62	$ 22.26	$ 19.93	$ 17.67
Total Return(c)	(35.61)%	12.68%	16.16%	14.07%	16.04%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 177,768	$ 391,824	$ 330,900	$ 226,390	$ 144,144
Ratio of Expenses to Average Net Assets	1.80%	1.68%	1.73%	1.78%	1.81%
Ratio of Gross Expenses to Average Net Assets(d)	–	1.68%	1.73%	1.78%	1.81%
Ratio of Net Investment Income to Average Net Assets	1.24%	0.76%	0.70%	1.25%	0.84%
Portfolio Turnover Rate	75.8%	85.6%(e)	81.0%	32.0%	20.0%
	2008	2007	2006	2005	2004
EQUITY INCOME FUND(a)
Class C shares
Net Asset Value, Beginning of Period	$ 23.42	$ 22.08	$ 19.79	$ 17.57	$ 15.29
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.25	0.19	0.16	0.26	0.16
Net Realized and Unrealized Gain (Loss) on Investments	(7.82)	2.51	2.96	2.22	2.30
Total From Investment Operations	(7.57)	2.70	3.12	2.48	2.46
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.26)	(0.16)	(0.20)	(0 .26)	(0.18)
Distributions from Realized Gains	(2.04)	(1.20)	(0.63)	–	–
Total Dividends and Distributions	(2.30)	(1.36)	(0.83)	(0 .26)	(0.18)
Net Asset Value, End of Period	$ 13.55	$ 23.42	$ 22.08	$ 19.79	$ 17.57
Total Return(c)	(35.55)%	12.72%	16.28%	14.16%	16.16%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 134,522	$ 299,675	$ 251,685	$ 128,523	$ 33,770
Ratio of Expenses to Average Net Assets	1.70%	1.61%	1.64%	1.68%	1.70%
Ratio of Gross Expenses to Average Net Assets(d)	–	1.61%	1.64%	1.68%	1.70%
Ratio of Net Investment Income to Average Net Assets	1.33%	0.83%	0.79%	1.35%	0.95%
Portfolio Turnover Rate	75.8%	85.6%(e)	81.0%	32.0%	20.0%

(a)	Effective June 13, 2008, Equity Income Fund I changed its name to Equity Income Fund.
(b)	Calculated based on average shares outstanding during the period.
(c)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.
(e)	Portfolio turnover rate excludes portfolio realignment from the acquisition of Equity Income Fund and WM Equity Income Fund.

See accompanying notes.

401

FINANCIAL HIGHLIGHTS PRINCIPAL FUNDS, INC.

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

	2008	2007(a)
GLOBAL REAL ESTATE SECURITIES FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.08	$ 10.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.16	0.01
Net Realized and Unrealized Gain (Loss) on Investments	(5.02)	0.07
Total From Investment Operations	(4.86)	0.08
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.18)	–
Total Dividends and Distributions	(0.18)	–
Net Asset Value, End of Period	$ 5.04	$ 10.08
Total Return(c)	(48.89)%(d)	0.80%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,704	$ 2,139
Ratio of Expenses to Average Net Assets(f)	1.45%	1.45%(g)
Ratio of Net Investment Income to Average Net Assets	2.06%	1.31%(g)
Portfolio Turnover Rate	100.9%	86.7%(g)
	2008	2007(a)
GLOBAL REAL ESTATE SECURITIES FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.07	$ 10.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.10	–
Net Realized and Unrealized Gain (Loss) on Investments	(5.05)	0.07
Total From Investment Operations	(4.95)	0.07
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.13)	–
Total Dividends and Distributions	(0.13)	–
Net Asset Value, End of Period	$ 4.99	$ 10.07
Total Return(c)	(49.64)%	0.70%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 932	$ 1,546
Ratio of Expenses to Average Net Assets(f)	2.20%	2.20%(g)
Ratio of Net Investment Income to Average Net Assets	1.23%	0.50%(g)
Portfolio Turnover Rate	100.9%	86.7%(g)

^(a) Period from October 1, 2007, date shares first offered, through October 31, 2007.

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

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

^(d) During 2007, the Fund processed a significant (relative to the Class) "As Of" transaction that resulted in a gain to the remaining shareholders of the Class. In accordance with the Fund's shareholder processing policies, this benefit inures all shareholders of the Class. Had such a gain not been recognized, the total return amounts expressed herein would have been smaller.

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

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

^(g) Computed on an annualized basis.

See accompanying notes.

402

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
GOVERNMENT & HIGH QUALITY BOND FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.06	$ 10.13	$ 10.11	$ 10.38
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.45	0.44	0.41	0.12
Net Realized and Unrealized Gain (Loss) on Investments	(0.74)	(0.06)	0.02	(0 .25)
Total From Investment Operations	(0.29)	0.38	0.43	(0 .13)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.43)	(0.45)	(0.41)	(0 .14)
Total Dividends and Distributions	(0.43)	(0.45)	(0.41)	(0 .14)
Net Asset Value, End of Period	$ 9.34	$ 10.06	$ 10.13	$ 10.11
Total Return(c)	(3.04)%	3.84%	4.38%	(1 .28)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 170,968	$ 194,295	$ 211,705	$ 244,381
Ratio of Expenses to Average Net Assets	0.90%	0.88%	0.96%	0.81%(e)
Ratio of Expenses to Average Net Assets (Excluding Reverse
Repurchase Agreement Expense)(f)	N/A	N/A	0.85%	0.77%(e)
Ratio of Net Investment Income to Average Net Assets	4.51%	4.39%	4.03%	3.35%(e)
Portfolio Turnover Rate	268.0%	261.5%	271.5%	542.3%(e),(g)
	2008	2007	2006	2005(a)
GOVERNMENT & HIGH QUALITY BOND FUND
Class B shares
Net Asset Value, Beginning of Period	$ 10.06	$ 10.13	$ 10.11	$ 10.38
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.36	0.35	0.32	0.09
Net Realized and Unrealized Gain (Loss) on Investments	(0.74)	(0.06)	0.02	(0 .26)
Total From Investment Operations	(0.38)	0.29	0.34	(0 .17)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.34)	(0.36)	(0.32)	(0.10)
Total Dividends and Distributions	(0.34)	(0.36)	(0.32)	(0 .10)
Net Asset Value, End of Period	$ 9.34	$ 10.06	$ 10.13	$ 10.11
Total Return(c)	(3.91)%	2.94%	3.48%	(1 .62)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 32,602	$ 33,667	$ 38,018	$ 47,116
Ratio of Expenses to Average Net Assets	1.79%	1.78%	1.79%	1.74%(e)
Ratio of Expenses to Average Net Assets (Excluding Reverse
Repurchase Agreement Expense)(f)	N/A	N/A	1.68%	1.69%(e)
Ratio of Net Investment Income to Average Net Assets	3.63%	3.49%	3.19%	2.42%(e)
Portfolio Turnover Rate	268.0%	261.5%	271.5%	542 .3%(e),(g)
	2008	2007(h)
GOVERNMENT & HIGH QUALITY BOND FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.07	$ 10.12
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.38	0.29
Net Realized and Unrealized Gain (Loss) on Investments	(0.75)	(0.04)
Total From Investment Operations	(0.37)	0.25
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.35)	(0.30)
Total Dividends and Distributions	(0.35)	(0.30)
Redemption fees	0.01	–
Net Asset Value, End of Period	$ 9.36	$ 10.07
Total Return(c)	(3.69)%	2.56%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 7,666	$ 1,506
Ratio of Expenses to Average Net Assets(i)	1.65%	1.65%(e)
Ratio of Net Investment Income to Average Net Assets	3.83%	3.63%(e)
Portfolio Turnover Rate	268.0%	261.5%

(a)	Period from June 28, 2005, date shares first offered, through October 31, 2005.
(b)	Calculated based on average shares outstanding during the period.
(c)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d)	Total return amounts have not been annualized.
(e)	Computed on an annualized basis.
(f)	Excludes interest expense paid on borrowings through reverse repurchase agreements.
(g)	Portfolio turnover rate excludes approximately $343,164,000 of securities from the acquisition of Principal Government Securities Income Fund, Inc.
(h)	Period from January 17, 2007 through October 31, 2007. Class C shares recognized $.01 of net investment income per share and incurred a net realized and unrealized loss of $.03 per share from January 10, 2007, through January 16, 2007.
(i)       Reflects Manager's contractual expense limit.

See accompanying notes.

403

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005	2004
HIGH YIELD FUND(a)
Class A shares
Net Asset Value, Beginning of Period	$ 8.75	$ 8.79		$ 8.23	$ 8.28	$ 7.88
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.59(b)		0.59(b)	0.61	0.56	0.58
Net Realized and Unrealized Gain (Loss) on Investments	(2.42)		0.21	0.55	(0 .03)	0.43
Total From Investment Operations	(1.83)		0.80	1.16	0.53	1.01
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.60)		(0.66)	(0.60)	(0 .58)	(0.61)
Distributions from Realized Gains	(0.24)		(0.18)	–	–	–
Total Dividends and Distributions	(0.84)		(0.84)	(0.60)	(0 .58)	(0.61)
Net Asset Value, End of Period	$ 6.08	$ 8.75		$ 8.79	$ 8.23	$ 8.28
Total Return(c)	(22.77)%		9.63%	14.63%	6.56%	13.23%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 765,971	$ 809,318		$ 422,747	$ 111,164	$ 85,190
Ratio of Expenses to Average Net Assets	0.92%		0.85%	0.90%	0.92%	0.93%
Ratio of Gross Expenses to Average Net Assets(d)	–		0.85%	0.90%	0.92%	0.93%
Ratio of Net Investment Income to Average Net Assets	7.48%		6.74%	7.31%	6.76%	7.11%
Portfolio Turnover Rate	28.8%		47.4%	85.0%	94.0%	82.0%
	2008		2007	2006	2005	2004
HIGH YIELD FUND(a)
Class B shares
Net Asset Value, Beginning of Period	$ 8.80	$ 8.83		$ 8.27	$ 8.32	$ 7.91
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.53(b)		0.52(b)	0.55	0.50	0.52
Net Realized and Unrealized Gain (Loss) on Investments	(2.44)		0.22	0.55	(0 .03)	0.44
Total From Investment Operations	(1.91)		0.74	1.10	0.47	0.96
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.54)		(0.59)	(0.54)	(0.52)	(0.55)
Distributions from Realized Gains	(0.24)		(0.18)	–	–	–
Total Dividends and Distributions	(0.78)		(0.77)	(0.54)	(0 .52)	(0.55)
Net Asset Value, End of Period	$ 6.11	$ 8.80		$ 8.83	$ 8.27	$ 8.32
Total Return(c)	(23.55)%		8.82%	13.72%	5.75%	12.50%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 49,140	$ 82,104		$ 83,143	$ 73,667	$ 80,036
Ratio of Expenses to Average Net Assets	1.71%		1.65%	1.66%	1.68%	1.69%
Ratio of Gross Expenses to Average Net Assets(d)	–		1.68%	1.66%	1.68%	1.69%
Ratio of Net Investment Income to Average Net Assets	6.64%		5.95%	6.55%	6.00%	6.35%
Portfolio Turnover Rate	28.8%		47.4%	85.0%	94.0%	82.0%
	2008		2007	2006	2005	2004
HIGH YIELD FUND(a)
Class C shares
Net Asset Value, Beginning of Period	$ 8.79	$ 8.83		$ 8.27	$ 8.32	$ 7.91
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.53(b)		0.52(b)	0.55	0.50	0.52
Net Realized and Unrealized Gain (Loss) on Investments	(2.43)		0.22	0.55	(0 .03)	0.44
Total From Investment Operations	(1.90)		0.74	1.10	0.47	0.96
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.54)		(0.60)	(0.54)	(0.52)	(0.55)
Distributions from Realized Gains	(0.24)		(0.18)	–	–	–
Total Dividends and Distributions	(0.78)		(0.78)	(0.54)	(0 .52)	(0.55)
Net Asset Value, End of Period	$ 6.11	$ 8.79		$ 8.83	$ 8.27	$ 8.32
Total Return(c)	(23.43)%		8.76%	13.74%	5.77%	12.51%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 120,324	$ 139,417		$ 76,883	$ 38,475	$ 33,318
Ratio of Expenses to Average Net Assets	1.70%		1.63%	1.65%	1.66%	1.68%
Ratio of Gross Expenses to Average Net Assets(d)	–		1.63%	1.65%	1.66%	1.68%
Ratio of Net Investment Income to Average Net Assets	6.69%		5.97%	6.56%	6.02%	6.36%
Portfolio Turnover Rate	28.8%		47.4%	85.0%	94.0%	82.0%

(a)	Effective June 13, 2008, High Yield Fund II changed its name to High Yield Fund.
(b)	Calculated based on average shares outstanding during the period.
(c)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

404

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005	2004
INCOME FUND
Class A shares
Net Asset Value, Beginning of Period	$ 8.99	$ 9.09	$ 9.05	$ 9.46	$ 9.35
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.47(a)	0.46(a)	0.48	0.45	0.46
Net Realized and Unrealized Gain (Loss) on Investments	(1.14)	(0.06)	0.05	(0 .38)	0.15
Total From Investment Operations	(0.67)	0.40	0.53	0.07	0.61
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.49)	(0.50)	(0.49)	(0.48)	(0.50)
Total Dividends and Distributions	(0.49)	(0.50)	(0.49)	(0 .48)	(0.50)
Net Asset Value, End of Period	$ 7.83	$ 8.99	$ 9.09	$ 9.05	$ 9.46
Total Return(b)	(7.90)%	4.47%	6.02%	0.75%	6.68%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 122,603	$ 145,964	$ 143,590	$ 147,521	$ 147,695
Ratio of Expenses to Average Net Assets	0.90%	0.90%	0.89%	0.91%	0.92%
Ratio of Gross Expenses to Average Net Assets(c)	–	0.90%	0.89%	0.91%	0.92%
Ratio of Net Investment Income to Average Net Assets	5.32%	5.13%	5.27%	4.83%	4.90%
Portfolio Turnover Rate	15.5%	15.2%	26.0%	20.0%	24.0%
	2008	2007	2006	2005	2004
INCOME FUND
Class B shares
Net Asset Value, Beginning of Period	$ 9.02	$ 9.12	$ 9.08	$ 9.49	$ 9.37
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.41(a)	0.40(a)	0.41	0.38	0.39
Net Realized and Unrealized Gain (Loss) on Investments	(1.16)	(0.07)	0.05	(0 .38)	0.16
Total From Investment Operations	(0.75)	0.33	0.46	–	0.55
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.42)	(0.43)	(0.42)	(0.41)	(0.43)
Total Dividends and Distributions	(0.42)	(0.43)	(0.42)	(0 .41)	(0.43)
Net Asset Value, End of Period	$ 7.85	$ 9.02	$ 9.12	$ 9.08	$ 9.49
Total Return(b)	(8.67)%	3.69%	5.23%	0.02%	6.03%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 51,278	$ 77,832	$ 99,751	$ 128,067	$ 152,065
Ratio of Expenses to Average Net Assets	1.64%	1.65%	1.65%	1.65%	1.65%
Ratio of Gross Expenses to Average Net Assets(c)	–	1.66%	1.65%	1.65%	1.65%
Ratio of Net Investment Income to Average Net Assets	4.57%	4.38%	4.51%	4.09%	4.17%
Portfolio Turnover Rate	15.5%	15.2%	26.0%	20.0%	24.0%
	2008	2007	2006	2005	2004
INCOME FUND
Class C shares
Net Asset Value, Beginning of Period	$ 9.02	$ 9.12	$ 9.08	$ 9.49	$ 9.37
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.41(a)	0.40(a)	0.41	0.38	0.39
Net Realized and Unrealized Gain (Loss) on Investments	(1.16)	(0.07)	0.05	(0 .38)	0.16
Total From Investment Operations	(0.75)	0.33	0.46	–	0.55
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.42)	(0.43)	(0.42)	(0.41)	(0.43)
Total Dividends and Distributions	(0.42)	(0.43)	(0.42)	(0 .41)	(0.43)
Net Asset Value, End of Period	$ 7.85	$ 9.02	$ 9.12	$ 9.08	$ 9.49
Total Return(b)	(8.68)%	3.71%	5.23%	0.01%	6.02%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 15,103	$ 12,107	$ 10,412	$ 10,761	$ 11,580
Ratio of Expenses to Average Net Assets	1.65%	1.65%	1.64%	1.66%	1.65%
Ratio of Gross Expenses to Average Net Assets(c)	–	1.84%	1.64%	1.66%	1.65%
Ratio of Net Investment Income to Average Net Assets	4.59%	4.37%	4.52%	4.08%	4.17%
Portfolio Turnover Rate	15.5%	15.2%	26.0%	20.0%	24.0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

405

FINANCIAL HIGHLIGHTS
PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
INFLATION PROTECTION FUND
Class A shares
Net Asset Value, Beginning of Period	$ 9.53	$ 9.67		$ 9.85	$ 10.13
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.49		0.41	0.54	0.21
Net Realized and Unrealized Gain (Loss) on Investments	(2.04)		(0.14)	(0.21)	(0 .32)
Total From Investment Operations	(1.55)		0.27	0.33	(0 .11)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.72)		(0.41)	(0.50)	(0 .17)
Distributions from Realized Gains	–		–	(0.01)	–
Tax Return of Capital Distribution	(0.12)		–	–	–
Total Dividends and Distributions	(0.84)		(0.41)	(0.51)	(0 .17)
Redemption fees	0.01		–	–	–
Net Asset Value, End of Period	$ 7.15	$ 9.53		$ 9.67	$ 9.85
Total Return(c)	(17.81)%		2.88%	3.38%	(1 .09)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 6,167	$ 4,223		$ 3,851	$ 1,508
Ratio of Expenses to Average Net Assets(e)	0.90%		0.90%	0.95%	1.10%(f)
Ratio of Expenses to Average Net Assets (Excluding Reverse
Repurchase Agreement Expense)(e),(g)	N/A		N/A	0.95%	1.10%(f)
Ratio of Net Investment Income to Average Net Assets	5.54%		4.34%	5.57%	6.26%(f)
Portfolio Turnover Rate	32.3%		88.2%	51.4%	45.5%(f)
	2008		2007(h)
INFLATION PROTECTION FUND
Class C shares
Net Asset Value, Beginning of Period	$ 9.56	$ 9.49
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.43		0.30
Net Realized and Unrealized Gain (Loss) on Investments	(2.05)		0.07
Total From Investment Operations	(1.62)		0.37
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.67)		(0.30)
Tax Return of Capital Distribution	(0.10)		–
Total Dividends and Distributions	(0.77)		(0.30)
Net Asset Value, End of Period	$ 7.17	$ 9.56
Total Return(c)	(18.45)%		4.00%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,808	$ 838
Ratio of Expenses to Average Net Assets(e)	1.65%		1.65%(f)
Ratio of Net Investment Income to Average Net Assets	4.89%		4.06%(f)
Portfolio Turnover Rate	32.3%		88.2%(f)
(a) Period from June 28, 2005, date shares first offered, through October 31, 2005.
(b) Calculated based on average shares outstanding during the period.
(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d) Total return amounts have not been annualized.
(e) Reflects Manager's contractual expense limit.
(f) Computed on an annualized basis.
(g) Excludes interest expense paid on borrowings through reverse repurchase agreements.
(h) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized loss of $.05 per share from January 10, 2007, through
January 16, 2007.

See accompanying notes.

406

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
INTERNATIONAL EMERGING MARKETS FUND
Class A shares
Net Asset Value, Beginning of Period	$ 39.50	$ 24.63	$ 19.43	$ 17.32
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.21	0.25	0.14	0.06
Net Realized and Unrealized Gain (Loss) on Investments	(20.16)	16.45	7.04	2.05
Total From Investment Operations	(19.95)	16.70	7.18	2.11
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.10)	(0.08)	(0.05)	–
Distributions from Realized Gains	(5.69)	(1.75)	(1.93)	–
Total Dividends and Distributions	(5.79)	(1.83)	(1.98)	–
Net Asset Value, End of Period	$ 13.76	$ 39.50	$ 24.63	$ 19.43
Total Return(c)	(58.51)%	72.31%	39.48%	12 .18%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 85,229	$ 225,132	$ 83,566	$ 55,053
Ratio of Expenses to Average Net Assets	1.81%	1.74%	1.98%	1.98%(e)
Ratio of Net Investment Income to Average Net Assets	0.78%	0.86%	0.63%	0.91%(e)
Portfolio Turnover Rate	127.6%	141.6%	134.0%	181 .2%(e),(f)
	2008	2007	2006	2005(a)
INTERNATIONAL EMERGING MARKETS FUND
Class B shares
Net Asset Value, Beginning of Period	$ 38.83	$ 24.37	$ 19.34	$ 17.32
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.04)	–	(0.04)	(0 .03)
Net Realized and Unrealized Gain (Loss) on Investments	(19.71)	16.21	7.00	2.05
Total From Investment Operations	(19.75)	16.21	6.96	2.02
Less Dividends and Distributions:
Distributions from Realized Gains	(5.69)	(1.75)	(1.93)	–
Total Dividends and Distributions	(5.69)	(1.75)	(1.93)	–
Net Asset Value, End of Period	$ 13.39	$ 38.83	$ 24.37	$ 19.34
Total Return(c)	(58.91)%	70.81%	38.41%	11.66%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 12,272	$ 33,457	$ 14,597	$ 9,520
Ratio of Expenses to Average Net Assets	2.72%	2.62%	2.81%	3.38%(e)
Ratio of Net Investment Income to Average Net Assets	(0.17)%	(0.01)%	(0.16)%	(0 .48)%(e)
Portfolio Turnover Rate	127.6%	141.6%	134.0%	181 .2%(e),(f)
	2008	2007(g)
INTERNATIONAL EMERGING MARKETS FUND
Class C shares
Net Asset Value, Beginning of Period	$ 39.30	$ 25.31
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.03)	(0.01)
Net Realized and Unrealized Gain (Loss) on Investments	(20.00)	13.99
Total From Investment Operations	(20.03)	13.98
Less Dividends and Distributions:
Distributions from Realized Gains	(5.69)	–
Total Dividends and Distributions	(5.69)	–
Redemption fees	–	0.01
Net Asset Value, End of Period	$ 13.58	$ 39.30
Total Return(c)	(58.91)%	55.43%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 6,248	$ 10,276
Ratio of Expenses to Average Net Assets(h)	2.79%	2.80%(e)
Ratio of Net Investment Income to Average Net Assets	(0.12)%	(0.01)%(e)
Portfolio Turnover Rate	127.6%	141.6%

^(a) Period from June 28, 2005, date shares first offered, through October 31, 2005.
^(b) Calculated based on average shares outstanding during the period.
^(c) Total return is calculated without the front-end sales charge or contingent deferred sales charge.
^(d) Total return amounts have not been annualized.
^(e) Computed on an annualized basis.
^(f) Portfolio turnover rate excludes approximately $24,418,000 of securities from the acquisition of Principal International Emerging Markets Fund, Inc.
^(g) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.75 per share from January 10, 2007, through
January 16, 2007.
^(h) Reflects Manager's contractual expense limit.

See accompanying notes.

407

FINANCIAL HIGHLIGHTS PRINCIPAL FUNDS, INC.

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

	2008	2007(a)
INTERNATIONAL GROWTH FUND
Class A shares
Net Asset Value, Beginning of Period	$ 15.53	$ 15.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.12	(0.01)
Net Realized and Unrealized Gain (Loss) on Investments	(7.46)	0.54
Total From Investment Operations	(7.34)	0.53
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.03)	–
Distributions from Realized Gains	(1.22)	–
Total Dividends and Distributions	(1.25)	–
Redemption fees	0.01	–
Net Asset Value, End of Period	$ 6.95	$ 15.53
Total Return(c)	(51.07)%	3.53%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,760	$ 375
Ratio of Expenses to Average Net Assets(e)	1.60%	1.60%(f)
Ratio of Net Investment Income to Average Net Assets	1.03%	(0.47)%(f)
Portfolio Turnover Rate	125.2%	129.4%(f)
	2008	2007(a)
INTERNATIONAL GROWTH FUND
Class C shares
Net Asset Value, Beginning of Period	$ 15.52	$ 15.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.02	(0.02)
Net Realized and Unrealized Gain (Loss) on Investments	(7.37)	0.54
Total From Investment Operations	(7.35)	0.52
Less Dividends and Distributions:
Distributions from Realized Gains	(1.22)	–
Total Dividends and Distributions	(1.22)	–
Net Asset Value, End of Period	$ 6.95	$ 15.52
Total Return(c)	(51.14)%	3.47%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 246	$ 22
Ratio of Expenses to Average Net Assets(e)	2.35%	2.35%(f)
Ratio of Net Investment Income to Average Net Assets	0.22%	(1.36)%(f)
Portfolio Turnover Rate	125.2%	129.4%(f)

(a)	Period from October 1, 2007, date shares first offered, through October 31, 2007.
(b)	Calculated based on average shares outstanding during the period.
(c)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d)	Total return amounts have not been annualized.
(e)	Reflects Manager's contractual expense limit.
(f)	Computed on an annualized basis.

See accompanying notes.

408

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
LARGECAP BLEND FUND I(b)
Class A shares
Net Asset Value, Beginning of Period	$ 10.57	$ 9.46	$ 8.36	$ 8.20
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.08	0.07	0.06	0.01
Net Realized and Unrealized Gain (Loss) on Investments	(3.88)	1.05	1.10	0.15
Total From Investment Operations	(3.80)	1.12	1.16	0.16
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.05)	(0.01)	(0.03)	–
Distributions from Realized Gains	(0.28)	–	(0.03)	–
Total Dividends and Distributions	(0.33)	(0.01)	(0.06)	–
Net Asset Value, End of Period	$ 6.44	$ 10.57	$ 9.46	$ 8.36
Total Return(d)	(37.03)%	11.81%	13.97%	1.95%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 82,298	$ 145,312	$ 138,832	$ 126,739
Ratio of Expenses to Average Net Assets	1.11%	1.11%	1.11%	1.04%(f)
Ratio of Net Investment Income to Average Net Assets	0.96%	0.70%	0.69%	0.41%(f)
Portfolio Turnover Rate	100.6%	106.2%	65.1%	148.8%(f),(g)
	2008	2007	2006	2005(a)
LARGECAP BLEND FUND I(b)
Class B shares
Net Asset Value, Beginning of Period	$ 10.39	$ 9.39	$ 8.35	$ 8.20
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	–	(0.03)	(0.02)	–
Net Realized and Unrealized Gain (Loss) on Investments	(3.81)	1.03	1.09	0.15
Total From Investment Operations	(3.81)	1.00	1.07	0.15
Less Dividends and Distributions:
Distributions from Realized Gains	(0.28)	–	(0.03)	–
Total Dividends and Distributions	(0.28)	–	(0.03)	–
Net Asset Value, End of Period	$ 6.30	$ 10.39	$ 9.39	$ 8.35
Total Return(d)	(37.62)%	10.65%	12.87%	1.83%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,947	$ 13,747	$ 17,761	$ 21,617
Ratio of Expenses to Average Net Assets	2.07%	2.15%	2.05%	1.47%(f)
Ratio of Net Investment Income to Average Net Assets	0.02%	(0.34)%	(0.24)%	(0 .02)%(f)
Portfolio Turnover Rate	100.6%	106.2%	65.1%	148 .8%(f),(g)
	2008	2007(h)
LARGECAP BLEND FUND I(b)
Class C shares
Net Asset Value, Beginning of Period	$ 10.52	$ 9.84
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.02	(0.02)
Net Realized and Unrealized Gain (Loss) on Investments	(3.88)	0.70
Total From Investment Operations	(3.86)	0.68
Less Dividends and Distributions:
Distributions from Realized Gains	(0.28)	–
Total Dividends and Distributions	(0.28)	–
Net Asset Value, End of Period	$ 6.38	$ 10.52
Total Return(d)	(37.63)%	6.91%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 581	$ 970
Ratio of Expenses to Average Net Assets(i)	1.90%	1.90%(f)
Ratio of Net Investment Income to Average Net Assets	0.19%	(0.29)%(f)
Portfolio Turnover Rate	100.6%	106.2%

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

^(b) Effective June 13, 2008, Partners LargeCap Blend Fund I changed its name to LargeCap Blend Fund I.

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes approximately $149,848,000 of securities from the acquisition of Principal Partners Blue Chip Fund, Inc. and $268,000 from portfolio realignment.

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

⁽ⁱ⁾ Reflects Manager's contractual expense limit.

See accompanying notes.

409

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
LARGECAP BLEND FUND II(b)
Class A shares
Net Asset Value, Beginning of Period	$ 12.45	$ 11.41		$ 10.35	$ 10.30
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.06		0.04	0.05	–
Net Realized and Unrealized Gain (Loss) on Investments	(4.22)		1.61	1.47	0.05
Total From Investment Operations	(4.16)		1.65	1.52	0.05
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.03)		(0.04)	(0.02)	–
Distributions from Realized Gains	(1.04)		(0.57)	(0.44)	–
Total Dividends and Distributions	(1.07)		(0.61)	(0.46)	–
Net Asset Value, End of Period	$ 7.22	$ 12.45		$ 11.41	$ 10.35
Total Return(d)	(36.29)%	15.07%		15.08%	0.49%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 37,841	$ 68,879		$ 59,400	$ 52,211
Ratio of Expenses to Average Net Assets	1.35%		1.40%	1.40%	1.44%(f)
Ratio of Net Investment Income to Average Net Assets	0.61%		0.32%	0.45%	(0 .01)%(f)
Portfolio Turnover Rate	60.0%		53.2%	52.1%	51 .8%(f),(g)
	2008		2007	2006	2005(a)
LARGECAP BLEND FUND II(b)
Class B shares
Net Asset Value, Beginning of Period	$ 12.33	$ 11.33		$ 10.32	$ 10.30
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.02)		(0.04)	(0.02)	(0 .03)
Net Realized and Unrealized Gain (Loss) on Investments	(4.17)		1.61	1.47	0.05
Total From Investment Operations	(4.19)		1.57	1.45	0.02
Less Dividends and Distributions:
Distributions from Realized Gains	(1.04)		(0.57)	(0.44)	–
Total Dividends and Distributions	(1.04)		(0.57)	(0.44)	–
Net Asset Value, End of Period	$ 7.10	$ 12.33		$ 11.33	$ 10.32
Total Return(d)	(36.82)%		14.37%	14.40%	0.19%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 14,273	$ 27,824		$ 25,615	$ 22,978
Ratio of Expenses to Average Net Assets	2.16%		2.09%	2.00%	2.15%(f)
Ratio of Net Investment Income to Average Net Assets	(0.19)%	(0.37)%		(0.15)%	(0 .71)%(f)
Portfolio Turnover Rate	60.0%		53.2%	52.1%	51 .8%(f),(g)
	2008		2007(h)
LARGECAP BLEND FUND II(b)
Class C shares
Net Asset Value, Beginning of Period	$ 12.38	$ 11.37
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.02)		(0.06)
Net Realized and Unrealized Gain (Loss) on Investments	(4.19)		1.07
Total From Investment Operations	(4.21)		1.01
Less Dividends and Distributions:
Distributions from Realized Gains	(1.04)		–
Total Dividends and Distributions	(1.04)		–
Net Asset Value, End of Period	$ 7.13	$ 12.38
Total Return(d)	(36.84)%		8.88%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 922	$ 1,182
Ratio of Expenses to Average Net Assets(i)	2.20%		2.20%(f)
Ratio of Net Investment Income to Average Net Assets	(0.25)%	(0.65)%(f)
Portfolio Turnover Rate	60.0%		53.2%

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

^(b) Effective June 13, 2008, Partners LargeCap Blend Fund changed its name to LargeCap Blend Fund II.

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes approximately $72,822,000 of securities from the acquisition of Principal Partners LargeCap Blend Fund, Inc. and $136,000 from portfolio realignment.

^(h) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.15 per share from January 10, 2007, through January 16, 2007.

⁽ⁱ⁾ Reflects Manager's contractual expense limit.

See accompanying notes.

410

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
LARGECAP GROWTH FUND
Class A shares
Net Asset Value, Beginning of Period	$ 9.96	$ 7.78	$ 7.09	$ 6.79
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	–	(0.01)	–	(0.01)
Net Realized and Unrealized Gain (Loss) on Investments	(3.70)	2.30	0.69	0.31
Total From Investment Operations	(3.70)	2.29	0.69	0.30
Less Dividends and Distributions:
Dividends from Net Investment Income	–	(0.01)	–	–
Distributions from Realized Gains	(0.15)	(0.10)	–	–
Tax Return of Capital Distribution	(0.02)	–	–	–
Total Dividends and Distributions	(0.17)	(0.11)	–	–
Net Asset Value, End of Period	$ 6.09	$ 9.96	$ 7.78	$ 7.09
Total Return(c)	(37.78)%	29.78%	9.73%	4.42%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 321,555	$ 535,659	$ 280,969	$ 270,930
Ratio of Expenses to Average Net Assets(e)	1.21%	1.19%	1.13%	1.01%(f)
Ratio of Net Investment Income to Average Net Assets	(0.02)%	(0.09)%	0.06%	(0 .24)%(f)
Portfolio Turnover Rate	88.8%	113.1%(g)	93.5%	169.0%(f),(h)
	2008	2007	2006	2005(a)
LARGECAP GROWTH FUND
Class B shares
Net Asset Value, Beginning of Period	$ 9.76	$ 7.69	$ 7.07	$ 6.79
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.08)	(0.09)	(0.06)	(0 .02)
Net Realized and Unrealized Gain (Loss) on Investments	(3.60)	2.26	0.68	0.30
Total From Investment Operations	(3.68)	2.17	0.62	0.28
Less Dividends and Distributions:
Distributions from Realized Gains	(0.15)	(0.10)	–	–
Tax Return of Capital Distribution	(0.02)	–	–	–
Total Dividends and Distributions	(0.17)	(0.10)	–	–
Net Asset Value, End of Period	$ 5.91	$ 9.76	$ 7.69	$ 7.07
Total Return(c)	(38.36)%	28.52%	8.77%	4.12%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 31,802	$ 94,254	$ 28,890	$ 35,551
Ratio of Expenses to Average Net Assets(e)	2.13%	2.12%	2.03%	1.73%(f)
Ratio of Net Investment Income to Average Net Assets	(0.91)%	(1.06)%	(0.85)%	(0 .96)%(f)
Portfolio Turnover Rate	88.8%	113.1%(g)	93.5%	169 .0%(f),(h)
	2008	2007(i)
LARGECAP GROWTH FUND
Class C shares
Net Asset Value, Beginning of Period	$ 9.90	$ 8.15
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.07)	(0.07)
Net Realized and Unrealized Gain (Loss) on Investments	(3.66)	1.82
Total From Investment Operations	(3.73)	1.75
Less Dividends and Distributions:
Distributions from Realized Gains	(0.15)	–
Tax Return of Capital Distribution	(0.02)	–
Total Dividends and Distributions	(0.17)	–
Net Asset Value, End of Period	$ 6.00	$ 9.90
Total Return(c)	(38.32)%	21.47%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 9,311	$ 8,037
Ratio of Expenses to Average Net Assets(e)	2.02%	2.03%(f)
Ratio of Net Investment Income to Average Net Assets	(0.89)%	(1.06)%(f)
Portfolio Turnover Rate	88.8%	113.1%(g)

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of WM Growth Fund.

^(h) Portfolio turnover rate excludes approximately $289,113,000 of securities from the acquisition of Principal Growth Fund, Inc.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.03 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

411

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
LARGECAP GROWTH FUND I(b)
Class A shares
Net Asset Value, Beginning of Period	$ 9.45	$ 8.27		$ 8.08	$ 7.93
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.06)		(0.05)	(0.02)	(0 .02)
Net Realized and Unrealized Gain (Loss) on Investments	(3.67)		1.60	0.52	0.17
Total From Investment Operations	(3.73)		1.55	0.50	0.15
Less Dividends and Distributions:
Distributions from Realized Gains	(0.40)		(0.37)	(0.31)	–
Total Dividends and Distributions	(0.40)		(0.37)	(0.31)	–
Net Asset Value, End of Period	$ 5.32	$ 9.45		$ 8.27	$ 8.08
Total Return(d)	(41.07)%	19.42%		6.12%	1.89%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 30,125	$ 55,689		$ 48,815	$ 48,782
Ratio of Expenses to Average Net Assets	1.57%		1.59%	1.56%	1.47%(f)
Ratio of Net Investment Income to Average Net Assets	(0.83)%	(0.57)%		(0.30)%	(0 .86)%(f)
Portfolio Turnover Rate	64.5%		47.7%	58.5%	66 .5%(f),(g)
	2008		2007	2006	2005(a)
LARGECAP GROWTH FUND I(b)
Class B shares
Net Asset Value, Beginning of Period	$ 9.25	$ 8.18		$ 8.06	$ 7.93
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.13)		(0.12)	(0.09)	(0 .05)
Net Realized and Unrealized Gain (Loss) on Investments	(3.56)		1.56	0.52	0.18
Total From Investment Operations	(3.69)		1.44	0.43	0.13
Less Dividends and Distributions:
Distributions from Realized Gains	(0.40)		(0.37)	(0.31)	–
Total Dividends and Distributions	(0.40)		(0.37)	(0.31)	–
Net Asset Value, End of Period	$ 5.16	$ 9.25		$ 8.18	$ 8.06
Total Return(d)	(41.54)%		18.25%	5.24%	1.64%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,467	$ 12,656		$ 13,696	$ 14,707
Ratio of Expenses to Average Net Assets	2.47%		2.50%	2.39%	2.39%(f)
Ratio of Net Investment Income to Average Net Assets	(1.73)%	(1.46)%		(1.12)%	(1 .79)%(f)
Portfolio Turnover Rate	64.5%		47.7%	58.5%	66 .5%(f),(g)
	2008		2007(h)
LARGECAP GROWTH FUND I(b)
Class C shares
Net Asset Value, Beginning of Period	$ 9.50	$ 8.55
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.11)		(0.10)
Net Realized and Unrealized Gain (Loss) on Investments	(3.67)		1.05
Total From Investment Operations	(3.78)		0.95
Less Dividends and Distributions:
Distributions from Realized Gains	(0.40)		–
Total Dividends and Distributions	(0.40)		–
Net Asset Value, End of Period	$ 5.32	$ 9.50
Total Return(d)	(41.39)%	11.11%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 415	$ 652
Ratio of Expenses to Average Net Assets(i)	2.20%		2.20%(f)
Ratio of Net Investment Income to Average Net Assets	(1.46)%	(1.44)%(f)
Portfolio Turnover Rate	64.5%		47.7%

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

^(b) Effective June 13, 2008, Partners LargeCap Growth Fund I changed its name to LargeCap Growth Fund I.

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes approximately $62,466,000 of securities from the acquisition of Principal Partners Equity Growth Fund, Inc.

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

⁽ⁱ⁾ Reflects Manager's contractual expense limit.

See accompanying notes.

412

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
LARGECAP GROWTH FUND II(b)
Class A shares
Net Asset Value, Beginning of Period	$ 9.91	$ 8.92		$ 8.15	$ 8.06
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.04)		(0.05)	(0.05)	(0 .02)
Net Realized and Unrealized Gain (Loss) on Investments	(3.07)		1.77	0.91	0.11
Total From Investment Operations	(3.11)		1.72	0.86	0.09
Less Dividends and Distributions:
Distributions from Realized Gains	(0.93)		(0.73)	(0.09)	–
Total Dividends and Distributions	(0.93)		(0.73)	(0.09)	–
Net Asset Value, End of Period	$ 5.87	$ 9.91		$ 8.92	$ 8.15
Total Return(d)	(34.55)%		20.74%	10.61%	1.12%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,107	$ 1,235		$ 595	$ 141
Ratio of Expenses to Average Net Assets	1.70%		1.70%	1.70%	1.70%(f)
Ratio of Net Investment Income to Average Net Assets	(0.53)%		(0.55)%	(0.58)%	(0 .80)%(f)
Portfolio Turnover Rate	132.4%	138.3%(g)		143.4%	95.2%(f)
	2008		2007(h)
LARGECAP GROWTH FUND II(b)
Class C shares
Net Asset Value, Beginning of Period	$ 9.84	$ 8.52
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.10)		(0.10)
Net Realized and Unrealized Gain (Loss) on Investments	(3.03)		1.42
Total From Investment Operations	(3.13)		1.32
Less Dividends and Distributions:
Distributions from Realized Gains	(0.93)		–
Total Dividends and Distributions	(0.93)		–
Net Asset Value, End of Period	$ 5.78	$ 9.84
Total Return(d)	(35.04)%	15.49%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 374	$ 418
Ratio of Expenses to Average Net Assets	2.45%		2.45%(f)
Ratio of Net Investment Income to Average Net Assets	(1.28)%	(1.38)%(f)
Portfolio Turnover Rate	132.4%	138.3%(g)

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

^(b) Effective June 13, 2008, Partners LargeCap Growth Fund II changed its name to LargeCap Growth Fund II.

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of Partners LargeCap Growth Fund.

^(h) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.27 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

413

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
LARGECAP S&P 500 INDEX FUND
Class A shares
Net Asset Value, Beginning of Period	$ 11.06	$ 9.86		$ 8.66	$ 8.59
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.15		0.14	0.12	0.03
Net Realized and Unrealized Gain (Loss) on Investments	(4.10)		1.21	1.22	0.04
Total From Investment Operations	(3.95)		1.35	1.34	0.07
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.14)		(0.12)	(0.10)	–
Distributions from Realized Gains	(0.12)		(0.03)	(0.04)	–
Total Dividends and Distributions	(0.26)		(0.15)	(0.14)	–
Net Asset Value, End of Period	$ 6.85	$ 11.06		$ 9.86	$ 8.66
Total Return(c)	(36.55)%		13.86%	15.54%	0.81%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 53,542	$ 90,317		$ 78,995	$ 72,994
Ratio of Expenses to Average Net Assets	0.65%		0.66%	0.67%	0.64%(e)
Ratio of Net Investment Income to Average Net Assets	1.57%		1.34%	1.31%	1.03%(e)
Portfolio Turnover Rate	8.2%		5.6%	3.7%	11 .5%(e),(f)
	2008		2007(g)
LARGECAP S&P 500 INDEX FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.99	$ 10.12
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.08		0.05
Net Realized and Unrealized Gain (Loss) on Investments	(4.07)		0.82
Total From Investment Operations	(3.99)		0.87
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.07)		–
Distributions from Realized Gains	(0.12)		–
Total Dividends and Distributions	(0.19)		–
Net Asset Value, End of Period	$ 6.81	$ 10.99
Total Return(c)	(36.92)%		8.60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,428	$ 2,691
Ratio of Expenses to Average Net Assets(h)	1.30%		1.30%(e)
Ratio of Net Investment Income to Average Net Assets	0.92%		0.56%(e)
Portfolio Turnover Rate	8.2%		5.6%

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

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

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

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

^(e) Computed on an annualized basis.

^(f) Portfolio turnover rate excludes approximately $71,356,000 of securities from the acquisition of Principal LargeCap Stock Index Fund, Inc.

^(g) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.12 per share from January 10, 2007, through January 16, 2007.

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

See accompanying notes.

414

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
LARGECAP VALUE FUND
Class A shares
Net Asset Value, Beginning of Period	$ 13.53	$ 13.11	$ 11.34	$ 11.31
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.19	0.19	0.18	0.05
Net Realized and Unrealized Gain (Loss) on Investments	(4.59)	1.00	1.98	(0.02)
Total From Investment Operations	(4.40)	1.19	2.16	0.03
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.16)	(0.17)	(0.10)	–
Distributions from Realized Gains	(1.04)	(0.60)	(0.29)	–
Total Dividends and Distributions	(1.20)	(0.77)	(0.39)	–
Net Asset Value, End of Period	$ 7.93	$ 13.53	$ 13.11	$ 11.34
Total Return(c)	(35.48)%	9.47%	19.53%	0 .27%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 171,897	$ 298,926	$ 295,285	$ 281,278
Ratio of Expenses to Average Net Assets	0.97%	0.94%	0.90%	0.80%(e)
Ratio of Net Investment Income to Average Net Assets	1.78%	1.41%	1.50%	1.18%(e)
Portfolio Turnover Rate	132.1%	100.3%	92.8%	181 .1%(e),(f)
	2008	2007	2006	2005(a)
LARGECAP VALUE FUND
Class B shares
Net Asset Value, Beginning of Period	$ 13.42	$ 13.00	$ 11.33	$ 11.31
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.09	0.04	0.06	0.03
Net Realized and Unrealized Gain (Loss) on Investments	(4.57)	1.01	1.96	(0 .01)
Total From Investment Operations	(4.48)	1.05	2.02	0.02
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.03)	(0.03)	(0.06)	–
Distributions from Realized Gains	(1.04)	(0.60)	(0.29)	–
Total Dividends and Distributions	(1.07)	(0.63)	(0.35)	–
Net Asset Value, End of Period	$ 7.87	$ 13.42	$ 13.00	$ 11.33
Total Return(c)	(36.08)%	8.37%	18.18%	0.18%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 9,598	$ 20,306	$ 23,025	$ 24,515
Ratio of Expenses to Average Net Assets	1.96%	2.01%	1.88%	1.22%(e)
Ratio of Net Investment Income to Average Net Assets	0.80%	0.34%	0.52%	0.77%(e)
Portfolio Turnover Rate	132.1%	100.3%	92.8%	181 .1%(e),(f)
	2008	2007(g)
LARGECAP VALUE FUND
Class C shares
Net Asset Value, Beginning of Period	$ 13.44	$ 12.80
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.11	0.05
Net Realized and Unrealized Gain (Loss) on Investments	(4.55)	0.59
Total From Investment Operations	(4.44)	0.64
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.07)	–
Distributions from Realized Gains	(1.04)	–
Total Dividends and Distributions	(1.11)	–
Net Asset Value, End of Period	$ 7.89	$ 13.44
Total Return(c)	(35.81)%	5.00%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,130	$ 1,043
Ratio of Expenses to Average Net Assets(h)	1.70%	1.70%(e)
Ratio of Net Investment Income to Average Net Assets	1.02%	0.44%(e)
Portfolio Turnover Rate	132.1%	100.3%

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

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

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

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

^(e) Computed on an annualized basis.

^(f) Portfolio turnover rate excludes approximately $329,124,000 of securities from the acquisition of Principal Capital Value Fund, Inc.

^(g) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.13 per share from January 10, 2007, through January 16, 2007.

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

See accompanying notes.

415

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
LARGECAP VALUE FUND III(b)
Class A shares
Net Asset Value, Beginning of Period	$ 15.88	$ 15.58		$ 13.51	$ 13.59
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.22		0.18	0.16	0.02
Net Realized and Unrealized Gain (Loss) on Investments	(6.50)		0.97	2.51	(0.10)
Total From Investment Operations	(6.28)		1.15	2.67	(0 .08)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.19)		(0.14)	(0.09)	–
Distributions from Realized Gains	(0.94)		(0.71)	(0.51)	–
Total Dividends and Distributions	(1.13)		(0.85)	(0.60)	–
Net Asset Value, End of Period	$ 8.47	$ 15.88		$ 15.58	$ 13.51
Total Return(d)	(42.36)%		7.63%	20.40%	(0.59)%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 32,423	$ 69,156		$ 64,815	$ 53,806
Ratio of Expenses to Average Net Assets	1.43%		1.41%	1.41%	1.49%(f)
Ratio of Net Investment Income to Average Net Assets	1.81%		1.17%	1.10%	0.47%(f)
Portfolio Turnover Rate	55.3%		29.2%	20.7%	28 .1%(f),(g)
	2008		2007	2006	2005(a)
LARGECAP VALUE FUND III(b)
Class B shares
Net Asset Value, Beginning of Period	$ 15.81	$ 15.54		$ 13.47	$ 13.59
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.11		0.06	0.07	(0 .02)
Net Realized and Unrealized Gain (Loss) on Investments	(6.47)		0.96	2.51	(0 .10)
Total From Investment Operations	(6.36)		1.02	2.58	(0 .12)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.09)		(0.04)	–	–
Distributions from Realized Gains	(0.94)		(0.71)	(0.51)	–
Total Dividends and Distributions	(1.03)		(0.75)	(0.51)	–
Net Asset Value, End of Period	$ 8.42	$ 15.81		$ 15.54	$ 13.47
Total Return(d)	(42.87)%		6.74%	19.67%	(0 .88)%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 10,135	$ 23,269		$ 23,374	$ 20,509
Ratio of Expenses to Average Net Assets	2.30%		2.18%	2.05%	2.28%(f)
Ratio of Net Investment Income to Average Net Assets	0.94%		0.40%	0.46%	(0 .33)%(f)
Portfolio Turnover Rate	55.3%		29.2%	20.7%	28 .1%(f),(g)
	2008		2007(h)
LARGECAP VALUE FUND III(b)
Class C shares
Net Asset Value, Beginning of Period	$ 15.80	$ 15.39
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.11		0.02
Net Realized and Unrealized Gain (Loss) on Investments	(6.46)		0.39
Total From Investment Operations	(6.35)		0.41
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.08)		–
Distributions from Realized Gains	(0.94)		–
Total Dividends and Distributions	(1.02)		–
Net Asset Value, End of Period	$ 8.43	$ 15.80
Total Return(d)	(42.78)%		2.66%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 884	$ 1,363
Ratio of Expenses to Average Net Assets	2.25%		2.25%(f)
Ratio of Net Investment Income to Average Net Assets	0.95%		0.13%(f)
Portfolio Turnover Rate	55.3%		29.2%

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

^(b) Effective June 13, 2008, Partners LargeCap Value Fund changed its name to LargeCap Value Fund III.

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes approximately $72,312,000 of securities from the acquisition of Principal Partners LargeCap Value Fund, Inc. and $331,000 from portfolio realignment.

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

See accompanying notes.

416

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
MIDCAP BLEND FUND
Class A shares
Net Asset Value, Beginning of Period	$ 15.97	$ 14.89	$ 13.78	$ 13.28
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.01)	0.01	0.04	0.01
Net Realized and Unrealized Gain (Loss) on Investments	(4.94)	2.52	1.81	0.49
Total From Investment Operations	(4.95)	2.53	1.85	0.50
Less Dividends and Distributions:
Dividends from Net Investment Income	–	(0.03)	(0.03)	–
Distributions from Realized Gains	(1.48)	(1.42)	(0.71)	–
Total Dividends and Distributions	(1.48)	(1.45)	(0.74)	–
Net Asset Value, End of Period	$ 9.54	$ 15.97	$ 14.89	$ 13.78
Total Return(c)	(33.98)%	18.27%	13.87%	3.77%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 362,130	$ 596,568	$ 549,528	$ 517,870
Ratio of Expenses to Average Net Assets(e)	1.06%	1.02%	1.02%	1.02%(f)
Ratio of Net Investment Income to Average Net Assets	(0.05)%	0.03%	0.28%	0.21%(f)
Portfolio Turnover Rate	26.8%	30.6%	43.4%	133.8%(f),(g)
	2008	2007	2006	2005(a)
MIDCAP BLEND FUND
Class B shares
Net Asset Value, Beginning of Period	$ 15.92	$ 14.86	$ 13.76	$ 13.28
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.06)	(0.04)	–	–
Net Realized and Unrealized Gain (Loss) on Investments	(4.92)	2.52	1.81	0.48
Total From Investment Operations	(4.98)	2.48	1.81	0.48
Less Dividends and Distributions:
Distributions from Realized Gains	(1.48)	(1.42)	(0.71)	–
Total Dividends and Distributions	(1.48)	(1.42)	(0.71)	–
Net Asset Value, End of Period	$ 9.46	$ 15.92	$ 14.86	$ 13.76
Total Return(c)	(34.31)%	17.93%	13.60%	3.61%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 35,769	$ 69,393	$ 68,090	$ 71,900
Ratio of Expenses to Average Net Assets(e)	1.50%	1.32%	1.32%	1.32%(f)
Ratio of Net Investment Income to Average Net Assets	(0.48)%	(0.26)%	(0.02)%	(0 .09)%(f)
Portfolio Turnover Rate	26.8%	30.6%	43.4%	133 .8%(f),(g)
	2008	2007(h)
MIDCAP BLEND FUND
Class C shares
Net Asset Value, Beginning of Period	$ 15.86	$ 14.20
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.12)	(0.12)
Net Realized and Unrealized Gain (Loss) on Investments	(4.88)	1.78
Total From Investment Operations	(5.00)	1.66
Less Dividends and Distributions:
Distributions from Realized Gains	(1.48)	–
Total Dividends and Distributions	(1.48)	–
Net Asset Value, End of Period	$ 9.38	$ 15.86
Total Return(c)	(34.58)%	11.69%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,639	$ 3,914
Ratio of Expenses to Average Net Assets(e)	1.95%	1.95%(f)
Ratio of Net Investment Income to Average Net Assets	(0.94)%	(0.98)%(f)
Portfolio Turnover Rate	26.8%	30.6%

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes approximately $574,898,000 of securities from the acquisition of Principal MidCap Fund, Inc.

^(h) 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.

See accompanying notes.

417

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
MIDCAP GROWTH FUND I(b)
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)	(0.08)		(0.09)	(0.09)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(4.80)		2.10	1.62	0.44
Total From Investment Operations	(4.88)		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	$ 6.82	$ 13.10		$ 12.68	$ 11.87
Total Return(d)	(41.57)%		17.32%	13.21%	3.49%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,885	$ 3,573		$ 1,722	$ 365
Ratio of Expenses to Average Net Assets(f)	1.75%		1.75%	1.75%	1 .75%(g)
Ratio of Net Investment Income to Average Net Assets	(0.78)%		(0.75)%	(0.76)%	(0 .90)%(g)
Portfolio Turnover Rate	98.8%		120.6%	133.4%	84.5%(g)
	2008		2007(h)
MIDCAP GROWTH FUND I(b)
Class C shares
Net Asset Value, Beginning of Period	$ 13.02	$ 11.69
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.16)		(0.16)
Net Realized and Unrealized Gain (Loss) on Investments	(4.74)		1.49
Total From Investment Operations	(4.90)		1.33
Less Dividends and Distributions:
Distributions from Realized Gains	(1.40)		–
Total Dividends and Distributions	(1.40)		–
Net Asset Value, End of Period	$ 6.72	$ 13.02
Total Return(d)	(42.02)%	11.38%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 202	$ 332
Ratio of Expenses to Average Net Assets(f)	2.50%		2.50%(g)
Ratio of Net Investment Income to Average Net Assets	(1.53)%	(1.58)%(g)
Portfolio Turnover Rate	98.8%		120.6%

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

^(b) Effective June 13, 2008, Partners MidCap Growth Fund I changed its name to MidCap Growth Fund I.

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

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

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

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

^(g) Computed on an annualized basis.

^(h) 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.

See accompanying notes.

418

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
MIDCAP GROWTH FUND III(b)
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)(c)	(0.10)	(0.12)	(0.09)	(0 .04)
Net Realized and Unrealized Gain (Loss) on Investments	(4.92)	2.93	0.85	0.41
Total From Investment Operations	(5.02)	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	$ 6.20	$ 11.99	$ 9.46	$ 8.77
Total Return(d)	(44.68)%	30.43%	8.64%	4.40%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 21,252	$ 39,400	$ 27,926	$ 25,628
Ratio of Expenses to Average Net Assets(f)	1.73%	1.75%	1.75%	1.75%(g)
Ratio of Net Investment Income to Average Net Assets	(1.05)%	(1.17)%	(0.97)%	(1 .40)%(g)
Portfolio Turnover Rate	167.3%	144.9%	145.8%	185 .7%(g),(h)
	2008	2007	2006	2005(a)
MIDCAP GROWTH FUND III(b)
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)(c)	(0.17)	(0.20)	(0.16)	(0 .06)
Net Realized and Unrealized Gain (Loss) on Investments	(4.80)	2.90	0.84	0.41
Total From Investment Operations	(4.97)	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	$ 6.04	$ 11.78	$ 9.36	$ 8.75
Total Return(d)	(45.07)%	29.55%	7.74%	4.17%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,477	$ 12,895	$ 10,516	$ 10,436
Ratio of Expenses to Average Net Assets(f)	2.50%	2.50%	2.50%	2.50%(g)
Ratio of Net Investment Income to Average Net Assets	(1.81)%	(1.91)%	(1.71)%	(2 .14)%(g)
Portfolio Turnover Rate	167.3%	144.9%	145.8%	185 .7%(g),(h)
	2008	2007(i)
MIDCAP GROWTH FUND III(b)
Class C shares
Net Asset Value, Beginning of Period	$ 11.99	$ 9.79
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.17)	(0.17)
Net Realized and Unrealized Gain (Loss) on Investments	(4.90)	2.37
Total From Investment Operations	(5.07)	2.20
Less Dividends and Distributions:
Distributions from Realized Gains	(0.77)	–
Total Dividends and Distributions	(0.77)	–
Net Asset Value, End of Period	$ 6.15	$ 11.99
Total Return(d)	(45.12)%	22.47%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 778	$ 1,070
Ratio of Expenses to Average Net Assets(f)	2.50%	2.50%(g)
Ratio of Net Investment Income to Average Net Assets	(1.82)%	(1.94)%(g)
Portfolio Turnover Rate	167.3%	144.9%

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

^(b) Effective June 13, 2008, Partners MidCap Growth Fund changed its name to MidCap Growth Fund III.

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

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

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

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

^(g) Computed on an annualized basis.

^(h) 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.

⁽ⁱ⁾ 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.

See accompanying notes.

419

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005	2004
MIDCAP STOCK FUND
Class A shares
Net Asset Value, Beginning of Period	$ 20.55	$ 20.86		$ 19.23	$ 17.06	$ 15.34
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	0.13		0.15	0.10	0.24	0.02
Net Realized and Unrealized Gain (Loss) on Investments	(6.28)		0.62	3.02	2.56	1.75
Total From Investment Operations	(6.15)		0.77	3.12	2.80	1.77
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.17)		(0.11)	(0.26)	(0.03)	(0.01)
Distributions from Realized Gains	(2.77)		(0.97)	(1.23)	(0 .60)	(0.04)
Total Dividends and Distributions	(2.94)		(1.08)	(1.49)	(0 .63)	(0.05)
Net Asset Value, End of Period	$ 11.46	$ 20.55		$ 20.86	$ 19.23	$ 17.06
Total Return(b)	(34.40)%		3.62%	17.12%	16.75%	11.57%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 36,639	$ 252,198		$ 215,201	$ 93,180	$ 59,491
Ratio of Expenses to Average Net Assets	1.30%		1.08%	1.09%	1.12%	1.14%
Ratio of Gross Expenses to Average Net Assets(c)	–		1.08%	1.09%	1.12%	1.14%
Ratio of Net Investment Income to Average Net Assets	0.84%		0.70%	0.53%	1.32%	0.12%
Portfolio Turnover Rate	29.1%		25.8%	22.0%	28.0%	23.0%
	2008		2007	2006	2005	2004
MIDCAP STOCK FUND
Class B shares
Net Asset Value, Beginning of Period	$ 19.23	$ 19.66		$ 18.23	$ 16.33	$ 14.82
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	(0.04)		(0.05)	(0.09)	0.06	(0.14)
Net Realized and Unrealized Gain (Loss) on Investments	(5.79)		0.59	2.85	2.44	1.69
Total From Investment Operations	(5.83)		0.54	2.76	2.50	1.55
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.03)		–	(0.10)	–	–
Distributions from Realized Gains	(2.77)		(0.97)	(1.23)	(0 .60)	(0.04)
Total Dividends and Distributions	(2.80)		(0.97)	(1.33)	(0 .60)	(0.04)
Net Asset Value, End of Period	$ 10.60	$ 19.23		$ 19.66	$ 18.23	$ 16.33
Total Return(b)	(34.98)%		2.63%	15.95%	15.63%	10.54%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 12,453	$ 29,395		$ 30,663	$ 24,218	$ 19,958
Ratio of Expenses to Average Net Assets	2.22%		2.06%	2.07%	2.11%	2.12%
Ratio of Gross Expenses to Average Net Assets(c)	–		2.10%	2.07%	2.11%	2.12%
Ratio of Net Investment Income to Average Net Assets	(0.30)%		(0.26)%	(0.45)%	0.33%	(0.86)%
Portfolio Turnover Rate	29.1%		25.8%	22.0%	28.0%	23.0%
	2008		2007	2006	2005	2004
MIDCAP STOCK FUND
Class C shares
Net Asset Value, Beginning of Period	$ 19.25	$ 19.66		$ 18.28	$ 16.36	$ 14.83
Income from Investment Operations:
Net Investment Income (Operating Loss)(a)	(0.05)		(0.03)	(0.06)	0.08	(0.13)
Net Realized and Unrealized Gain (Loss) on Investments	(5.79)		0.59	2.85	2.44	1.70
Total From Investment Operations	(5.84)		0.56	2.79	2.52	1.57
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.04)		–	(0.18)	–	–
Distributions from Realized Gains	(2.77)		(0.97)	(1.23)	(0 .60)	(0.04)
Total Dividends and Distributions	(2.81)		(0.97)	(1.41)	(0 .60)	(0.04)
Net Asset Value, End of Period	$ 10.60	$ 19.25		$ 19.66	$ 18.28	$ 16.36
Total Return(b)	(35.00)%		2.74%	16.09%	15.73%	10.60%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 4,296	$ 10,380		$ 8,051	$ 4,303	$ 1,769
Ratio of Expenses to Average Net Assets	2.25%		1.95%	1.95%	1.99%	2.04%
Ratio of Gross Expenses to Average Net Assets(c)	–		2.18%	1.95%	1.99%	2.04%
Ratio of Net Investment Income to Average Net Assets	(0.33)%		(0.16)%	(0.33)%	0.45%	(0.79)%
Portfolio Turnover Rate	29.1%		25.8%	22.0%	28.0%	23.0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

420

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
MIDCAP VALUE FUND II(b)
Class A shares
Net Asset Value, Beginning of Period	$ 15.88	$ 15.93		$ 15.08	$ 14.86
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	0.05		0.01	(0.01)	(0 .03)
Net Realized and Unrealized Gain (Loss) on Investments	(6.26)		1.23	2.19	0.25
Total From Investment Operations	(6.21)		1.24	2.18	0.22
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.02)		–	–	–
Distributions from Realized Gains	(1.59)		(1.29)	(1.33)	–
Total Dividends and Distributions	(1.61)		(1.29)	(1.33)	–
Net Asset Value, End of Period	$ 8.06	$ 15.88		$ 15.93	$ 15.08
Total Return(d)	(43.29)%		7.98%	15.13%	1.48%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 6,097	$ 12,310		$ 9,266	$ 2,196
Ratio of Expenses to Average Net Assets(f)	1.75%		1.72%	1.75%	1 .75%(g)
Ratio of Net Investment Income to Average Net Assets	0.42%		0.09%	(0.05)%	(0 .62)%(g)
Portfolio Turnover Rate	165.6%		147.3%	151.4%	87.9%(g)
	2008		2007	2006	2005(a)
MIDCAP VALUE FUND II(b)
Class B shares
Net Asset Value, Beginning of Period	$ 15.71	$ 15.89		$ 15.05	$ 14.86
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.04)		(0.11)	(0.12)	(0 .07)
Net Realized and Unrealized Gain (Loss) on Investments	(6.16)		1.22	2.29	0.26
Total From Investment Operations	(6.20)		1.11	2.17	0.19
Less Dividends and Distributions:
Distributions from Realized Gains	(1.59)		(1.29)	(1.33)	–
Total Dividends and Distributions	(1.59)		(1.29)	(1.33)	–
Net Asset Value, End of Period	$ 7.92	$ 15.71		$ 15.89	$ 15.05
Total Return(d)	(43.68)%		7.12%	15.11%	1.28%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,006	$ 2,087		$ 1,324	$ 427
Ratio of Expenses to Average Net Assets(f)	2.50%		2.50%	2.50%	2.50%(g)
Ratio of Net Investment Income to Average Net Assets	(0.33)%		(0.70)%	(0.80)%	(1 .29)%(g)
Portfolio Turnover Rate	165.6%		147.3%	151.4%	87.9%(g)
	2008		2007(h)
MIDCAP VALUE FUND II(b)
Class C shares
Net Asset Value, Beginning of Period	$ 15.79	$ 15.28
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.04)		(0.10)
Net Realized and Unrealized Gain (Loss) on Investments	(6.20)		0.61
Total From Investment Operations	(6.24)		0.51
Less Dividends and Distributions:
Distributions from Realized Gains	(1.59)		–
Total Dividends and Distributions	(1.59)		–
Net Asset Value, End of Period	$ 7.96	$ 15.79
Total Return(d)	(43.72)%		3.34%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 744	$ 1,307
Ratio of Expenses to Average Net Assets(f)	2.50%		2.50%(g)
Ratio of Net Investment Income to Average Net Assets	(0.33)%	(0.79)%(g)
Portfolio Turnover Rate	165.6%		147.3%

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

^(b) Effective June 13, 2008, Partners MidCap Value Fund changed its name to MidCap Value II.

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

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

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

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

^(g) Computed on an annualized basis.

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

See accompanying notes.

421

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
MONEY MARKET FUND
Class A shares
Net Asset Value, Beginning of Period	$ 1.00	$ 1.00		$ 1.00	$ 1.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.03		0.05	0.04	0.01
Total From Investment Operations	0.03		0.05	0.04	0.01
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.03)		(0.05)	(0.04)	(0 .01)
Total Dividends and Distributions	(0.03)		(0.05)	(0.04)	(0 .01)
Net Asset Value, End of Period	$ 1.00	$ 1.00		$ 1.00	$ 1.00
Total Return(c)	3.02%		5.02%	4.41%	1.02%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 775,670	$ 1,953,474		$ 431,696	$ 344,589
Ratio of Expenses to Average Net Assets(e)	0.50%		0.44%	0.54%	0.60%(f)
Ratio of Net Investment Income to Average Net Assets	3.19%		4.91%	4.35%	2.95%(f)
	2008		2007	2006	2005(a)
MONEY MARKET FUND
Class B shares
Net Asset Value, Beginning of Period	$ 1.00	$ 1.00		$ 1.00	$ 1.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.02		0.04	0.03	0.01
Total From Investment Operations	0.02		0.04	0.03	0.01
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.02)		(0.04)	(0.03)	(0.01)
Total Dividends and Distributions	(0.02)		(0.04)	(0.03)	(0 .01)
Net Asset Value, End of Period	$ 1.00	$ 1.00		$ 1.00	$ 1.00
Total Return(c)	2.03%		4.04%	2.90%	0.59%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 87,353	$ 33,265		$ 2,976	$ 3,099
Ratio of Expenses to Average Net Assets(e)	1.50%		1.41%	1.98%	1.87%(f)
Ratio of Net Investment Income to Average Net Assets	1.87%		3.95%	2.90%	1.67%(f)
	2008		2007(g)
MONEY MARKET FUND
Class C shares
Net Asset Value, Beginning of Period	$ 1.00	$ 1.00
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.02		0.03
Total From Investment Operations	0.02		0.03
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.02)		(0.03)
Total Dividends and Distributions	(0.02)		(0.03)
Net Asset Value, End of Period	$ 1.00	$ 1.00
Total Return(c)	2.08%		2.94%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 42,966	$ 11,214
Ratio of Expenses to Average Net Assets(e)	1.44%		1.70%(f)
Ratio of Net Investment Income to Average Net Assets	1.84%		3.67%(f)

(a)	Period from June 28, 2005, date shares first offered, through October 31, 2005.
(b)	Calculated based on average shares outstanding during the period.
(c)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d)	Total return amounts have not been annualized.
(e)	Reflects Manager's contractual expense limit.
(f)	Computed on an annualized basis.
(g)	Period from January 16, 2007, date shares first offered, through October 31, 2007.

See accompanying notes.

422

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005	2004
MORTGAGE SECURITIES FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.54	$ 10.54	$ 10.53	$ 10.88	$ 10.89
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.46(a)	0.47(a)	0.44	0 .41(a)	0.40(a)
Net Realized and Unrealized Gain (Loss) on Investments	(0.17)	0.01	0.04	(0 .30)	0.05
Total From Investment Operations	0.29	0.48	0.48	0.11	0.45
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.49)	(0.48)	(0.47)	(0.46)	(0.46)
Total Dividends and Distributions	(0.49)	(0.48)	(0.47)	(0 .46)	(0.46)
Net Asset Value, End of Period	$ 10.34	$ 10.54	$ 10.54	$ 10.53	$ 10.88
Total Return(b)	2.72%	4.65%	4.74%	1.02%	4.26%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 83,376	$ 90,167	$ 98,110	$ 120,615	$ 134,896
Ratio of Expenses to Average Net Assets	0.91%	0.91%	0.91%	0.92%	0.93%
Ratio of Gross Expenses to Average Net Assets(c)	–	0.93%	0.91%	0.92%	0.93%
Ratio of Net Investment Income to Average Net Assets	4.38%	4.45%	4.25%	3.84%	3.64%
Portfolio Turnover Rate	5.3%	13.6%	13.0%	34.0%	30.0%
	2008	2007	2006	2005	2004
MORTGAGE SECURITIES FUND
Class B shares
Net Asset Value, Beginning of Period	$ 10.53	$ 10.54	$ 10.52	$ 10.87	$ 10.88
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.39(a)	0.39(a)	0.37	0 .33(a)	0.32(a)
Net Realized and Unrealized Gain (Loss) on Investments	(0.17)	–	0.05	(0 .30)	0.05
Total From Investment Operations	0.22	0.39	0.42	0.03	0.37
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.41)	(0.40)	(0.40)	(0.38)	(0.38)
Total Dividends and Distributions	(0.41)	(0.40)	(0.40)	(0 .38)	(0.38)
Net Asset Value, End of Period	$ 10.34	$ 10.53	$ 10.54	$ 10.52	$ 10.87
Total Return(b)	2.06%	3.78%	4.06%	0.28%	3.50%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 39,613	$ 58,227	$ 85,761	$ 122,147	$ 157,900
Ratio of Expenses to Average Net Assets	1.65%	1.66%	1.66%	1.65%	1.65%
Ratio of Gross Expenses to Average Net Assets(c)	–	1.68%	1.66%	1.65%	1.65%
Ratio of Net Investment Income to Average Net Assets	3.64%	3.72%	3.50%	3.11%	2.92%
Portfolio Turnover Rate	5.3%	13.6%	13.0%	34.0%	30.0%
	2008	2007	2006	2005	2004
MORTGAGE SECURITIES FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.52	$ 10.53	$ 10.51	$ 10.86	$ 10.87
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.39(a)	0.39(a)	0.37	0 .33(a)	0.32(a)
Net Realized and Unrealized Gain (Loss) on Investments	(0.18)	0.01	0.05	(0 .30)	0.05
Total From Investment Operations	0.21	0.40	0.42	0.03	0.37
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.41)	(0.41)	(0.40)	(0.38)	(0.38)
Total Dividends and Distributions	(0.41)	(0.41)	(0.40)	(0 .38)	(0.38)
Net Asset Value, End of Period	$ 10.32	$ 10.52	$ 10.53	$ 10.51	$ 10.86
Total Return(b)	1.99%	3.92%	4.00%	0.29%	3.53%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 6,118	$ 7,273	$ 7,964	$ 6,775	$ 6,279
Ratio of Expenses to Average Net Assets	1.63%	1.63%	1.63%	1.64%	1.64%
Ratio of Gross Expenses to Average Net Assets(c)	–	1.93%	1.63%	1.64%	1.64%
Ratio of Net Investment Income to Average Net Assets	3.66%	3.74%	3.53%	3.12%	2.93%
Portfolio Turnover Rate	5.3%	13.6%	13.0%	34.0%	30.0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

423

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
PREFERRED SECURITIES FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.11	$ 10.76		$ 10.60	$ 10.94
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.58		0.59	0.57	0.19
Net Realized and Unrealized Gain (Loss) on Investments	(3.45)		(0.63)	0.09	(0.26)
Total From Investment Operations	(2.87)		(0.04)	0.66	(0 .07)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.56)		(0.61)	(0.50)	(0.27)
Total Dividends and Distributions	(0.56)		(0.61)	(0.50)	(0 .27)
Net Asset Value, End of Period	$ 6.68	$ 10.11		$ 10.76	$ 10.60
Total Return(c)	(29.61)%		(0.45)%	6.44%	(0 .66)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 190,999	$ 81,441		$ 7,105	$ 2,174
Ratio of Expenses to Average Net Assets(e)	1.00%		1.00%	1.08%	1.35%(f)
Ratio of Net Investment Income to Average Net Assets	6.61%		5.65%	5.42%	5.07%(f)
Portfolio Turnover Rate	18.7%		33.9%	22.4%	17.8%(f)
	2008		2007(g)
PREFERRED SECURITIES FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.11	$ 10.79
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.52		0.39
Net Realized and Unrealized Gain (Loss) on Investments	(3.46)		(0.68)
Total From Investment Operations	(2.94)		(0.29)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.49)		(0.39)
Total Dividends and Distributions	(0.49)		(0.39)
Net Asset Value, End of Period	$ 6.68	$ 10.11
Total Return(c)	(30.14)%	(2.72)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 116,229	$ 21,750
Ratio of Expenses to Average Net Assets(e)	1.75%		1.75%(f)
Ratio of Net Investment Income to Average Net Assets	5.94%		4.85%(f)
Portfolio Turnover Rate	18.7%		33.9%

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Period from January 17, 2007 through October 31, 2007. Class C shares recognized $.01 per share of net investment income and incurred a net realized and unrealized loss of $.02 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

424

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
REAL ESTATE SECURITIES FUND
Class A shares
Net Asset Value, Beginning of Period	$ 24.97	$ 27.56		$ 20.43	$ 20.12
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.27		0.19	0.14	0.09
Net Realized and Unrealized Gain (Loss) on Investments	(7.39)		(0.60)	7.80	0.35
Total From Investment Operations	(7.12)		(0.41)	7.94	0.44
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.29)		(0.11)	(0.19)	(0.13)
Distributions from Realized Gains	(5.73)		(2.07)	(0.62)	–
Total Dividends and Distributions	(6.02)		(2.18)	(0.81)	(0 .13)
Net Asset Value, End of Period	$ 11.83	$ 24.97		$ 27.56	$ 20.43
Total Return(c)	(36.02)%	(1.92)%		40.07%	2.20%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 64,787	$ 124,434		$ 125,408	$ 80,894
Ratio of Expenses to Average Net Assets(e)	1.28%		1.29%	1.43%	1.49%(f)
Ratio of Net Investment Income to Average Net Assets	1.62%		0.75%	0.61%	1.29%(f)
Portfolio Turnover Rate	47.2%	77.8%(g)		37.8%	26 .7%(f),(h)
	2008		2007	2006	2005(a)
REAL ESTATE SECURITIES FUND
Class B shares
Net Asset Value, Beginning of Period	$ 24.83	$ 27.56		$ 20.44	$ 20.12
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.13		(0.02)	0.02	0.03
Net Realized and Unrealized Gain (Loss) on Investments	(7.32)		(0.60)	7.80	0.35
Total From Investment Operations	(7.19)		(0.62)	7.82	0.38
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.17)		(0.04)	(0.08)	(0 .06)
Distributions from Realized Gains	(5.73)		(2.07)	(0.62)	–
Total Dividends and Distributions	(5.90)		(2.11)	(0.70)	(0 .06)
Net Asset Value, End of Period	$ 11.74	$ 24.83		$ 27.56	$ 20.44
Total Return(c)	(36.50)%	(2.74)%		39.33%	1.90%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 14,551	$ 31,026		$ 29,044	$ 22,712
Ratio of Expenses to Average Net Assets(e)	2.08%		2.07%	1.95%	2.38%(f)
Ratio of Net Investment Income to Average Net Assets	0.81%	(0.06)%		0.10%	0.39%(f)
Portfolio Turnover Rate	47.2%	77.8%(g)		37.8%	26 .7%(f),(h)
	2008		2007(i)
REAL ESTATE SECURITIES FUND
Class C shares
Net Asset Value, Beginning of Period	$ 24.89	$ 27.41
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.15		(0.08)
Net Realized and Unrealized Gain (Loss) on Investments	(7.36)		(2.44)
Total From Investment Operations	(7.21)		(2.52)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.18)		–
Distributions from Realized Gains	(5.73)		–
Total Dividends and Distributions	(5.91)		–
Net Asset Value, End of Period	$ 11.77	$ 24.89
Total Return(c)	(36.48)%	(9.19)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 4,382	$ 7,976
Ratio of Expenses to Average Net Assets(e)	1.98%		1.99%(f)
Ratio of Net Investment Income to Average Net Assets	0.93%	(0.37)%(f)
Portfolio Turnover Rate	47.2%		77.8%(g)

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of WM REIT Fund.

^(h) Portfolio turnover rate excludes approximately $101,379,000 of securities from the acquisition of Principal Real Estate Securities Fund, Inc.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.89 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

425

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005(a)
SHORT-TERM BOND FUND
Class A shares
Net Asset Value, Beginning of Period	$ 9.79	$ 9.93		$ 9.97	$ 10.12
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.45		0.46	0.41	0.11
Net Realized and Unrealized Gain (Loss) on Investments	(1.33)		(0.11)	0.01	(0.10)
Total From Investment Operations	(0.88)		0.35	0.42	0.01
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.47)		(0.49)	(0.46)	(0.16)
Total Dividends and Distributions	(0.47)		(0.49)	(0.46)	(0 .16)
Net Asset Value, End of Period	$ 8.44	$ 9.79		$ 9.93	$ 9.97
Total Return(c)	(9.33)%		3.57%	4.29%	0.07%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 62,240	$ 89,390		$ 93,951	$ 122,471
Ratio of Expenses to Average Net Assets	0.79%		0.78%	0.96%	0.80%(e)
Ratio of Expenses to Average Net Assets (Excluding Reverse
Repurchase Agreement Expense)(f)	N/A		N/A	0.73%	0.70%(e)
Ratio of Net Investment Income to Average Net Assets	4.82%		4.66%	4.10%	3.15%(e)
Portfolio Turnover Rate	22.1%		42.8%	49.1%	110.8%(e),(g)
	2008		2007(h)
SHORT-TERM BOND FUND
Class C shares
Net Asset Value, Beginning of Period	$ 9.79	$ 9.93
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.37		0.30
Net Realized and Unrealized Gain (Loss) on Investments	(1.34)		(0.11)
Total From Investment Operations	(0.97)		0.19
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.38)		(0.33)
Total Dividends and Distributions	(0.38)		(0.33)
Net Asset Value, End of Period	$ 8.44	$ 9.79
Total Return(c)	(10.18)%		1.91%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,641	$ 1,585
Ratio of Expenses to Average Net Assets(i)	1.70%		1.70%(e)
Ratio of Net Investment Income to Average Net Assets	3.91%		3.79%(e)
Portfolio Turnover Rate	22.1%		42.8%

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

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

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

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

^(e) Computed on an annualized basis.

^(f) Excludes interest expense paid on borrowings through reverse repurchase agreements.

^(g) Portfolio turnover rate excludes approximately $117,013,000 of securities from the acquisition of Principal Limited Term Bond Fund, Inc.

^(h) Period from January 17, 2007 through October 31, 2007. Class C shares recognized $.01 of net investment income per share and incurred a net realized and unrealized loss of $.01 per share from January 10, 2007, through January 16, 2007.

⁽ⁱ⁾ Reflects Manager's contractual expense limit.

See accompanying notes.

426

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005	2004
SHORT-TERM INCOME FUND(a)
Class A shares
Net Asset Value, Beginning of Period	$ 11.59	$ 11.60		$ 11.55	$ 11.90	$ 11.95
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.43(b)		0.29(b)	0.40	0.40	0.40
Net Realized and Unrealized Gain (Loss) on Investments	(0.43)		0.11	0.05	(0 .35)	(0.05)
Total From Investment Operations	–		0.40	0.45	0.05	0.35
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.43)		(0.41)	(0.40)	(0.40)	(0.40)
Total Dividends and Distributions	(0.43)		(0.41)	(0.40)	(0 .40)	(0.40)
Net Asset Value, End of Period	$ 11.16	$ 11.59		$ 11.60	$ 11.55	$ 11.90
Total Return(c)	(0.06)%		4.14%	4.15%	0.49%	2.87%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 36,725	$ 36,639		$ 32,081	$ 36,287	$ 54,082
Ratio of Expenses to Average Net Assets	0.95%		0.95%	0.95%	0.81%	0.83%
Ratio of Gross Expenses to Average Net Assets(d)	–		0.97%	0.95%	0.93%	0.92%
Ratio of Net Investment Income to Average Net Assets	3.67%		4.11%	3.54%	3.36%	3.23%
Portfolio Turnover Rate	64.5%		29.4%	14.0%	13.0%	14.0%
	2008		2007	2006	2005	2004
SHORT-TERM INCOME FUND(a)
Class C shares
Net Asset Value, Beginning of Period	$ 11.60	$ 11.60		$ 11.55	$ 11.90	$ 11.95
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.34(b)		0.21(b)	0.35	0.30	0.30
Net Realized and Unrealized Gain (Loss) on Investments	(0.42)		0.13	0.05	(0 .35)	(0.05)
Total From Investment Operations	(0.08)		0.34	0.40	(0 .05)	0.25
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.35)		(0.34)	(0.35)	(0.30)	(0.30)
Total Dividends and Distributions	(0.35)		(0.34)	(0.35)	(0 .30)	(0.30)
Net Asset Value, End of Period	$ 11.17	$ 11.60		$ 11.60	$ 11.55	$ 11.90
Total Return(c)	(0.78)%		3.47%	3.39%	(0 .26)%	2.10%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 4,892	$ 4,952		$ 6,980	$ 13,477	$ 18,970
Ratio of Expenses to Average Net Assets	1.67%		1.68%	1.68%	1.56%	1.58%
Ratio of Gross Expenses to Average Net Assets(d)	–		2.10%	1.68%	1.65%	1.66%
Ratio of Net Investment Income to Average Net Assets	2.95%		3.38%	2.81%	2.61%	2.48%
Portfolio Turnover Rate	64.5%		29.4%	14.0%	13.0%	14.0%

^(a) On January 12, 2007 the fund succeeded to the operations of another fund in a shareholder-approved reorganization. As part of the reorganization, the fund issued one share of stock for each five outstanding shares of the predecessor fund, with the result that the fund's net asset value per share was increased without changing the proportionate beneficial interests of shareholders. The financial highlights have been restated to reflect the issuance of new shares.

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

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

^(d) Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

427

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
SMALLCAP BLEND FUND
Class A shares
Net Asset Value, Beginning of Period	$ 17.95	$ 17.30	$ 15.93	$ 15.69
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.02)	(0.05)	(0.02)	(0.01)
Net Realized and Unrealized Gain (Loss) on Investments	(6.14)	2.10	2.33	0.25
Total From Investment Operations	(6.16)	2.05	2.31	0.24
Less Dividends and Distributions:
Distributions from Realized Gains	(1.43)	(1.40)	(0.94)	–
Total Dividends and Distributions	(1.43)	(1.40)	(0.94)	–
Net Asset Value, End of Period	$ 10.36	$ 17.95	$ 17.30	$ 15.93
Total Return(c)	(36.97)%	12.48%	14.97%	1 .53%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 66,286	$ 118,157	$ 109,783	$ 97,133
Ratio of Expenses to Average Net Assets	1.46%	1.43%	1.40%	1.37%(e)
Ratio of Net Investment Income to Average Net Assets	(0.11)%	(0.28)%	(0.15)%	(0 .27)%(e)
Portfolio Turnover Rate	55.6%	60.9%	103.0%	137 .4%(e),(f)
	2008	2007	2006	2005(a)
SMALLCAP BLEND FUND
Class B shares
Net Asset Value, Beginning of Period	$ 17.60	$ 17.12	$ 15.89	$ 15.69
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.13)	(0.19)	(0.14)	(0 .06)
Net Realized and Unrealized Gain (Loss) on Investments	(5.99)	2.07	2.31	0.26
Total From Investment Operations	(6.12)	1.88	2.17	0.20
Less Dividends and Distributions:
Distributions from Realized Gains	(1.43)	(1.40)	(0.94)	–
Total Dividends and Distributions	(1.43)	(1.40)	(0.94)	–
Net Asset Value, End of Period	$ 10.05	$ 17.60	$ 17.12	$ 15.89
Total Return(c)	(37.52)%	11.55%	14.09%	1.27%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 10,021	$ 22,058	$ 24,476	$ 25,241
Ratio of Expenses to Average Net Assets	2.33%	2.26%	2.11%	2.22%(e)
Ratio of Net Investment Income to Average Net Assets	(0.97)%	(1.11)%	(0.85)%	(1 .13)%(e)
Portfolio Turnover Rate	55.6%	60.9%	103.0%	137 .4%(e),(f)
	2008	2007(g)
SMALLCAP BLEND FUND
Class C shares
Net Asset Value, Beginning of Period	$ 17.85	$ 16.60
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.12)	(0.14)
Net Realized and Unrealized Gain (Loss) on Investments	(6.08)	1.39
Total From Investment Operations	(6.20)	1.25
Less Dividends and Distributions:
Distributions from Realized Gains	(1.43)	–
Total Dividends and Distributions	(1.43)	–
Net Asset Value, End of Period	$ 10.22	$ 17.85
Total Return(c)	(37.44)%	7.53%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 836	$ 1,573
Ratio of Expenses to Average Net Assets(h)	2.20%	2.20%(e)
Ratio of Net Investment Income to Average Net Assets	(0.85)%	(1.04)%(e)
Portfolio Turnover Rate	55.6%	60.9%

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

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

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

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

^(e) Computed on an annualized basis.

^(f) Portfolio turnover rate excludes approximately $118,621,000 of securities from the acquisition of Principal SmallCap Fund, Inc. and $60,235,000 from portfolio realignment.

^(g) Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.25 per share from January 10, 2007, through January 16, 2007.

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

See accompanying notes.

428

FINANCIAL HIGHLIGHTS PRINCIPAL FUNDS, INC.

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

	2008	2007(a)
SMALLCAP GROWTH FUND
Class A shares
Net Asset Value, Beginning of Period	$ 10.18	$ 8.87
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.07)	(0.04)
Net Realized and Unrealized Gain (Loss) on Investments	(4.10)	1.35
Total From Investment Operations	(4.17)	1.31
Less Dividends and Distributions:
Distributions from Realized Gains	(0.58)	–
Total Dividends and Distributions	(0.58)	–
Net Asset Value, End of Period	$ 5.43	$ 10.18
Total Return(c)	(43.33)%	14.77%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 29,467	$ 115,046
Ratio of Expenses to Average Net Assets(e)	1.51%	1.19%(f)
Ratio of Net Investment Income to Average Net Assets	(0.80)%	(0.59)%(f)
Portfolio Turnover Rate	62.9%	70.0%(f),(g)
	2008	2007(a)
SMALLCAP GROWTH FUND
Class B shares
Net Asset Value, Beginning of Period	$ 10.07	$ 8.87
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.15)	(0.15)
Net Realized and Unrealized Gain (Loss) on Investments	(4.02)	1.35
Total From Investment Operations	(4.17)	1.20
Less Dividends and Distributions:
Distributions from Realized Gains	(0.58)	–
Total Dividends and Distributions	(0.58)	–
Net Asset Value, End of Period	$ 5.32	$ 10.07
Total Return(c)	(43.82)%	13.53%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,931	$ 7,549
Ratio of Expenses to Average Net Assets(e)	2.57%	2.54%(f)
Ratio of Net Investment Income to Average Net Assets	(1.90)%	(1.94)%(f)
Portfolio Turnover Rate	62.9%	70.0%(f),(g)
	2008	2007(a)
SMALLCAP GROWTH FUND
Class C shares
Net Asset Value, Beginning of Period	$ 10.10	$ 8.87
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.12)	(0.12)
Net Realized and Unrealized Gain (Loss) on Investments	(4.04)	1.35
Total From Investment Operations	(4.16)	1.23
Less Dividends and Distributions:
Distributions from Realized Gains	(0.58)	–
Total Dividends and Distributions	(0.58)	–
Net Asset Value, End of Period	$ 5.36	$ 10.10
Total Return(c)	(43.58)%	13.87%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,184	$ 1,730
Ratio of Expenses to Average Net Assets(e)	2.21%	2.21%(f)
Ratio of Net Investment Income to Average Net Assets	(1.55)%	(1.60)%(f)
Portfolio Turnover Rate	62.9%	70.0%(f),(g)

^(a) Period from January 17, 2007 through October 31, 2007. Class A and Class B shares incurred a net realized and unrealized loss of $.05 and $.03 per share from January 10, 2007, through January 16, 2007. Class C shares incurred a net realized and unrealized gain of $.20 per share from January 10, 2007, through January 16, 2007.

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of WM SmallCap Growth Fund.

See accompanying notes.

429

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
SMALLCAP GROWTH FUND II(b)
Class A shares
Net Asset Value, Beginning of Period	$ 10.16	$ 9.42	$ 8.85	$ 8.72
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.12)	(0.14)	(0.15)	(0 .05)
Net Realized and Unrealized Gain (Loss) on Investments	(4.03)	1.58	1.20	0.18
Total From Investment Operations	(4.15)	1.44	1.05	0.13
Less Dividends and Distributions:
Distributions from Realized Gains	(0.54)	(0.70)	(0.48)	–
Total Dividends and Distributions	(0.54)	(0.70)	(0.48)	–
Net Asset Value, End of Period	$ 5.47	$ 10.16	$ 9.42	$ 8.85
Total Return(d)	(42.88)%	16.21%	12.12%	1.49%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 10,302	$ 19,434	$ 16,263	$ 13,137
Ratio of Expenses to Average Net Assets(f)	1.95%	1.95%	1.95%	1 .95%(g)
Ratio of Net Investment Income to Average Net Assets	(1.54)%	(1.50)%	(1.57)%	(1 .68)%(g)
Portfolio Turnover Rate	78.0%	62.9%	80.7%	53 .4%(g),(h)
	2008	2007	2006	2005(a)
SMALLCAP GROWTH FUND II(b)
Class B shares
Net Asset Value, Beginning of Period	$ 9.97	$ 9.33	$ 8.83	$ 8.72
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.18)	(0.21)	(0.21)	(0 .08)
Net Realized and Unrealized Gain (Loss) on Investments	(3.92)	1.55	1.19	0.19
Total From Investment Operations	(4.10)	1.34	0.98	0.11
Less Dividends and Distributions:
Distributions from Realized Gains	(0.54)	(0.70)	(0.48)	–
Total Dividends and Distributions	(0.54)	(0.70)	(0.48)	–
Net Asset Value, End of Period	$ 5.33	$ 9.97	$ 9.33	$ 8.83
Total Return(d)	(43.22)%	15.24%	11.31%	1.26%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,699	$ 7,842	$ 7,413	$ 6,720
Ratio of Expenses to Average Net Assets(f)	2.70%	2.70%	2.70%	2.70%(g)
Ratio of Net Investment Income to Average Net Assets	(2.29)%	(2.24)%	(2.32)%	(2 .43)%(g)
Portfolio Turnover Rate	78.0%	62.9%	80.7%	53 .4%(g),(h)
	2008	2007(i)
SMALLCAP GROWTH FUND II(b)
Class C shares
Net Asset Value, Beginning of Period	$ 10.10	$ 9.04
Income from Investment Operations:
Net Investment Income (Operating Loss)(c)	(0.18)	(0.17)
Net Realized and Unrealized Gain (Loss) on Investments	(3.98)	1.23
Total From Investment Operations	(4.16)	1.06
Less Dividends and Distributions:
Distributions from Realized Gains	(0.54)	–
Total Dividends and Distributions	(0.54)	–
Net Asset Value, End of Period	$ 5.40	$ 10.10
Total Return(d)	(43.25)%	11.73%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 339	$ 502
Ratio of Expenses to Average Net Assets(f)	2.70%	2.70%(g)
Ratio of Net Investment Income to Average Net Assets	(2.29)%	(2.28)%(g)
Portfolio Turnover Rate	78.0%	62.9%

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

^(b) Effective June 13, 2008, Partners SmallCap Growth Fund II changed its name to SmallCap Growth Fund II.

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

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

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

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

^(g) Computed on an annualized basis.

^(h) Portfolio turnover rate excludes approximately $21,459,000 of securities from the acquisition of Principal Partners SmallCap Growth Fund, Inc. and $84,000 from portfolio realignment.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized gain of $.19 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

430

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008	2007	2006	2005(a)
SMALLCAP VALUE FUND
Class A shares
Net Asset Value, Beginning of Period	$ 18.82	$ 19.21	$ 17.49	$ 16.98
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.05	0.06	0.01	(0 .01)
Net Realized and Unrealized Gain (Loss) on Investments	(5.16)	0.44	2.99	0.52
Total From Investment Operations	(5.11)	0.50	3.00	0.51
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.08)	–	–	–
Distributions from Realized Gains	(1.33)	(0.89)	(1.28)	–
Total Dividends and Distributions	(1.41)	(0.89)	(1.28)	–
Net Asset Value, End of Period	$ 12.30	$ 18.82	$ 19.21	$ 17.49
Total Return(c)	(29.06)%	2.55%	18.03%	3 .00%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 14,995	$ 23,033	$ 8,839	$ 1,302
Ratio of Expenses to Average Net Assets(e)	1.35%	1.36%	1.49%	1.70%(f)
Ratio of Net Investment Income to Average Net Assets	0.33%	0.34%	0.07%	(0 .18)%(f)
Portfolio Turnover Rate	101.9%	112.8%(g)	97.9%	133.7%(f)
	2008	2007	2006	2005(a)
SMALLCAP VALUE FUND
Class B shares
Net Asset Value, Beginning of Period	$ 18.59	$ 19.14	$ 17.55	$ 16.98
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.09)	(0.11)	(0.13)	(0 .05)
Net Realized and Unrealized Gain (Loss) on Investments	(5.09)	0.45	3.00	0.62
Total From Investment Operations	(5.18)	0.34	2.87	0.57
Less Dividends and Distributions:
Distributions from Realized Gains	(1.33)	(0.89)	(1.28)	–
Total Dividends and Distributions	(1.33)	(0.89)	(1.28)	–
Net Asset Value, End of Period	$ 12.08	$ 18.59	$ 19.14	$ 17.55
Total Return(c)	(29.76)%	1.68%	17.18%	3 .36%(d),(h)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 2,789	$ 4,545	$ 1,612	$ 439
Ratio of Expenses to Average Net Assets(e)	2.29%	2.27%	2.24%	2.45%(f)
Ratio of Net Investment Income to Average Net Assets	(0.60)%	(0.58)%	(0.70)%	(0 .82)%(f)
Portfolio Turnover Rate	101.9%	112.8%(g)	97.9%	133.7%(f)
	2008	2007(i)
SMALLCAP VALUE FUND
Class C shares
Net Asset Value, Beginning of Period	$ 18.72	$ 18.93
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	(0.06)	(0.06)
Net Realized and Unrealized Gain (Loss) on Investments	(5.12)	(0.15)
Total From Investment Operations	(5.18)	(0.21)
Less Dividends and Distributions:
Distributions from Realized Gains	(1.33)	–
Total Dividends and Distributions	(1.33)	–
Net Asset Value, End of Period	$ 12.21	$ 18.72
Total Return(c)	(29.54)%	(1.11)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,481	$ 4,496
Ratio of Expenses to Average Net Assets(e)	2.08%	2.09%(f)
Ratio of Net Investment Income to Average Net Assets	(0.41)%	(0.42)%(f)
Portfolio Turnover Rate	101.9%	112.8%(g)

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

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Portfolio turnover rate excludes portfolio realignment from the acquisition of WM SmallCap Value Fund.

^(h) During 2005, the Fund processed a significant (relative to the Class) "As Of" transaction that resulted in a gain to the remaining shareholders of the Class. In accordance with the Fund's shareholder processing policies, this benefit inures all shareholders of the Class. Had such a gain not been recognized, the total return amounts expressed herein would have been smaller.

⁽ⁱ⁾ Period from January 17, 2007 through October 31, 2007. Class C shares incurred a net realized and unrealized loss of $.27 per share from January 10, 2007, through January 16, 2007.

See accompanying notes.

431

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
		2008		2007	2006	2005	2004
TAX-EXEMPT BOND FUND(a)
Class A shares
Net Asset Value, Beginning of Period	$ 7.41		$ 7.70		$ 7.70	$ 7.95	$ 7.96
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.34(b)			0.33(b)	0.33	0.33	0.33
Net Realized and Unrealized Gain (Loss) on Investments	(1.10)			(0.25)	0.15	(0 .16)	0.08
Total From Investment Operations	(0.76)			0.08	0.48	0.17	0.41
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.34)			(0.35)	(0.33)	(0.33)	(0.33)
Distributions from Realized Gains		–		(0.02)	(0.15)	(0 .09)	(0.09)
Total Dividends and Distributions	(0.34)			(0.37)	(0.48)	(0 .42)	(0.42)
Net Asset Value, End of Period	$ 6.31		$ 7.41		$ 7.70	$ 7.70	$ 7.95
Total Return(c)	(10.57)%			0.72%	6.42%	2.19%	5.35%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 220,771		$ 282,685		$ 165,325	$ 175,146	$ 184,711
Ratio of Expenses to Average Net Assets	1.00%			1.09%	1.15%	1.00%	0.96%
Ratio of Expenses to Average Net Assets (Excluding Interest
Expense and Fees)(d)	0.76%			0.77%	N/A	N/A	N/A
Ratio of Gross Expenses to Average Net Assets(e)	1.07%			1.15%	1.15%	1.00%	0.96%
Ratio of Net Investment Income to Average Net Assets	4.85%			4.37%	4.32%	4.22%	4.22%
Portfolio Turnover Rate	65.3%			51.0%	25.0%	28.0%	25.0%
		2008		2007	2006	2005	2004
TAX-EXEMPT BOND FUND(a)
Class B shares
Net Asset Value, Beginning of Period	$ 7.41		$ 7.70		$ 7.70	$ 7.95	$ 7.96
Income from Investment Operations:
Net Investment Income (Operating Loss)		0.32(b)		0.29(b)	0.27	0.27	0.27
Net Realized and Unrealized Gain (Loss) on Investments		(1.10)		(0.25)	0.15	(0 .16)	0.08
Total From Investment Operations		(0.78)		0.04	0.42	0.11	0.35
Less Dividends and Distributions:
Dividends from Net Investment Income		(0.32)		(0.31)	(0.27)	(0.27)	(0.27)
Distributions from Realized Gains		–		(0.02)	(0.15)	(0 .09)	(0.09)
Total Dividends and Distributions		(0.32)		(0.33)	(0.42)	(0 .36)	(0.36)
Net Asset Value, End of Period	$ 6.31		$ 7.41		$ 7.70	$ 7.70	$ 7.95
Total Return(c)	(10.94)%			0.24%	5.63%	1.43%	4.57%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 11,837		$ 19,941		$ 22,881	$ 30,073	$ 35,433
Ratio of Expenses to Average Net Assets		1.39%		1.54%	1.91%	1.75%	1.71%
Ratio of Expenses to Average Net Assets (Excluding Interest Expense
and Fees)(d)		1.15%		1.24%	N/A	N/A	N/A
Ratio of Gross Expenses to Average Net Assets(e)		1.96%		1.98%	1.91%	1.75%	1.71%
Ratio of Net Investment Income to Average Net Assets		4.44%		3.90%	3.56%	3.47%	3.47%
Portfolio Turnover Rate		65.3%		51.0%	25.0%	28.0%	25.0%
		2008		2007	2006	2005	2004
TAX-EXEMPT BOND FUND(a)
Class C shares
Net Asset Value, Beginning of Period	$ 7.42		$ 7.70		$ 7.70	$ 7.95	$ 7.96
Income from Investment Operations:
Net Investment Income (Operating Loss)		0.28(b)		0.26(b)	0.27	0.27	0.27
Net Realized and Unrealized Gain (Loss) on Investments		(1.11)		(0.24)	0.15	(0 .16)	0.08
Total From Investment Operations		(0.83)		0.02	0.42	0.11	0.35
Less Dividends and Distributions:
Dividends from Net Investment Income		(0.28)		(0.28)	(0.27)	(0.27)	(0.27)
Distributions from Realized Gains		–		(0.02)	(0.15)	(0 .09)	(0.09)
Total Dividends and Distributions		(0.28)		(0.30)	(0.42)	(0 .36)	(0.36)
Net Asset Value, End of Period	$ 6.31		$ 7.42		$ 7.70	$ 7.70	$ 7.95
Total Return(c)	(11.52)%			(0.01)%	5.60%	1.41%	4.58%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 3,672		$ 2,931		$ 2,547	$ 2,360	$ 3,641
Ratio of Expenses to Average Net Assets		1.89%		1.94%	1.93%	1.76%	1.71%
Ratio of Expenses to Average Net Assets (Excluding Interest Expense
and Fees)(d)		1.65%		1.65%	N/A	N/A	N/A
Ratio of Gross Expenses to Average Net Assets(e)		2.50%		2.74%	1.93%	1.76%	1.71%
Ratio of Net Investment Income to Average Net Assets		3.99%		3.50%	3.54%	3.46%	3.47%
Portfolio Turnover Rate		65.3%		51.0%	25.0%	28.0%	25.0%

(a)	Effective June 13, 2008, Tax-Exempt Bond Fund I changed its name to Tax-Exempt Bond Fund.
(b)	Calculated based on average shares outstanding during the period.
(c)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(d)	Excludes interest expense and fees paid through inverse floater agreements. See "Operating Policies" in notes to financial statements.
(e)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

432

FINANCIAL HIGHLIGHTS PRINCIPAL FUNDS, INC.

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

	2008	2007	2006(a)
ULTRA SHORT BOND FUND
Class A shares
Net Asset Value, Beginning of Period	$ 9.55	$ 10.06	$ 10.05
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.39	0.52	0.29
Net Realized and Unrealized Gain (Loss) on Investments	(1.83)	(0.50)	(0.01)
Total From Investment Operations	(1.44)	0.02	0.28
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.38)	(0.54)	(0.27)
Total Dividends and Distributions	(0.38)	(0.54)	(0.27)
Redemption fees	–	0.01	–
Net Asset Value, End of Period	$ 7.73	$ 9.55	$ 10.06
Total Return(c)	(15.40)%	(0.04)%	3.00%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 5,169	$ 15,700	$ 20,427
Ratio of Expenses to Average Net Assets(e)	0.80%	0.73%	0.75%(f)
Ratio of Net Investment Income to Average Net Assets	4.46%	5.21%	4.57%(f)
Portfolio Turnover Rate	14.8%	46.5%	49.0%(f)
	2008	2007(g)
ULTRA SHORT BOND FUND
Class C shares
Net Asset Value, Beginning of Period	$ 9.55	$ 10.06
Income from Investment Operations:
Net Investment Income (Operating Loss)(b)	0.34	0.35
Net Realized and Unrealized Gain (Loss) on Investments	(1.84)	(0.48)
Total From Investment Operations	(1.50)	(0.13)
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.32)	(0.38)
Total Dividends and Distributions	(0.32)	(0.38)
Net Asset Value, End of Period	$ 7.73	$ 9.55
Total Return(c)	(16.04)%	(1.47)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 1,090	$ 2,856
Ratio of Expenses to Average Net Assets(e)	1.50%	1.50%(f)
Ratio of Net Investment Income to Average Net Assets	3.81%	4.51%(f)
Portfolio Turnover Rate	14.8%	46.5%

^(a) Period from March 15, 2006, date shares first offered, through October 31, 2006.

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

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

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

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

^(f) Computed on an annualized basis.

^(g) Period from January 17, 2007 through October 31, 2007. Class C shares recognized $.01 of net investment income per share, all of which was distributed, during the period January 10, 2007, through January 16, 2007.

See accompanying notes.

433

	FINANCIAL HIGHLIGHTS
	PRINCIPAL FUNDS, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended October 31 (except as noted):
	2008		2007	2006	2005	2004
WEST COAST EQUITY FUND
Class A shares
Net Asset Value, Beginning of Period	$ 49.35	$ 43.09		$ 38.99	$ 35.04	$ 32.14
Income from Investment Operations:
Net Investment Income (Operating Loss)	0.23(a)		0.30(a)	0.18	0.25	0.06(a)
Net Realized and Unrealized Gain (Loss) on Investments	(15.43)		7.13	5.02	4.33	2.84
Total From Investment Operations	(15.20)		7.43	5.20	4.58	2.90
Less Dividends and Distributions:
Dividends from Net Investment Income	(0.23)		(0.18)	(0.13)	(0.20)	–
Distributions from Realized Gains	(3.21)		(0.99)	(0.97)	(0 .43)	–
Total Dividends and Distributions	(3.44)		(1.17)	(1.10)	(0 .63)	–
Net Asset Value, End of Period	$ 30.71	$ 49.35		$ 43.09	$ 38.99	$ 35.04
Total Return(b)	(32.95)%	17.59%		13.50%	13.13%	9.06%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 390,075	$ 956,005		$ 880,755	$ 735,037	$ 621,924
Ratio of Expenses to Average Net Assets	0.93%		0.83%	0.85%	0.91%	0.94%
Ratio of Gross Expenses to Average Net Assets(c)	–		0.83%	0.85%	0.91%	0.94%
Ratio of Net Investment Income to Average Net Assets	0.57%		0.63%	0.44%	0.68%	0.17%
Portfolio Turnover Rate	9.7%		17.6%	15.0%	13.0%	12.0%
	2008		2007	2006	2005	2004
WEST COAST EQUITY FUND
Class B shares
Net Asset Value, Beginning of Period	$ 43.33	$ 38.16		$ 34.84	$ 31.48	$ 29.14
Income from Investment Operations:
Net Investment Income (Operating Loss)	(0.14)(a)	(0.10)(a)		(0.18)	(0 .09)	(0.24)(a)
Net Realized and Unrealized Gain (Loss) on Investments	(13.40)		6.26	4.47	3.88	2.58
Total From Investment Operations	(13.54)		6.16	4.29	3.79	2.34
Less Dividends and Distributions:
Distributions from Realized Gains	(3.21)		(0.99)	(0.97)	(0 .43)	–
Total Dividends and Distributions	(3.21)		(0.99)	(0.97)	(0 .43)	–
Net Asset Value, End of Period	$ 26.58	$ 43.33		$ 38.16	$ 34.84	$ 31.48
Total Return(b)	(33.59)%	16.46%		12.45%	12.09%	8.03%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 92,828	$ 185,705		$ 184,340	$ 167,531	$ 141,134
Ratio of Expenses to Average Net Assets	1.88%		1.74%	1.78%	1.85%	1.89%
Ratio of Gross Expenses to Average Net Assets(c)	–		1.74%	1.78%	1.85%	1.89%
Ratio of Net Investment Income to Average Net Assets	(0.41)%	(0.27)%		(0.49)%	(0 .26)%	(0.78)%
Portfolio Turnover Rate	9.7%		17.6%	15.0%	13.0%	12.0%
	2008		2007	2006	2005	2004
WEST COAST EQUITY FUND
Class C shares
Net Asset Value, Beginning of Period	$ 43.53	$ 38.31		$ 34.94	$ 31.56	$ 29.20
Income from Investment Operations:
Net Investment Income (Operating Loss)	(0.14)(a)		(0.08)(a)	(0.16)	(0 .06)	(0.21)(a)
Net Realized and Unrealized Gain (Loss) on Investments	(13.47)		6.29	4.50	3.88	2.57
Total From Investment Operations	(13.61)		6.21	4.34	3.82	2.36
Less Dividends and Distributions:
Dividends from Net Investment Income	–		–	–	(0.01)	–
Distributions from Realized Gains	(3.21)		(0.99)	(0.97)	(0 .43)	–
Total Dividends and Distributions	(3.21)		(0.99)	(0.97)	(0 .44)	–
Net Asset Value, End of Period	$ 26.71	$ 43.53		$ 38.31	$ 34.94	$ 31.56
Total Return(b)	(33.60)%		16.56%	12.53%	12.18%	8.12%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)	$ 12,632	$ 22,174		$ 21,039	$ 13,613	$ 9,000
Ratio of Expenses to Average Net Assets	1.87%		1.69%	1.69%	1.78%	1.80%
Ratio of Gross Expenses to Average Net Assets(c)	–		1.74%	1.69%	1.78%	1.80%
Ratio of Net Investment Income to Average Net Assets	(0.40)%		(0.23)%	(0.40)%	(0 .19)%	(0.69)%
Portfolio Turnover Rate	9.7%		17.6%	15.0%	13.0%	12.0%

(a)	Calculated based on average shares outstanding during the period.
(b)	Total return is calculated without the front-end sales charge or contingent deferred sales charge.
(c)	Excludes expense reimbursement from Manager and/or custodian credits.

See accompanying notes.

434

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Principal Funds, Inc.

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Bond & Mortgage Securities Fund, California Municipal Fund, Disciplined LargeCap Blend Fund, Diversified International Fund, Equity Income Fund, Global Real Estate Securities Fund, Government & High Quality Bond Fund, High Yield Fund, Income Fund, Inflation Protection Fund, International Emerging Markets Fund, International Growth Fund, LargeCap Blend Fund I, LargeCap Blend Fund II, LargeCap Growth Fund, LargeCap Growth Fund I, LargeCap Growth Fund II, LargeCap S&P 500 Index Fund, LargeCap Value Fund, LargeCap Value Fund III, MidCap Blend Fund, MidCap Growth Fund I, MidCap Growth Fund III, MidCap Stock Fund, MidCap Value Fund II, Money Market Fund, Mortgage Securities Fund, Preferred Securities Fund, Real Estate Securities Fund, Short-Term Bond Fund, Short-Term Income Fund, SmallCap Blend Fund, SmallCap Growth Fund, SmallCap Growth Fund II, SmallCap Value Fund, Tax-Exempt Bond Fund, Ultra Short Bond Fund, and West Coast Equity Fund (38 of the 74 portfolios constituting Principal Funds, Inc. (collectively the “Funds”)) as of October 31, 2008, and the related statements of operations, statements of cash flows for California Municipal Fund and Tax-Exempt Bond Fund, statements of changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of California Municipal Fund, Equity Income Fund, High Yield Fund, Income Fund, MidCap Stock Fund, Mortgage Securities Fund, Short-Term Income Fund, Tax-Exempt Bond Fund, and West Coast Equity Fund for each of the periods presented through October 31, 2006, were audited by other auditors whose reports dated December 18, 2006 (California Municipal Fund, Equity Income Fund, High Yield Fund, Income Fund, MidCap Stock Fund, Mortgage Securities Fund, Short-Term Income Fund, and West Coast Equity Fund) and December 29, 2006 (Tax-Exempt Bond Fund), expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2008 by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the funds listed above constituting portfolios within Principal Funds, Inc. at October 31, 2008, the results of their operations, cash flows of California Municpal Fund and Tax-Exempt Bond Fund, the changes in their net assets and their financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Des Moines, Iowa

December 23, 2008

435

FUND DIRECTORS AND OFFICERS

Under Maryland law, a Board of Directors oversees the Fund. The Directors have financial or other relevant experience and meet several times during the year to review contracts, Fund activities and the quality of services provided to the Fund. Each director also has the same position with Principal Variable Contracts Funds, Inc. which is also sponsored by Principal Life Insurance Company. Each director holds office for an indefinite term. Directors considered to be “interested persons” as defined in the Investment Company Act of 1940, as amended, as shown below are considered to be interested because of an affiliation with the Manager and Principal Life Insurance Company.

The following directors are considered not to be “interested persons” as defined in the 1940 Act

		Number of
		Portfolios in Fund
		Complex	Other
Name, Position Held with the Fund,	Principal Occupation(s)	Overseen by	Directorships
Address*, and Year of Birth	During past 5 years	Director	Held by Director**
Elizabeth Ballantine	Principal, EBA Associates	114	The McClatchy
Director since 2004			Company
Member, Nominating and Governance
Committee
1948
Kristianne Blake	President, Kristianne Gates Blake,	114	Avista Corporation;
Director since 2007	P.S.		Russell Investment
Member, Operations Committee			Company; Russell
1954			Investment Funds
Craig Damos	CEO/President, Vertical Growth	114	None
Director since 2008	Officer, and CFO, The Weitz
Member, Operations Committee	Company
1954
Richard W. Gilbert	President, Gilbert Communications,	114	Calamos Asset
Director since 1985	Inc.		Management, Inc.
Member, Nominating and Governance
Committee
Member, Executive Committee
1940
Mark A. Grimmett	Executive Vice President and CFO,	114	None
Director since 2004	Merle Norman Cosmetics, Inc.
Member, Audit Committee
1960
Fritz S. Hirsch	President and CEO, Sassy, Inc.	114	None
Director since 2005
Member, Audit Committee
1951
William C. Kimball	Retired. Formerly Chairman and	114	Casey’s General Stores,
Director since 1999	CEO, Medicap Pharmacies, Inc.		Inc.
Member, Nominating and Governance
Committee
1947
Barbara A. Lukavsky	President and CEO, Barbican	114	None
Director since 1987	Enterprises, Inc.
Member, Nominating and Governance
Committee
1940
Daniel Pavelich	Retired. Formerly, Chairman and	114	Catalytic Inc.; Vaagen
Director since 2007	CEO of BDO Seidman.		Bros. Lumber, Inc.
Member, Audit Committee
1944

436

The following directors are considered to be “interested persons” as defined in the 1940 Act, as amended, because of an affiliation with the Manager and Principal Life.

Ralph C. Eucher	Director, Principal Management	114	None
Director, Vice Chairman and CEO	Corporation, since 1999. Director,
Member, Executive Committee	Principal Funds Distributor, Inc. since
1952	2007. Director, Princor since 1999.
President Princor 1999-2005. Senior
Vice President, Principal Life, since
2002. Prior thereto, Vice President.
William G. Papesh	Retired December 2007. Prior thereto,	114	None
Director	President and Director of Edge Asset
Member, Operations Committee	Management, Inc. since 2007;
1943	President and CEO of WM Group of
	Funds 1987-2006.

Larry D. Zimpleman                            Chairman and Director, Principal                   114                      None

Director and Chairman of the Board      Management Corporation and Princor

Member, Executive Committee             since 2001. Chief Executive Officer

1951                                                   Principal Life since 2008, President and Chief Operating Officer, Principal Life since 2006. President,

                                                          Retirement and Investor Services, Principal Financial Group, Inc. 2003-2006.

                                                         Executive Vice President, 2001-2003, and prior thereto, Senior Vice President, Principal Life.

*Correspondence intended for each Director who is other than an Interested Director may be sent to 711 High Street, Des Moines, IA 50392.

**Directorships of any company registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Securities Exchange Act or any other mutual fund.

The following table presents officers of the Funds.

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
Craig L. Bassett	Vice President and Treasurer, Principal Life.
Treasurer
711 High Street, Des Moines, IA 50392
1952
Michael J. Beer	Executive Vice President and Chief Operating
Executive Vice President	Officer, Principal Management Corporation.
711 High Street, Des Moines, IA 50392	Executive Vice President, Principal Funds
1961	Distributor, Inc., since 2007. President, Princor, since
2005.
Randy L. Bergstrom	Counsel, Principal Life.
Assistant Tax Counsel
711 High Street, Des Moines, IA 50392
1955

437

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
David J. Brown	Vice President, Product & Distribution Compliance,
Chief Compliance Officer	Principal Life. Senior Vice President, Principal
711 High Street, Des Moines, IA 50392	Management Corporation since 2004. Senior Vice
1960	President, Principal Funds Distributor, Inc., since
	2007. Second Vice President, Princor, since 2003,
	and prior thereto, Vice President, Principal
	Management Corporation and Princor.
Jill R. Brown	Second Vice President, Principal Financial Group and
Senior Vice President	Senior Vice President, Principal Management
1100 Investment Blvd, ste 200	Corporation and Princor, since 2006. Chief Financial
El Dorado Hills, CA 95762	Officer, Princor since 2003. Vice President, Princor
1967	2003-2006. Senior Vice President and Chief Financial
	Officer, Principal Funds Distributor, Inc., since 2007.
	Prior thereto, Assistant Financial Controller, Principal
Life.
Nora M. Everett	President since 2008, Senior Vice President and
President	Deputy General Counsel, Principal Financial Group,
711 High Street Des Moines, IA 50392	Inc. 2004-2008. Vice President and Counsel,
1959	Principal Financial Group, Inc. 2001-2004.
Cary Fuchs	President, Principal Funds Distributor, since 2007;
Senior Vice President of Distribution	Director of Mutual Fund Operations, Principal
1100 Investment Blvd, ste 200	Shareholder Services, since 2005; prior thereto,
El Dorado Hills, CA 95762	Divisional Vice President Boston Financial Data
1957	Services.
Steve Gallaher	Second Vice President and Counsel, Principal Life
Assistant Counsel	since 2006. Self-Employed Writer in 2005. 2004 and
711 High Street Des Moines, IA 50392	prior thereto Senior Vice President and Counsel of
1955	Principal Residential Mortgage, Inc.
Ernie H. Gillum	Vice President and Chief Compliance Officer,
Vice President, Assistant Secretary	Principal Management Corporation, since 2004, and
711 High Street Des Moines, IA 50392	prior thereto, Vice President, Compliance and Product
1955	Development, Principal Management Corporation.
Patrick A. Kirchner	Counsel, Principal Life.
Assistant Counsel
711 High Street, Des Moines, IA 50392
1960
Carolyn F. Kolks	Counsel, Principal Life, since 2003 and prior thereto,
Assistant Tax Counsel	Attorney.
711 High Street, Des Moines, IA 50392
1962
Sarah J. Pitts	Counsel, Principal Life.
Assistant Counsel
711 High Street, Des Moines, IA 50392
1945
Layne A. Rasmussen	Vice President and Controller – Mutual Funds,
Vice President, Controller, and CFO	Principal Management Corporation.
711 High Street, Des Moines, IA 50392
1958

438

Name, Position Held with the Fund,	Principal Occupation(s)
Address, and Year of Birth	During past 5 years
Michael D. Roughton	Vice President and Senior Securities Counsel,
Counsel	Principal Financial Group, Inc. Senior Vice President
711 High Street, Des Moines, IA 50392	and Counsel, Principal Management Corporation,
1951	Principal Funds Distributor, Inc., and Princor.
	Counsel, Principal Global.
Adam U. Shaikh	Counsel, Principal Life, since 2006. Prior thereto,
Assistant Counsel	practicing attorney.
711 High Street, Des Moines, IA 50392
1972
Dan Westholm	Director Treasury, since 2003. Prior thereto, Assistant
Assistant Treasurer	Treasurer.
711 High Street, Des Moines, IA 50392
1966
Beth Wilson	Director and Secretary, Principal Funds, since 2007.
Vice President and Secretary	Prior thereto, Business Manager for Pella
711 High Street, Des Moines, IA 50392	Corporation.
1956

The Audit Committee selects the independent auditors for the Fund and oversees the activities of the independent auditors as well as the internal auditors. The committee also receives reports about accounting and financial matters affecting the Fund.

The Executive Committee is selected by the Board. It may exercise all the powers of the Board, with certain exceptions, when the Board is not in session. The Committee must report its actions to the Board.

The Nominating and Governance Committee selects and nominates all candidates who are not “interested persons” of the fund for election to the Board. The committee also oversees the structure and efficiency of the Board of Directors and the committees the Board establishes, and the activities of the Funds’ Chief Compliance Officer.

The Operations Committee oversees the provision of administrative and distribution services to the Funds, communications with the Funds’ shareholders, and provides review and oversight of the Funds’ operations.

Additional information about the Fund is available in the Prospectuses dated February 29, 2008 and the Statement of Additional Information dated September 30, 2008. These documents may be obtained free of charge by writing or telephoning Principal Funds Distributor, Inc., P.O. Box 10423, Des Moines, IA 50306. Telephone 1-800-222-5852.

PROXY VOTING POLICIES

A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities and the results of the proxy votes for the most recent twelve months ended June 30 may be obtained free of charge by telephoning Principal Funds Distributor, Inc., at 1-800-222-5852, at the Principal Funds website at www.principal.com, or at www.sec.gov.

SCHEDULES OF INVESTMENTS

The Fund files complete schedules of investments with the Securities and Exchange Commission as of January 31 and July 31 of each year on Form N-Q. The Fund’s Form N-Q can be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. or on the Commission’s website at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330.

SOURCE OF DISTRIBUTIONS

To the extent that distributions paid by the Funds are comprised of something other than income or capital gains, such as a return of capital, a notice will be included in your quarterly statement pursuant to Section 19(a) of the Investment Company Act of 1940, as amended, and Rule 19a-1 disclosing the source of such distributions. Furthermore, such notices shall be posted monthly on our web site at www.principalfunds.com. You may request a copy of all such notices, free of charge, by telephoning 1-800-222-5852. The amounts and sources of distributions included in such notices are estimates only and should not be reported for tax purposes. The Fund will send shareholders a Form 1099-DIV for the calendar year that will tell shareholders how to report these distributions for federal income tax purposes.

439

BOARD CONSIDERATION OF INVESTMENT ADVISORY CONTRACTS

During the period covered by this report, the Board of Directors of Principal Funds, Inc. (“PFI”) approved (1) a new Subadvisory Agreement with Westwood Management Corporation (“Westwood”) related to the LargeCap Value Fund III series of PFI; (2) the Amended and Restated Management Agreement (the “Management Agreement”) between PFI and Principal Management Corporation (the “Manager”) and a new Subadvisory Agreement with Pacific Investment Management Company LLC (“PIMCO”) related to the creation of the Core Plus Bond Fund I; (3) the Management Agreement and Amended and Restated Subadvisory Agreements with Principal Global Investors, Inc. (“PGI”), Principal Real Estate Investors, LLC (“PREI”) and Spectrum Asset Management, Inc. (“Spectrum”) related to the creation of the Global Diversified Income Fund (“Global Diversified”); (4) an Amended and Restated Subadvisory Agreement with Mellon Capital Management Corporation (“Mellon”) related to the MidCap Growth Fund III; and (5) annual review and renewal of the Management Agreement and the Subadvisory Agreements relating to all Funds. In preparation for their approval process, the Independent Directors met with independent legal counsel in advance of the meetings to discuss the information provided.

Westwood Subadvisory Agreement

At its June 9, 2008 meeting, the Board considered whether to enter into a Subadvisory Agreement with Westwood on behalf of the LargeCap Value Fund III (“LargeCap Value III” or “Fund”).

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreement. The Board considered the Subadviser’s reputation, qualifications and background, its investment approach, the experience and skills of its investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for PFI and that the due-diligence program recommended Westwood for the Fund.

The Board reviewed the historical composite performance of the Subadviser as compared to its Morningstar peer group and relevant benchmark index. The Board noted that as of March 31, 2008, the Subadviser had outperformed its category and benchmark index during most periods over the last five years. The Board concluded, based on this information, that investment performance was expected to be satisfactory.

The Board reviewed the proposed subadvisory fees and the effect of the new agreement on the subadvisory fee the Manager pays. It noted that the proposed subadvisory fee schedule is higher than the subadvisory fee schedule of the existing subadviser to the Fund. The Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and Subadviser and that the Manager compensates the Subadviser from its fees. The Board noted that the Subadviser represented that the proposed subadvisory fee for the Fund was not higher than fees charged to its other subadvisory clients with investment mandates similar to those of the Fund. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedule for the Fund was reasonable and appropriate.

The Board considered that the Subadvisory Agreement would have a slightly negative impact on the Manager’s profitability during the first year of the Subadvisory Agreement and, therefore, concluded that it need not reassess the profitability of the Fund’s Management Agreement with the Manager. In concluding that the Subadviser’s anticipated profitability will not be unreasonable, the Board determined that it need not review estimated levels of profits to the Subadviser because, as the Board noted, the Manager will compensate the Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with the Subadviser at arm’s length. The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreement. The Board noted the breakpoints included in the fee schedule and concluded that the fee schedule reflects an appropriate recognition of economies of scale at current asset levels. The Board also considered the character and amount of other incidental benefits to be received by the Subadviser. The Board considered the Subadviser’s soft dollar practices. The Board concluded that the subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of the Subadvisory Agreement are fair and reasonable and that approval of the Subadvisory Agreement is in the best interests of the Fund.

Mellon Subadvisory Agreement

At its June 9, 2008 meeting, the Board considered whether to enter into a new Subadvisory Agreement with Mellon related to the addition of Mellon (the “Subadviser”) to the MidCap Growth Fund III (the “Fund”) following a proposed merger with MidCap Growth Fund I (the “Merging Fund”).

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreement. The Board considered the Subadviser’s reputation, qualifications and background, its investment approach, the experience and skills of its investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for PFI and that the due-diligence program recommended the Subadviser for the Fund.

The Board reviewed the performance of the Merging Fund, which was sub-advised by the Subadviser, as compared to its Morningstar peer group. The Board noted that the Merging Fund’s long-term (3-year) performance was above median. The Board also considered the Manager’s statement that the Subadviser’s performance was expected to be complementary to the existing Subadviser’s performance and the Board concluded, based on this information, that investment performance was expected to be satisfactory.

440

The Board reviewed the proposed subadvisory fees and the effect of the new agreement on the subadvisory fee the Manager pays. It noted that the proposed subadvisory fee schedule is lower than the subadvisory fee schedule of the existing subadviser to the Fund. The Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and Subadviser and that the Manager compensates the Subadviser from its fees. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedule for the Fund was reasonable and appropriate.

The Board considered that the Manager’s overall profitability would slightly decrease with the addition of the new Subadvisory Agreement and, therefore, concluded that it need not reassess the profitability of the Fund’s Management Agreement with the Manager. In concluding that the Subadviser’s anticipated profitability will not be unreasonable, the Board determined that it need not review estimated levels of profits to the Subadviser because, as the Board noted, the Manager will compensate the Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with the Subadviser at arm’s length. The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreement. The Board noted the breakpoints included in the fee schedule and concluded that the fee schedule reflects an appropriate recognition of economies of scale at current asset levels. The Board also considered the character and amount of other incidental benefits to be received by the Subadviser. The Board considered the Subadviser’s soft dollar practices. The Board concluded that the subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of the Subadvisory Agreement are fair and reasonable and that approval of the Subadvisory Agreement is in the best interests of the Fund.

Management Agreement and PIMCO Subadvisory Agreement

At its June 9, 2008 meeting, the Board considered whether to enter into the Management Agreement with the Manager and a Subadvisory Agreement with PIMCO (the “Subadviser”) related to the creation of a new series of PFI, the Core Plus Bond Fund I.

Management Agreement

With respect to the Management Agreement, the Board considered, among other factors, that the Manager and its affiliates have demonstrated a commitment to support the various series of PFI (collectively, the “Funds”), including undertakings to cap Fund expenses to provide competitive expense ratios for shareholders and investment into the business through the acquisition of another fund complex with the goal of building economies of scale to be shared with shareholders. In addition, the Board considered the following factors, and made certain findings and conclusions with regard thereto, for the Fund. The Board concluded that a long-term relationship with a capable, conscientious adviser is in the best interests of the Fund.

The Board considered the nature, quality and extent of services to be provided under the Management Agreement, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources would be provided under the Management Agreement. The Board also considered the proposed delegation of day-to-day portfolio management responsibility to the Subadviser and the program developed by the Manager for identifying, recommending, monitoring and replacing subadvisers. The Board concluded that this due diligence process has worked well for PFI’s other subadvised Funds. The Board also considered the compliance program established by the Manager, the level of compliance attained for other PFI Funds and that a similar level of compliance was expected to be attained for the Fund.

The Board noted that the Manager would not directly control the Fund’s investment performance, but rather would engage the Subadviser to manage the portfolio. Based upon its familiarity with the Manager’s performance in monitoring subadvisers to other subadvised Funds, the Board concluded that the Manager has in place an effective due diligence process to monitor performance, to encourage remedial action and to change the Subadviser at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s performance was expected to be satisfactory with respect to investment performance.

The Board considered the Fund’s proposed management fee. The Board received information regarding how the Fund’s proposed management fee ranked in comparison to the advisory fees of a peer group of institutional intermediate investment-grade debt funds (“Peer Group”) based upon Lipper data. In assessing whether the management fee was reasonable, the Board considered a variety of factors, including the amount of the fee, the comparison of the fees to the Peer Group, the services to be provided, the Manager’s expectations for the Fund’s investment performance and the Manager’s anticipated profitability.

The Board also considered the level of fees that would be retained by the Manager after payment of the subadvisory fee. Although the proposed management fee was at the higher end of the range of the advisory fees of the Peer Group, the Board noted the strong reputation and performance record of the Subadviser. Considering all factors it deemed relevant, the Board concluded that the proposed management fee for the Fund was reasonable and appropriate in light of the nature and quality of services expected to be provided by the Manager and other relevant factors. The Board reviewed the Manager’s anticipated profitability from the Fund under the Management Agreement. Based upon the forecasted profitability percentage the Manager provided, the Board concluded that the profitability to the Manager from the management of the Fund was not expected to be unreasonable, taking into account the reasonableness of the Fund’s proposed management fee, and given the expected level of services to be provided.

441

The Board considered whether there would be economies of scale with respect to the management of the Fund and whether the Fund would benefit from any such economies of scale through breakpoints in fees. The Board reviewed the levels at which breakpoints in the proposed management fee would occur and the amounts of the proposed reductions, as well as the breakpoint in the Subadvisory Agreement. The Board concluded that the proposed management fee for the Fund reflects an appropriate level of sharing of economies of scale at the current anticipated asset levels.

The Board also considered the character and amount of other incidental benefits expected to be received by the Manager and its affiliates from their relationships with the Fund. The Board concluded that the management and subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Subadvisory Agreement

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreement. The Board considered the reputation, qualifications and background of the Subadviser, investment approach of the Subadviser, the experience and skills of the Subadviser’s investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for the Funds and that the due diligence program recommended the Subadviser for the Fund.

The Board reviewed historical composite performance of the Subadviser as compared to a Morningstar peer group and relevant benchmark index. The Board noted that as of March 31, 2008, the Subadviser had outperformed its Morningstar category and benchmark index during most periods over the last one, three, five and ten year periods. The Board concluded, based on this information, that investment performance was expected to be satisfactory.

The Board considered the subadvisory fee proposed to be paid to the Subadviser and noted the proposed breakpoint. The Board also considered that the subadvisory fee rate was only slightly higher than the median for the peer group, that it was negotiated at arm’s length between the Manager and the Subadviser and that the Manager compensates the Subadviser from its fees. The Board noted that the Subadviser represented that the proposed subadvisory fees for the Fund were not higher than fees charged to its other subadvisory clients with investment mandates similar to those of the Fund. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedule for the Fund was reasonable and appropriate.

The Board concluded that the Subadviser’s anticipated profitability would not be unreasonable. In reaching this conclusion, the Board determined that they need not review the estimated level of profits to the Subadviser. They based this decision on the facts that both the management and subadvisory fees were determined to be reasonable and the Manager compensates the Subadviser from its own fees having negotiated the Subadvisory Agreement with the Subadviser at arm’s-length.

The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreement. The Board noted the breakpoint included in the fee schedule and concluded that the fee schedule reflects an appropriate recognition of economies of scale at current anticipated asset levels.

The Board also considered the character and amount of other incidental benefits to be received by the Subadviser. The Board noted the Subadviser’s representation that it generally does not enter into soft dollar arrangements.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of the Sub-Advisory Agreement and Management Agreement are fair and reasonable and that approval of each Agreement is in the best interests of the Fund.

Management Agreement and PGI, PREI, and Spectrum Subadvisory Agreements

At its September 8, 2008 meeting, the Board considered whether to enter into the Management Agreement with the Manager and Amended and Restated Subadvisory Agreements with PGI, PREI, and Spectrum (collectively the “Subadvisers”) related to the creation of Global Diversified.

Management Agreement

With respect to the Management Agreement, the Board considered, among other factors, that the Manager and its affiliates have demonstrated a commitment to support the various series of PFI (collectively, the “Funds”), including undertakings to cap Fund expenses to provide competitive expense ratios for shareholders and investment into the business through the acquisition of another fund complex with the goal of building economies of scale to be shared with shareholders. In addition, the Board considered the following factors, and made certain findings and conclusions with regard thereto, for the Fund.

442

The Board considered the nature, quality and extent of services to be provided under the Management Agreement, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources would be provided under the Management Agreement. The Board also considered the proposed delegation of day-to-day portfolio management responsibility to the Subadvisers and the program developed by the Manager for identifying, recommending, monitoring and replacing subadvisers. The Board concluded that this due diligence process has worked well for PFI’s other subadvised Funds. The Board also considered the compliance program established by the Manager, the level of compliance attained for other PFI Funds and that a similar level of compliance was expected to be attained for the Fund.

The Board noted that the Manager would not directly control the Fund’s investment performance, but rather would engage the Subadvisers to manage the portfolio. Based upon their familiarity with the Manager’s performance in monitoring subadvisers to other subadvised Funds, the Board concluded that the Manager has in place an effective due diligence process to monitor performance, to encourage remedial action and to change the Subadvisers at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s performance with respect to Subadviser oversight was expected to be satisfactory.

The Board considered the Fund’s proposed management fee. The Board received information regarding how the Fund’s proposed management fee ranked in comparison to the advisory fees of a peer group of retail front-end load and no-load mixed asset, target allocation moderate funds (“Peer Group”) based upon Lipper data. For comparison purposes, the Manager also provided blended average peer group fees, using both Morningstar and Lipper data, determined by calculating the weighted average of average peer group fees based upon the proposed weightings of the Fund’s underlying portfolio strategies (the “Blended Peer Averages”). In assessing whether the management fee was reasonable, the Board considered a variety of factors, including the amount of the fee, the comparison of the fee to the Peer Group and to the Blended Peer Averages, the services to be provided, the Manager’s expectations for the Fund’s investment performance and the Manager’s anticipated profitability. The Board determined that the Blended Peer Averages provided the most meaningful comparisons to the proposed management fee, and the Board noted that the proposed fee was in line with the Blended Peer Averages. Considering all factors they deemed relevant, the Board concluded that the proposed management fee for the Fund was reasonable and appropriate in light of the nature and quality of services expected to be provided by the Manager and other relevant factors.

The Board reviewed the Manager’s anticipated profitability from the Fund under the Management Agreement. The Board concluded that the proposed management fee was reasonable, taking into account the forecasted profitability percentage the Manager provided and given the expected level of services to be provided. The Board considered whether there would be economies of scale with respect to the management of the Fund and whether the Fund would benefit from any such economies of scale through breakpoints in fees. The Board reviewed the levels at which breakpoints in the proposed management fee would occur and the amounts of the proposed reductions, as well as the breakpoints in the Subadvisory Agreements. The Board concluded that the proposed management fee for the Fund reflects an appropriate level of sharing of economies of scale at the currently anticipated asset levels. The Board also considered the character and amount of other incidental benefits expected to be received by the Manager and its affiliates from their relationships with the Fund. The Board concluded that the management and subadvisory fees for the Fund were reasonable in light of these fall-out benefits.

Subadvisory Agreements

The Board considered the nature, quality and extent of services to be provided under the Subadvisory Agreements. The Board considered the reputation, qualifications and background of the Subadvisers, investment approaches of the Subadvisers, the experience and skills of the Subadvisers’ investment personnel who would be responsible for the day-to-day management of the Fund, and the resources made available to such personnel. In addition, the Board considered the Manager’s program for identifying, recommending, monitoring and replacing subadvisers for the Funds and that the due diligence program recommended the Subadvisers for the Fund.

The Board reviewed the historical total return performance of the Subadvisers in portfolios with investment strategies similar to certain of the proposed portfolio strategies for the Fund, as compared to Morningstar peer groups and relevant benchmark indices. The Board noted that as of June 30, 2008, the Subadvisers had outperformed the benchmark indices during most periods over the last one, three, five and ten year periods where performance was available. The Board also noted the Manager’s statement that the Subadvisers have delivered competitive returns in portfolio or sub-portfolio strategies similar to those proposed for the Fund, but with a different mandate. The Board concluded, based on this information, that investment performance was expected to be satisfactory.

The Board considered the subadvisory fees proposed to be paid to the Subadvisers and noted the proposed breakpoints. The Board also considered that the subadvisory fee rates were modestly higher than the average for the Peer Group and that the Manager compensates the Subadvisers from its fees. The Board noted that the Subadvisers represented that they do not have other subadvisory clients with investment mandates similar to those of the Fund and, thus, the proposed subadvisory fees are not higher than the fees charged by the Subadvisers to other similar clients. On the basis of the information provided, the Board concluded that the proposed subadvisory fee schedules for the Fund were reasonable and appropriate.

443

The Board noted that the Manager has proposed to compensate the Subadviser from its own management fee and that the proposed fees are competitive. In concluding that the proposed subadvisory fees were reasonable, the Board determined that they need not review the estimated levels of profits to the Subadvisers because, as they noted, the management fees were determined to be reasonable and the Manager compensates the Subadvisers from its own fees. The Board considered whether there are economies of scale with respect to the subadvisory services to be provided to the Fund under the Subadvisory Agreements. The Board noted the breakpoints included in the fee schedules and concluded that the fee schedules reflect an appropriate recognition of economies of scale at currently anticipated asset levels. The Board also considered the character and amount of other incidental benefits to be received by the Subadvisers. The Board noted the Manager’s representation that it had recently reviewed the soft dollar practices of the Subadvisers and had concluded that the indirect benefits received by the Subadvisers as a result of their use of soft dollars did not result in the Subadvisers receiving unreasonable compensation in relation to the services provided. The Board also noted Spectrum’s policy that it may execute trades on behalf of its clients as broker-dealer unless a client directs execution to another broker-dealer, and considered that this practice could result in other incidental benefits to Spectrum.

Based upon all of the information considered and the conclusions reached, the Board determined that the terms of each Subadvisory Agreement and Management Agreement are fair and reasonable and that approval of each of the Agreements is in the best interests of the Fund.

Annual Review and Renewal of Management Agreement and Subadvisory Agreements.

Also at its September 8, 2008 meeting, the Board performed its annual review and renewal of the Management Agreement and the Subadvisory Agreements relating to all Funds.

Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”) requires the Board, including a majority of the Directors who have no direct or indirect interest in the investment advisory agreement and are not “interested persons” of PFI, as defined in the 1940 Act (the “Independent Directors”), annually to review and consider the continuation of: (1) the Management Agreement as it relates to the seventy-three (73) series of PFI (each series is referred to as a “Fund”) (2) the subadvisory agreements between the Manager and each of Alliance Capital Management L.P.; American Century Investment Management, Inc.; Ark Asset Management Co., Inc.; Barrow, Hanley, Mewhinney & Strauss; Columbus Circle Investors (“CCI”); Dimensional Fund Advisors, Inc.; Edge Asset Management Inc. (“Edge”); Emerald Advisors, Inc.; Essex Investment Management Company, LLC; Goldman Sachs Asset Management, L.P.; J.P. Morgan Investment Management, Inc.; Jacobs Levy Equity Management, Inc.; Lehman Brothers Asset Management LLC; Los Angeles Capital Management and Equity Research, Inc.; Mackay Shields, LLC; Mazama Capital Management, Inc.; Mellon Capital Management Corporation; Morgan Stanley Investments LP; Neuberger Berman Management, Inc.; Principal Real Estate Investors, LLC (“PREI”); Principal Global Investors, LLC (“PGI”); Pyramis Global Advisors, LLC; Spectrum Asset Management, Inc. (“Spectrum”); T. Rowe Price Associates, Inc.; Turner Investment Partners, Inc.; UBS Global Asset Management (Americas), Inc.; and Vaughan Nelson Investment Management, LP; Westwood; (collectively, the “Subadvisers”). The Management Agreement and the Subadvisory Agreements are collectively referred to as the “Advisory Agreements.”

The Board, including the Independent Directors, considered the factors and reached the conclusions described below relating to the selection of the Manager and each Subadviser and the continuation of the Advisory Agreements. On August 11, September 7 and September 8, the Independent Directors also met independently of Fund management and the directors who are interested persons of PFI with their independent legal counsel and an independent consultant. In evaluating the Advisory Agreements, the Board, including Independent Directors, reviewed a broad range of information requested for this purpose by the Independent Directors, including but not limited to the following: (i) the investment performance of each Fund compared to the investment performance of a market index and a broad based industry category determined by Morningstar, (ii) a comparison of each Fund’s management fee (at current asset levels and theoretical asset levels) and expense ratio (at current asset levels) to the advisory fee and expense ratio for the mutual funds in a narrow peer group and a broad-based industry category, both selected by Lipper, (iii) fee schedules applicable to the Manager’s and the Subadvisers’ other clients, (iv) the Manager’s financial results and condition, including its profitability from services it performed for each Fund, (v) an analysis of the Manager’s and each Subadviser’s allocation of the benefits of economies of scale (vi) the Manager’s and each Subadvisers’ record of compliance with applicable laws and regulations, and with each Fund’s investment policies and restrictions, and (vii) the nature and character of the services the Manager and each Subadviser provides to each Fund.

Nature, Extent and Quality of Services

With regard to the Manager, the Board considered the nature, quality and extent of services provided under the Management Agreements, including administrative services. The Board considered the experience and skills of senior management leading fund operations, the experience and skills of the personnel performing the functions under the Management Agreement and the resources made available to such personnel, the ability of the Manager to attract and retain high-quality personnel, and the organizational depth and stability of the Manager. The Board concluded that appropriate resources were provided under the Management Agreement. The Board also considered the delegation of day-to-day portfolio management responsibility to the Subadvisers and the due diligence program developed by the Manager for identifying, recommending, monitoring and replacing Subadvisers. The Board concluded that this due diligence process was working well. The Board also considered the compliance program established by the Manager and the level of compliance attained for the Funds.

444

With regard to each Subadviser, the Board considered the nature, quality and extent of services provided under each Subadvisory Agreement. The Board considered the reputation, qualifications and background of the Subadviser, investment approach of the Subadviser, the experience and skills of investment personnel responsible for the day-to-day management of each Fund, and the resources made available to such personnel. The Board also considered the Subadvisers’ compliance with investment policies and general legal compliance. In addition, the Board considered the analysis provided under the Manager’s due-diligence program, which resulted in the Manager recommending that each Subadvisory Agreement be continued.

Investment Performance

The Board reviewed each Fund’s investment performance over longer-term periods (both for a blended three- and five-year period and for a three year period), and compared those returns to various agreed-upon performance measures, including market indices and peer group data based upon a broad-based, industry category determined by Morningstar. For Funds that did not have a three year history, the Board reviewed performance for a one-year period. The Board also considered whether each Fund’s investment results were consistent with the Fund’s investment objective and policies. For most Funds, the Board concluded that the Fund’s investment returns met or exceeded acceptable levels of investment performance. There were some Funds, or certain Subadvisers for a multi-manager fund, that had not attained during the relevant period a level of investment performance the Board considered satisfactory. However, the Board noted that the Manager does not directly control investment performance, but rather engages the Subadvisers that manage the portfolios. The Board concluded that the Manager has in place an effective due diligence process to monitor investment performance, to encourage remedial action and to make changes in the Subadviser at the appropriate time, if necessary. Therefore, the Board concluded that the Manager’s oversight of the Subadvisers was satisfactory.

As to each Fund, the Manager had advised the Board either that the investment services delivered by the Subadviser to the Fund were reasonable or the Subadviser’s longer-term track record justified continuing the contract with more in-depth monitoring. Based upon all relevant factors, the Board concluded that either: (i) the investment performance of each Fund either met or exceeded acceptable levels of investment performance, and was therefore satisfactory; or (ii) although the Fund experienced underperformance, based upon that Fund’s particular circumstances, it was in the best interests of the Fund to continue to closely monitor performance and to renew the Subadvisory Agreements. In each case involving underperformance, the Board concluded that the Manager was providing effective monitoring.

Investment Management and Subadvisory Fees

The Board considered each Fund’s management fees. The Board received information, based on data supplied by Lipper, comparing each Fund’s contractual management fee (at current asset levels and at theoretical asset levels) and actual (after fee waivers) management fee (at current asset levels) and actual total expense ratio (at current asset levels for Class A shares) to advisory fees and expense ratios of mutual funds in a narrow peer group independently selected by Lipper (“Expense Group”) and a broad-based, industry category defined by Lipper (“Expense Universe”). For PFI Funds that did not offer Class A shares, the information provided was based upon Class I shares. In addition, the Board also reviewed information for Class I shares for certain Funds for which Class A shares were a small component of the Fund’s assets.

In assessing whether the management fees were reasonable, the Board considered a variety of factors, including the amount of the fees, breakpoints, comparison to fees of peer group funds and to other funds managed by the Manager, subadvisory fees paid, services provided, investment performance, total expense ratios, profitability and expense caps. For most Funds, actual management fees and expense ratios were within the third quartile or better when compared to their Expense Group. For some Funds, although actual management fees were higher than the third quartile, total expense ratios were within the third quartile or better. For Funds with expense ratios within the fourth quartile, the Board requested further explanation from the Manager regarding the reasonableness of management fees. The Board considered factors related to certain Funds with both actual management fees and total expenses higher than third quartile as compared to their Expense Group and certain other Funds that experienced significant underperformance. For the SAM Portfolios, the Board determined that the Manager’s unique active asset allocation strategy justified higher management fees than the Funds’ peer groups and that the total expense ratios (including the expenses of the underlying funds) compare favorably. The Board considered that certain comparable PFI Funds have different management fees and noted the reasons cited by the Manager for the differing fees.

With respect to the Board’s review of the expense caps in place with respect to certain Funds, the Board considered the Manager’s proposals to extend the expense caps in place for most Funds for an additional year, to raise the expense caps for certain Funds and to let expense caps for certain other Funds expire, based upon the individual circumstances of these Funds. The Board also considered the Manager’s proposals to either add new expense caps or to lower the expense caps (thereby decreasing the effective expense ratios) applicable to certain share classes of the LargeCap Value Fund III, the MidCap Value Fund II, and the SmallCap Growth Fund II. The Board also considered the Manager’s proposal to decrease the 12b-1 fees by 10 basis points for the Short-Term Income Fund.

Considering all factors it deemed relevant, the Board concluded that the management fee schedule for each Fund was reasonable and appropriate in light of the nature and quality of services provided by the Manager and other relevant factors.

The Board considered each Fund’s subadvisory fees. The Board evaluated the subadvisory fees based upon data supplied by Lipper, which compared the contractual subadvisory fees to available information about subadvised funds in the Expense Universe.

445

For each Subadviser not affiliated with the Manager (“Unaffiliated Subadvisers”) (each Subadviser except PGI, PREI, Edge, CCI and Spectrum), the Board also considered that the subadvisory fee rate was negotiated at arm’s length between the Manager and each Subadviser and that the Manager compensates the Subadviser from its fees.

For the Subadvisers that reported fees for “Other Clients” with comparable investment policies and receiving comparable services, the Board noted that most Subadvisers stated that they did not charge higher fees to the Manager for the Funds than were charged to their Other Clients. For the Subadvisers that did not make this representation, the Board considered the Subadviser’s representation that the fees compared favorably with those charged to Other Clients. The Board noted that the different fees to Other Clients were generally a result of fewer assets, a different level of services provided, and/or a different competitive environment at the time of the initiation of the relationship, which had resulted in the lower fees charged to the Other Clients.

For Funds where PGI, PREI, Edge, CCI or Spectrum was engaged as the Subadviser, the Board noted that the Subadviser is an affiliate of the Manager and that, therefore, the parties may allocate the fee among themselves based upon other than competitive factors, but that in the end, the shareholders pay only the management fee. Therefore, in these cases, particularly when no comparative data on subadvisory fees was provided, the Board focused primarily on whether the management fee and total expense ratios were reasonable.

For certain Subadvisers, the Manager was able to negotiate lower fees (AllianceBernstein with respect to LargeCap Value Fund III and J.P. Morgan and Mellon Capital with respect to SmallCap Value Fund I). The Board concluded that these amended fee schedules were appropriate and should be approved.

Based upon all of the above, the Board determined that the subadvisory fees for each Fund, with the amendments proposed by the Manager, were reasonable.

Profitability

The Board reviewed detailed information regarding revenues the Manager receives under the Management Agreements, as well as the estimated direct and indirect costs the Manager incurs in providing to each Fund the services described in the applicable Advisory Agreements, for the year ended December 31, 2007. The Board also considered the returns on revenue generated in connection with the payment of subadvisory fees to affiliated Subadvisers (PGI, PREI, Edge, CCI Circle and Spectrum). The Board concluded that the management fee for each Fund was reasonable, taking into account the profitability percentages the Manager provided.

The Board noted that the Manager compensates each Unaffiliated Subadviser from its own management fees and that the fees were competitive. In concluding that the Unaffiliated Subadvisers’ fees were reasonable, the Board determined that it need not review estimated levels of profits to each Unaffiliated Subadviser because, as the Board noted, the Manager compensates each Unaffiliated Subadviser from its own management fees and the Manager had negotiated the Subadvisory Agreement with each Unaffiliated Subadviser at arm’s-length.

Economies of Scale

The Board considered whether there are economies of scale with respect to the management of each Fund and whether the Funds benefit from any such economies of scale through breakpoints in fees. The Board also reviewed the levels at which breakpoints occurred and the amount of the reductions. The Board also considered whether the effective management fee rate for each Fund under the Management Agreement is reasonable in relation to the asset size of such Fund. The Board concluded that the fee schedule for each Fund reflects an appropriate level of sharing of any economies of scale.

The Board noted that the management fees for the LargeCap S&P 500 Index Fund, MidCap S&P 400 Index Fund and SmallCap S&P 600 Index Fund series (the “Index Funds”) do not include breakpoints. Although their management fee schedules do not contain breakpoints, the Board noted that each Index Fund has a relatively low basis point fee for initial Fund assets and the Board concluded that these Funds do not generate sufficient economies of scale at their current asset sizes to justify a breakpoint at this time.

The Board identified some Funds whose asset levels have exceeded the last breakpoint level in the Fund’s fee schedule. The Board discussed these and other Funds with management and concluded that the existing breakpoints are appropriate at the current asset levels. The Board noted, however, that the Manager would present a proposal at the December board meeting regarding the applicability of potential new breakpoints to address future growth.

The Board considered whether there are economies of scale with respect to the subadvisory services provided to each Fund and, if so, whether the subadvisory fees reflect such economies of scale through breakpoints in fees. The Board also considered whether the effective subadvisory fee rate for each Fund under the Subadvisory Agreement is reasonable in relation to the asset size of such Fund. The Board concluded that the fee schedule for each Fund, with the amendments proposed by the Manager, reflects an appropriate recognition of any economies of scale at current asset levels.

Other Benefits to the Manager and Subadvisers

The Board also considered the character and amount of other incidental benefits received by the Manager and its affiliates from their relationships with the Funds. The Board concluded that management and subadvisory fees for each Fund were reasonable in light of these fall-out benefits.

446

The Board also considered the character and amount of other incidental benefits received by each Subadviser. The Board considered as a part of this analysis each Subadviser’s soft dollar practices and brokerage practices. The Board concluded that, taking into account these benefits, the fees charged under each Subadvisory Agreement were reasonable.

Overall Conclusions

Based upon all of the information it considered and the conclusions it reached, the Board determined unanimously that the terms of each Advisory Agreement continue to be fair and reasonable and that the continuation of each Advisory Agreement, with the changes proposed by the Manager, is in the best interests of each Fund.

447

FEDERAL INCOME TAX INFORMATION
PRINCIPAL FUNDS, INC.
October 31, 2008 (unaudited)

Long Term Capital Gain Dividends. Certain of the Funds distributed long term capital gain dividends during the fiscal year ended October 31, 2008. Details of designated long term capital gain dividends for federal income tax purposes are shown in the notes to financial statements.

Dividend Received Deduction. For corporate shareholders, the percentage of ordinary income distributions (dividend income and short-term gains, if any) for the year ended October 31, 2008, that qualifies for the dividend received deduction is as follows:

	Deductible		Deductible
	Percentage		Percentage
Disciplined LargeCap Blend Fund	100%	MidCap Blend Fund	63%
Equity Income Fund	57	MidCap Growth Fund I	13
High Yield Fund	3	MidCap Growth Fund III	100
LargeCap Blend Fund I	100	MidCap Stock Fund	91
LargeCap Blend Fund II	54	MidCap Value Fund II	21
LargeCap Growth Fund	100	Preferred Securities Fund	3
LargeCap Growth Fund I	70	SmallCap Blend Fund	26
LargeCap Growth Fund II	15	SmallCap Growth Fund II	14
LargeCap S&P 500 Index Fund	100	SmallCap Value Fund	31
LargeCap Value Fund	64	West Coast Equity Fund	100
LargeCap Value Fund III	89

Qualified Dividend Income. Certain dividends paid by the Funds may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of ordinary income distributions for the fiscal year ended October 31, 2008, taxed at a maximum rate of 15% is as follows:

	Percentage		Percentage
Disciplined LargeCap Blend Fund	100%	LargeCap Value Fund	64%
Diversified International Fund	39	LargeCap Value Fund III	93
Equity Income Fund	62	MidCap Blend Fund	66
Global Real Estate Securities Fund	21	MidCap Growth Fund I	13
High Yield Fund	4	MidCap Growth Fund III	100
International Emerging Markets Fund	12	MidCap Stock Fund	88
International Growth Fund	31	MidCap Value Fund II	23
LargeCap Blend Fund I	100	Preferred Securities Fund	19
LargeCap Blend Fund II	55	SmallCap Blend Fund	27
LargeCap Growth Fund	100	SmallCap Growth Fund II	14
LargeCap Growth Fund I	70	SmallCap Value Fund	34
LargeCap Growth Fund II	16	West Coast Equity Fund	100
LargeCap S&P 500 Index Fund	100

Foreign Taxes Paid. The following Funds elect under the Internal Revenue Code Section 853 to pass through foreign taxes paid by each Fund to its shareholders. The total amount of foreign taxes passed through to shareholders on a per share basis for the year ended October 31, 2008, are as follows:

	Foreign Taxes
	Per Share
Diversified International Fund	.0356
Global Real Estate Securities Fund	.0186
International Emerging Markets Fund	.0694
International Growth Fund	.0252

This information is given to meet certain requirements of the Internal Revenue Code and should not be used by shareholders for preparing their income tax returns. For tax return preparation purposes, please refer to the information supplied with the 1099-DIV form you receive from the Fund’s transfer agent.

448

WE’LL GIVE YOU AN EDGE^®

A mutual fund’s share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

     This annual report is published as general information for the shareholders of Principal Funds. This material is not authorized for distribution unless preceded or accompanied by a current prospectus that includes more information regarding the risk factors, expenses, policies, and objectives of the funds. Investors should read the prospectus carefully before investing.

To obtain an additional prospectus, please contact your financial professional or call 800-222-5852.

For more information about these funds, including their full names, please see the Principal Funds, Inc. prospectus or visit www.principalfunds.com.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group^®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

Distributed by:
Principal Funds Distributor, Inc.
Member FINRA
1100 Investment Blvd., Suite 200
El Dorado Hills, CA 95762

FV 400-2 | 12/2008 | #11510122010
©2008 Principal Financial Services, Inc.

Principal Funds Distributor, Inc.
711 High Street
Des Moines, IA 50392-6370

Do not use this address for business correspondence.

PRINCIPAL FUNDS

Institutional, J & R Share Classes

Annual Report

October 31, 2008

Table of Contents

Economic & Financial Market Review	2
Important Fund Information	4
SAM Portfolios’ Performance and Investment Overview:
SAM Flexible Income Portfolio	5
SAM Conservative Balanced Portfolio	6
SAM Balanced Portfolio	7
SAM Conservative Growth Portfolio	8
SAM Strategic Growth Portfolio	9
Principal LifeTime Funds’ Performance and Investment Overview:
Principal LifeTime 2010 Fund	10
Principal LifeTime 2015 Fund	11
Principal LifeTime 2020 Fund	12
Principal LifeTime 2025 Fund	13
Principal LifeTime 2030 Fund	14
Principal LifeTime 2035 Fund	15
Principal LifeTime 2040 Fund	16
Principal LifeTime 2045 Fund	17
Principal LifeTime 2050 Fund	18
Principal LifeTime 2055 Fund	19
Principal LifeTime Strategic Income Fund	20
Large U.S. Equity Funds’ Performance and Investment Overview:
Disciplined LargeCap Blend Fund	21
Equity Income Fund	22
LargeCap Blend Fund I	23
LargeCap Blend Fund II	24
LargeCap Growth Fund	25
LargeCap Growth Fund I	26
LargeCap Growth Fund II	27
LargeCap S&P 500 Index Fund	28
LargeCap Value Fund	29
LargeCap Value Fund I	30
LargeCap Value Fund II	31
LargeCap Value Fund III	32
West Coast Equity Fund	33
Small/Mid U.S. Equity Funds’ Performance and Investment Overview:
MidCap Blend Fund	34
MidCap Growth Fund	35
MidCap Growth Fund I	36
MidCap Growth Fund II	37
MidCap Growth Fund III	38
MidCap S&P 400 Index Fund	39
MidCap Stock Fund	40
MidCap Value Fund I	41
MidCap Value Fund II	42

Table of Contents

MidCap Value Fund III	43
Real Estate Securities Fund	44
SmallCap Blend Fund	45
SmallCap Blend Fund I	46
SmallCap Growth Fund	47
SmallCap Growth Fund I	48
SmallCap Growth Fund II	49
SmallCap Growth Fund III	50
SmallCap S&P 600 Index Fund	51
SmallCap Value Fund	52
SmallCap Value Fund I	53
SmallCap Value Fund II	54
SmallCap Value Fund III	55

International Equity Funds’ Performance and Investment Overview:

Diversified International Fund	56
Global Equity Fund I	57
Global Real Estate Securities Fund	58
International Emerging Markets Fund	59
International Fund I	60
International Growth Fund	61
Fixed-Income Funds’ Performance and Investment Overview:
Bond & Mortgage Securities Fund	62
Government & High Quality Bond Fund	63
High Quality Intermediate-Term Bond Fund	64
High Yield Fund	65
High Yield Fund I	66
Income Fund	67
Inflation Protection Fund	68
Mortgage Securities Fund	69
Preferred Securities Fund	70

Short-Term Fixed-Income Funds’ Performance and Investment Overview:

Short-Term Bond Fund	71
Short-Term Income Fund	72
Ultra Short Bond Fund	73
Money Market Fund	74
Glossary	75
Shareholder Expense Example	80
Financial Statements	90
Notes to Financial Statements	210
Schedules of Investments	231
Financial Highlights	626
Report of Registered Independent Public Accounting Firm	803
Supplemental Information	804

Not FDIC Insured
May Lose Value • Not a Deposit • No Bank Guarantee
Not Insured by any Federal Government Agency

1

Economic & Financial Market Review

Despite Aggressive Fed Actions, Credit Crisis Rages

Few could have predicted the transformation that occurred in the capital markets during the past twelve months. What began as a seemingly isolated crisis in assets related to U.S. subprime mortgages ballooned into an all-encompassing crisis in liquidity and confidence that touched asset classes around the globe. Stocks faltered as the credit crisis expanded. In this tenuous environment, risk premiums soared and investors sought relative safety by investing in U.S. Treasuries.

The Federal Reserve (the Fed) took aggressive actions during the period, including:

• lowering the federal funds rate from 4.5% to 1.00% (the federal funds rate is the interest rate at which financial institutions lend balances to one another overnight).
• lowering the discount rate from 5.0% to 1.25% (the discount rate is the interest rate at which financial institutions can borrow directly from the Fed).
• reviving a Depression-era tool, the primary dealer credit facility, to allow non-banks to borrow directly from the Fed.

As the domestic crisis expanded worldwide, international central banks joined the Fed in massive attempts to foster stability and liquidity in capital markets.

Major U.S. Financial Institutions Falter and Fall

Few of the most prominent U.S. financial institutions weathered the tumult unscathed. Milestones for the period included: JPMorgan bought out Bear Stearns at $10 per share; Fannie Mae and Freddie Mac were placed into conservatorship; Bank of America acquired Merrill Lynch; Lehman Brothers filed for Chapter 11 bankruptcy protection; the Federal Reserve extended an $85 billion loan in exchange for a 79.9% equity stake in AIG; the Reserve Primary Fund — the oldest U.S. money market fund — “broke the buck” as its net asset value dropped below $1 per share; Washington Mutual Bank failed — the largest U.S. bank failure on record — and JPMorgan acquired its deposit base as the bank’s investors were wiped out; Wells Fargo agreed to acquire troubled Wachovia. And the last two major investment banks standing — Goldman Sachs and Morgan Stanley —changed their status to become bank holding companies, agreeing to oversight by the Fed in order to access the discount window.

In October, following intense debate, Congress passed a highly controversial $700 billion credit facility in an effort to slow or halt the escalating cycle of deleveraging by investing directly in troubled assets and troubled financial institutions. At the end of October, approximately $250 billion had been used for direct investments in institutions.

Within this environment, value stocks performed roughly in line with growth stocks, while small-cap stocks had a modest advantage over their larger peers (although returns were decidedly negative for all market segments, as measured by the Russell indices). U.S. real estate investment trust securities also suffered, losing slightly more than the major U.S. equity indices.

2

Commodities Climb, Then Plummet

Commodity prices rose throughout much of the 12-month period. Oil led the way, rising from $85 per barrel at the beginning of the period to nearly $150 per barrel by July (as measured by NYMEX crude oil futures). Prices were driven up in part by strong international demand and by speculation of continued growth in emerging market economies. Soon after reaching their highs, however, commodity prices corrected sharply, due partly to growing signs of a deep global recession. By the end of October, oil had dropped to below $70 per barrel.

Both Emerging and Developed Foreign Markets Suffer

The abrupt and severe correction in commodities markets caused emerging markets (particularly heavy commodities exporters such as Russia) to suffer huge market losses in the midst of skyrocketing risk premiums. Geopolitical turmoil in Russia added to investor angst in that region. Developed markets also suffered heavily, with European financial institutions under tremendous pressure and the outlook for growth significantly weakened. For U.S.-based investors, returns on international stocks generally were even lower due to resurgence in the U.S. dollar.

Risk Aversion Drives Investors to U.S. Treasuries

As credit risk climbed during the period, investors stampeded to the relative safety of U.S. Treasuries. With the investor rush to safety, the broad U.S. fixed-income market significantly lagged Treasuries. Investment-grade corporate bonds (as measured by the Barclays Capital Aggregate Bond Index) trailed like-duration Treasuries by 22.5%, and the financial segment of U.S. corporate bonds lost 25.6% relative to Treasuries. Commercial mortgage-backed securities also lagged Treasuries by 24.5%, reflecting investor fear that commercial real estate would flounder under pressure from depressed residential real estate and restricted credit conditions. Meanwhile, asset-backed securities — which are primarily collateralized by consumer debt — were down 21.0% relative to Treasuries.

*Indices are unmanaged, and individuals cannot invest directly in an index. Returns shown for indices assume reinvestment of all dividends and distributions. See glossary on page 75 for definitions of indices.

3

Important Fund Information

The following information applies to all funds shown in this annual report:

The line graphs on the following pages illustrate the growth of a hypothetical $10,000 investment. For each Fund, the illustration is based on performance of the share class indicated.

Investment results shown represent historical performance and do not guarantee future results. Your investment’s returns and principal values will fluctuate with changes in interest rates and other market conditions so the value, when redeemed, may be worth more or less than original costs. Current performance may be lower or higher than the performance shown. For more information, including the most recent month-end performance, visit www.principalfunds.com, call your financial professional, or call 800-222-5852.

See glossary on page 75 for definitions of indices and terms.

1	Performance assumes reinvestment of all dividends and capital gains. Extended performance is calculated based on the historical performance of the fund’s oldest share class, adjusted for the fees and expenses of the share class shown.
	Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. Periods of less than one year are not annualized.
2	Returns for the benchmark indices assume reinvestment of all dividends and distributions. Indices are unmanaged, and individuals cannot invest directly in an index.

4

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s mortgage- and asset-backed fixed-income holdings added value, outperforming the Barclays Capital Aggregate Bond Index. The Portfolio’s exposure to large-cap value and large-cap growth securities also proved to be top contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500.

On the negative side, the Portfolio’s exposure to both short-term and high-yield bonds detracted the most from performance amid deteriorating credit markets, as these holdings significantly lagged the Barclays Capital Aggregate Bond Index. Also, the Portfolio’s preferred securities holdings considerably underperformed both their respective benchmark and the Barclays Capital Aggregate Bond Index.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities — was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits.

The Portfolio ended the 12-month period with an overall allocation of 73% fixed income and 27% equities diversified across 16 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

5

SAM Conservative Balanced Portfolio^*

Sub-Advisor: Edge Asset Management, Inc.

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s mortgage- and asset-backed holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to international developed markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities — was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits.

The Portfolio ended the 12-month period with an overall allocation of 40% equities and 60% fixed income diversified across 16 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time, the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. Looking ahead, the management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

*      As of 8/1/00, the SAM Conservative Balanced Portfolio’s objectives and strategies changed. This information should be considered when reviewing past performance. Please see the prospectus for detailed information.

6

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposures to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s mortgage- and asset-backed holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to international developed markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities — was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits.

The Portfolio ended the 12-month period with an overall allocation of 60% equities and 40% fixed income diversified across 16 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time, the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. Looking ahead, the management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

7

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s mortgage- and asset-backed holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to international developed markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. A new asset class — preferred securities — was also introduced early in the period with the addition of the Preferred Securities Fund, sub-advised by Spectrum Asset Management, primarily for its diversification benefits. In addition, the Portfolio added two short-term fixed-income funds: the Money Market Fund, sub-advised by Principal Global Investors, and the Short-Term Income Fund, sub-advised by Edge Asset Management, Inc., which invests in securities having effective maturities of five years or less.

The Portfolio ended the 12-month period with an overall allocation of 80% equities and 20% fixed income diversified across 15 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time, the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. Looking ahead, the management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

8

What contributed to or detracted from Portfolio performance during the fiscal year?

The Principal Strategic Asset Management (SAM) Portfolios invest wholly in the institutional class shares of the underlying funds.

During the fiscal year, the Portfolio’s exposure to large-cap value and large-cap growth securities proved to be the top two contributors to positive relative performance. Even as domestic equities continued to lose ground, these asset classes were able to outperform both their respective benchmarks and the S&P 500. Within fixed income, the Portfolio’s cash holdings added value, outperforming the Barclays Capital Aggregate Bond Index.

On the negative side, the Portfolio’s allocation to both international developed and emerging markets detracted from returns as international stocks suffered sharp losses through the end of the period, considerably lagging the S&P 500. Also, exposure to high-yield bonds was a primary detractor amid deteriorating credit markets, as this fixed-income sector significantly lagged the Barclays Capital Aggregate Bond Index. The Portfolio’s mid-cap growth exposure hurt performance as well as this asset class underperformed both its respective benchmark and the S&P 500.

Were there any changes to the Portfolio’s composition during the fiscal year?

During the fiscal year, the Portfolio added two new large-cap funds, the LargeCap Growth Fund II, sub-advised by American Century Investment Management, and the LargeCap Value Fund III, co-sub-advised by AllianceBernstein and Westwood Management Corporation, to improve overall diversification within large-cap equities. In addition, the Portfolio added two short-term fixed-income funds: the Money Market Fund, sub-advised by Principal Global Investors, and the Short-Term Income Fund, sub-advised by Edge Asset Management, Inc., which invests in securities having effective maturities of five years or less.

The Portfolio ended the 12-month period with an overall allocation of 94% equities and 6% fixed income, diversified across 12 asset classes, reflecting management’s focus on maintaining a neutral Portfolio risk position and allocation between equities and fixed income.

What is the outlook for the Portfolio?

For some time the management team has been optimistic that a recession could be avoided. It now appears the breadth and depth of the recent credit crisis is severely impacting real economic conditions and may take until the middle of 2009 to dissipate. However, there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The management team is assessing the opportune time to adjust the Portfolio’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions get discounted in market prices.

9

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

A majority of this Fund is invested in fixed income, which contributed positively to performance on a relative basis as fixed-income securities significantly outperformed equities for the 12-month period. Other positives for the period included the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperforming the MSCI REIT Index, and the International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperforming the MSCI EAFE Index.

On the negative side, despite outperforming the Merrill Lynch Hybrid Preferred Securities Index, the Preferred Securities Fund detracted from performance. The High Yield Fund I also hurt performance, although historically both of these underlying funds have added value and diversification to the Principal LifeTime Funds. As a whole, the fixed-income funds struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral during the fiscal year. The International Emerging Markets Fund, which had performed well within Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2010 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund. Additionally, we are currently evaluating our options regarding the management of the Inflation Protection Fund used in the Fund.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

10

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

A majority of this Fund is invested in fixed income, which contributed positively to performance as fixed income significantly outperformed equities during the 12-month period. The Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index while the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index.

On the negative side, despite outperforming the Merrill Lynch Hybrid Preferred Securities Index, the Preferred Securities Fund, sub-advised by Spectrum Asset Management, detracted from performance. The High Yield Fund I, sub-advised by Lehman and JP Morgan, hurt performance as well, although historically both investment options have added value and diversification to Principal LifeTime Funds. The fixed-income options struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral. Also, the International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a strong headwind. Following the investment option’s significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added in October to further diversify the Fund.

What is the outlook for the Fund?

The Principal LifeTime 2015 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalization, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital. Additionally, we are currently evaluating our options regarding the management of the Inflation Protection Fund used in the Fund.

11

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns during the period. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2020 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

12

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index while the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor domestic equity market, many of the managers within domestic equity added to relative performance. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities saw double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a strong headwind. Following the investment option’s significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The fixed-income options also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added in October to further diversify the Fund.

What is the outlook for the Fund?

The Principal LifeTime 2025 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalization, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

13

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2030 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the portfolio (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

14

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index while the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor domestic equity market, many of the managers within domestic equity added to relative performance. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this option is invested in equities, which detracted from performance as both domestic and international equities saw double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a strong headwind. Following the investment option’s significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The fixed-income options also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added in October to further diversify the Fund.

What is the outlook for the Fund?

The Principal LifeTime 2035 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalization, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

15

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2040 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

16

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index while the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor domestic equity market, many of the managers within domestic equity added to relative performance. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this option is invested in equities, which detracted from performance as both domestic and international equities saw double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a strong headwind. Following the investment option’s significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The fixed-income options also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added in October to further diversify the Fund.

What is the outlook for the Fund?

The Principal LifeTime 2045 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalization, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

17

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the 12-month period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor performance of the domestic equity market, many of the managers within domestic equities added to relative performance during the fiscal year. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs and LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this Fund is invested in equities, which detracted from performance as both domestic and international equities experienced double-digit negative absolute returns during the period. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The underlying fixed-income funds also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime 2050 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

18

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

For the period, the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperformed the MSCI REIT Index while the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperformed the MSCI EAFE Index. Despite the poor domestic equity market, many of the managers within domestic equity added to relative performance. The LargeCap Growth Fund, sub-advised by Columbus Circle Investors, the LargeCap Value Fund, sub-advised by Principal Global Investors, and the MidCap Value Fund I, sub-advised by Goldman Sachs & LA Capital Management, all significantly added to relative performance.

On the negative side, a majority of this option is invested in equities, which detracted from performance as both domestic and international equities saw double-digit negative absolute returns. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a strong headwind. Following the investment option’s significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes. The fixed-income options also struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added in October to further diversify the Fund.

What is the outlook for the Fund?

The Principal LifeTime 2055 Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalization, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital.

19

Principal LifeTime Strategic Income Fund

Sub-Advisor: Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

The Principal LifeTime Funds invest wholly in the institutional class shares of the underlying funds. Any specific performance comparisons of the underlying funds correspond to that share class.

A majority of this Fund is invested in fixed income, which contributed positively to performance on a relative basis as fixed-income securities significantly outperformed equities for the 12-month period. Other positives for the period included the Real Estate Securities Fund, sub-advised by Principal Real Estate Investors, outperforming the MSCI REIT Index and the Principal International Fund I, sub-advised by Fidelity (Pyramis Global Advisors), outperforming the MSCI EAFE Index.

On the negative side, despite outperforming the Merrill Lynch Hybrid Preferred Securities Index, the Preferred Securities Fund detracted from performance. The High Yield Fund I also hurt performance, although historically both of these underlying funds have added value and diversification to the Principal LifeTime Funds. As a whole, the fixed-income funds struggled, particularly the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. Fixed-income investors fled to the relative safety of U.S. Treasuries and agencies, leaving all other fixed-income sectors in a downward spiral during the fiscal year. The International Emerging Markets Fund, sub-advised by Principal Global Investors, which had performed well within the Principal LifeTime Funds over the past few years, ran into a large headwind during the period. Following a significant run-up in recent years and amid a slowdown in the global economy, many investors sold out of non-U.S. equity asset classes.

Were there any changes to the Fund’s composition during the fiscal year?

The Core Plus Bond Fund I, sub-advised by PIMCO, and the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital, were added to the Fund in October to further diversify the portfolio.

What is the outlook for the Fund?

The Principal LifeTime Strategic Income Fund is well-diversified by asset classes and underlying funds. The major asset classes of the Fund (U.S. equities, non-U.S. equities, and fixed income) are constructed to provide diversification by investment process, style, and investment manager. Overall exposures to growth, value, market capitalizations, and other characteristics are carefully monitored and neutralized where possible. Moving forward, our goal in the intermediate-term bond asset class is to split the weighting equally between the Core Plus Bond Fund I, sub-advised by PIMCO, and the Bond & Mortgage Securities Fund, sub-advised by Principal Global Investors. In the international equity segment, our goal is to have one-third of our international equity exposure in the International Large Value Fund, sub-advised by AXA Rosenberg and Causeway Capital. Additionally, we are currently evaluating our options regarding the management of the Inflation Protection Fund used within the Fund.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

20

What contributed to or detracted from Fund performance during the fiscal year?

The Fund had positive stock selection in the financial, consumer discretionary, and telecommunication services sectors. It avoided any exposure to AIG, Wachovia Corp., and Sprint Nextel Corp., which helped the Fund’s relative performance compared to the benchmark. On the negative side, the Fund had poor stock selection in the industrial, materials, utilities, and consumer staples sectors. Negative contributors to relative performance included United States Steel Corp., AK Steel Holding Corp., and Anheuser-Busch Companies, Inc.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes that the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

21

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection within the financial sector combined with the decision to underweight the financial sector were the two biggest contributors to outperformance. Avoidance of brokerage stocks for much of the 12-month period was also beneficial. Stock selection within the health care sector was the third-largest contributor to outperformance. Both Abbott Labs and Roche Holding showed positive returns. The Fund’s largest holding, Wal-Mart Stores, added a positive contribution as well.

On the negative side, stock selection within consumer staples was the biggest detractor from performance. In particular, the Fund’s position in Safeway, Inc. was a laggard. Stock selection within the materials sector was the second-biggest detractor. With the economy softening globally, several metals stocks — Alcoa, Freeport-McMoRan, and Weyerhaeuser — were very weak. Stock selection within the real estate investment trust (REIT) sector was the third-biggest detractor due to the Fund’s exposure to two industrial REITs, AMB Property and ProLogis.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund focuses on providing investors with conservative, income-oriented exposure to the stock market. Using bottom-up fundamental and quantitative analysis, the sub-advisor seeks undervalued large-cap firms they believe demonstrate strong balance sheets, cash flow, and dividend growth prospects, plus the potential to weather most economic conditions. To enhance diversification and income potential, the Fund may also invest in real estate investment trusts as well as convertible, corporate, and government bonds.

What is the outlook for the Fund?

The effect of a deteriorating global economy over the period is reflected in substantially lower stock prices. However, many stocks held in the Fund potentially offer compelling value. While it is impossible to predict the direction of the stock market over the near term, historically the stock market bottoms out ahead of the trough in the economy. Furthermore, valuations suggest the possibility of strong performance for investors who have a three-to-five-year investment time horizon. The Fund’s philosophy of investing in quality mid-sized companies historically has served investors well over the long term.

22

What contributed to or detracted from Fund performance during the fiscal year?

During the fiscal year, quality was by far the best performing theme, followed by management, sentiment, valuation, profitability, and momentum. Among specific sectors, stock selection was positive overall. Of all sectors in the benchmark index, the Fund’s holdings in the financial sector outpaced their peers the most. On an individual stock level, underweighted positions in AIG and Fannie Mae, as well as an overweighted position in UST, contributed most positively to returns. On the negative side, holdings in the consumer staples sector were least successful relative to their peers in the benchmark. Overweighted positions in Sprint Nextel, CBS, and Regions Financial were among the biggest detractors from relative performance.

Were there any changes to the Fund’s composition during the fiscal year?

In the first quarter of 2008 the Fund manager began rebalancing the U.S. large-cap portfolios more frequently in order to achieve more timely exposure to investment themes and to better exploit shorter-lived information sources. Also, several enhancements were made to the investment process in an effort to improve performance.

What is the outlook for the Fund?

The sub-advisor continues to believe that cheaper stocks should outpace more expensive ones, and that good momentum stocks should perform better than poor momentum stocks. They prefer stocks about which fundamental research analysts are becoming more positive —profitable companies with sustainable earnings that use their capital to enhance shareholder value. As such, the sub-advisor anticipates remaining fully invested and expects that the value they add over time will be due to stock selection, as opposed to sector or size allocations. Although their underlying philosophy remains unchanged, they maintain a robust research agenda in an effort to enhance their process.

23

What contributed to or detracted from Fund performance during the fiscal year?

Strong stock selection in financials, such as insurance and commercial banks, was the largest positive contributor to relative returns. Underweighting thrifts and mortgage finance companies also helped. AIG was eliminated from the Fund prior to government action, amid liquidity concerns. Selections in information technology were beneficial to relative returns as well. For example, participating in the IPO of IT services provider Visa contributed to performance, and underweighting Yahoo! helped as its stock price suffered twice — on Microsoft’s retracted takeover bid, and after issuing a dampened outlook for ad revenue in a weak economy. Additionally, a slight underweighting in the industrial sector made a small contribution to relative returns, which was also augmented by advantageous stock selection. Specifically, underweighting General Electric was helpful, as was avoiding multi-industry company Textron, Inc.

On the negative side, utilities were the greatest detractor, behind adverse stock selection. Overweighting independent power producers and energy traders such as AES and NRG Energy hurt due to falling natural gas prices. Avoiding regulated utility Southern Company detracted as it performed well despite decreased demand. Also, consumer discretionary selections struggled as consumer spending slowed. Portfolio positions in hotels, restaurants, and leisure dragged on returns. Specifically, overweighting International Game Technology and holding non-index companies MGM Mirage, Melco PBL Entertainment, and Las Vegas Sands detracted from performance. Additionally, stock selection in materials was a minor detraction. A non-index position in Potash Corporation of Saskatchewan, which produces crop nutrients used in fertilizer, was detrimental, as was an overweighting in International Paper.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. With sector weightings that are approximately equal to those of the S&P 500, the sub-advisor invests primarily in large-cap stocks. A team of T. Rowe Price equity analysts selects stocks from the industries they cover based on rigorous fundamental analysis that assesses the quality of the business franchise, earnings growth potential for the company, and the value of the stock.

What is the outlook for the Fund?

The sub-advisor believes conditions that have roiled the global economy and the equity markets in recent months are likely to continue into the foreseeable future. Given that the U.S. and its major trading partners have adopted measures to inject capital and restore confidence in the financial system, the sub-advisor intends to continue to emphasize rigorous research and comprehensive analysis in seeking out companies they believe have potential for capital appreciation, while maintaining sector weightings comparable to the S&P 500. The sub-advisor remains confident this strategy will serve investors well over the long term.

24

What contributed to or detracted from Fund performance during the fiscal year?

A few performance bright spots over the period were companies such as Millennium Pharmaceuticals and Wrigley, which benefited from being taken over at healthy premiums. Also, XTO Energy and Occidental Petroleum prospered from the early-2008 escalation in energy prices. Delta Airlines added value as well due to the rapid decline in energy prices. On the negative side, sub-par stock selection detracted most from performance, particularly in technology, as Google, Cisco, and Apple were hurt by profit-taking and IT spending deceleration. Goldman Sachs was also weak, as the company’s business suffered from the need to deleverage its business model, sluggish investment banking trends, and volatile trading conditions. Lastly, eye care-oriented drug and medical device company Alcon declined substantially late in the period after missing earnings and lowering guidance, largely because of higher-than-expected sales and marketing spending.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies are based on the premise that companies doing better than expected will have rising securities prices, while companies producing lower-than-expected results will not. This discipline is referred to as positive momentum and positive surprise. Through in-depth analysis of company fundamentals in the context of the prevailing economic environment, the sub-advisor selects companies that meet the criteria of positive momentum and positive surprise.

What is the outlook for the Fund?

The sub-advisor believes that although rapid action may prevent the credit crisis from depriving sound businesses and consumers of credit, keeping a recession mild, the potential for a severe recession with high unemployment rates is growing rapidly as the financial crisis deepens and spreads abroad. Further, they believe that because the deteriorating economic environment has made bottom-up stock selection difficult, maintaining a strong focus on high-quality companies possessing stable business models is prudent.

25

What contributed to or detracted from Fund performance during the fiscal year?

While every sector in the Russell 1000^® Growth Index saw double-digit losses over the period, the health care sector was one of the least damaged on a relative basis. As a result, an overweighting in the health care sector — led by the Fund’s biotechnology holdings — was the greatest positive contributor to relative returns. Stock selection in telecommunication services was also beneficial, though the effect was somewhat mitigated by a heavy overweighting in the sector. Some of the Fund’s wireless companies, such as tower and antenna company American Tower Systems, fared better than the broader sector overall. Additionally, underweighting energy stocks boosted relative returns as falling energy prices battered the sector. Avoiding positions in oil refiner and gasoline retailer Valero Corporation, as well as global oilfield service provider Baker Hughes, was helpful. However, the benefit was limited by adverse stock selection.

On the negative side, stock selection in the consumer discretionary category led detractors. Slowing consumer spending and travel led to deep declines in the Fund’s hotel, restaurant, and leisure company holdings. Specifically, positions in MGM Mirage, Las Vegas Sands, and Marriott International all performed poorly. Conversely, defensive sectors like consumer staples performed relatively well in a challenging market environment, and an underweighting in the group hampered returns significantly. Tobacco and food product companies — in which the Fund had little exposure — had strong results for the period. Weak stock selection in information technology was a factor in the Fund’s underperformance as well. Additionally, concerns about decreased spending from both consumers and businesses caused declines for some portfolio holdings, including game companies Nintendo and Electronic Arts and credit card company Mastercard.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment process involves finding and holding large companies they believe offer solid earnings and cash-flow growth.

What is the outlook for the Fund?

The sub-advisor believes that the equity market is closer to a bottom than to a top, but remains somewhat cautious in the near term due to the current challenging market environment. However, it is important to recognize that the sub-advisor is a long-term investor and their investment philosophy remains unchanged. Risk aversion and pessimism in the markets have resulted in lower valuations for many high-quality growth companies, and the sub-advisor continues to rely on the strength of their independent research to select stocks for the Fund that reflect above-average earnings and free cash flow over time. They continue to concentrate on the underlying fundamentals of their holdings. However, they are paying more attention to credit considerations, including evaluation of companies’ credit facilities, terms, and counterparties, given the credit environment.

Over time, the sub-advisor believes that better fundamentals will drive improvements in sentiment and stock performance. One encouraging note is the possible expansion in price/earnings multiples that could be driven by two factors: a reduction in risk aversion and a softening of inflation fears. Regarding inflation worries, weaker global economic growth and tighter monetary policy outside of the U.S. may eventually put the inflation genie back in the bottle. The sub-advisor believes that over time, falling commodity prices may help ease pressure on the inflation front, along with improving worker productivity and restrained wage gains. In this scenario it is possible, they believe, to see some stock prices moving higher even absent a return of robust economic and corporate earnings growth.

26

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection in the consumer discretionary sector drove the Fund’s outperformance, led by positioning in multi-line and specialty retail, among other industries. The sector was home to the number one overall contributor to relative results, an overweighted position in Family Dollar Stores. Materials shares were another important source of outperformance, led by allocation and selection decisions in the chemicals and metals and mining industry segments. Monsanto, the world’s largest seed producer, was the leading contributor in this space. Financial shares also helped relative performance, thanks to stock selection in insurance, as well as to underweighted positions in consumer finance and thrift companies. The key contribution to relative results in this sector came from an overweighted position in The Chubb Corporation.

On the negative side, the information technology sector was the largest detractor from relative returns. Stock selection in the software industry drove the underperformance, behind an underweighted position in Microsoft, which appeared to be viewed by investors as a large “safe-haven” during the market turmoil experienced throughout the period. An underweighted position as well as stock selection in the IT services industry segment also detracted. Here, it hurt to be under-represented in IBM, another company apparently viewed by investors as a safe haven. An overweighting in Western Union and DST Systems also detracted. Industrial shares were the only other sector to hurt relative performance, largely as a result of an overweighted position in, and stock selection among, electrical equipment companies. Additionally, positioning in the commercial services, building products, and road and rail industries detracted slightly.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund is structured to potentially provide long-term capital appreciation for investors who can tolerate short-term share price fluctuations. The sub-advisor pursues this objective by continuing to remain fully invested in large companies exhibiting sustainable improvement in their businesses. It is the sub-advisor’s belief that owning such companies will generate outperformance over time versus both the Russell 1000^® Growth Index and other funds within the large-growth peer group.

What is the outlook for the Fund?

The sub-advisor’s investment process focuses on large companies exhibiting sustainable improvement in their businesses. Each stock is selected based on a thesis, and the entire research effort is designed to identify the companies in each sector and industry the sub-advisor believes are likely to outperform. They believe owning such companies will generate outperformance over time versus the Russell 1000^® Growth Index and the other funds in the large-growth peer group. As a result, the Fund’s sector and industry selection as well as capitalization range allocations are primarily a result of identifying what the sub-advisor believes to be superior individual securities.

27

What contributed to or detracted from Fund performance during the fiscal year?

The Fund underperformed the S&P 500 for the period due primarily to transaction costs, timing of cash flows, and portfolio fees. All 10 economic sectors in the index posted negative returns during the period. The health care and consumer staples sectors provided the least negative returns for the period, while the financial and telecommunication services sectors delivered the largest negative returns.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor uses a passive indexing strategy and does not attempt to manage market volatility, use defensive strategies, or reduce the effect of any long-term periods of negative stock market performance.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

28

What contributed to or detracted from Fund performance during the fiscal year?

The Fund had positive stock selection in the financial, consumer discretionary, and information technology sectors. It held underweighted positions in AIG, Wachovia Corp., and Washington Mutual, Inc., which helped the Fund’s relative performance compared to the benchmark. On the negative side, the Fund had poor stock selection in the industrial, health care, utilities, and consumer staples sectors. Negative contributors to relative performance included Manitowoc Co., Idearc Inc., and Bunge Ltd.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

29

What contributed to or detracted from Fund performance during the fiscal year?

Overall, allocation of risk factors contributed to performance. The Fund had less exposure to stocks with value characteristics and a lesser emphasis on larger market-capitalization stocks relative to the index. An overweighting in volatility also contributed to performance. Also, an overweighting in banks and railroads added value. In railroads, Burlington Northern drove outperformance. Additionally, avoiding exposure to both AIG and Wachovia contributed greatly to positive relative performance. Holdings in Wells Fargo, Comcast, and Symantec also added value.

On the negative side, from a factor standpoint, an underweighting in momentum detracted from performance; this was the only factor allocation that detracted significantly. However, industry allocations detracted greatly during the period. The largest detractor was an underweighting in energy reserves (though this underweighting began to benefit the Fund late in the period as oil prices fell). Overweightings in auto parts and insurance also detracted from performance. Additionally, stock selection detracted from relative performance. The largest individual detractors were Hartford Financial Services, Fifth Third Bancorp, and Sprint Nextel.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The investment philosophy seeks to deliver superior results for clients through UBS’s globally integrated investment organization. Intrinsic value is determined by the fundamentals that drive a security’s future cash flow. Discrepancies between market price and intrinsic value arise from market behavior and market structure, providing opportunities to outperform. A truly integrated global approach produces superior research. Leading-edge risk management and strong knowledge of clients are critical for superior portfolio construction. Teams of investment specialists working together deliver consistent results. This philosophy has been tested and proven for more than 24 years. While specific factors such as security selection, market selection, or factor exposures may affect performance over time, the management team will continue to seek superior results for the Fund throughout all market conditions.

What is the outlook for the Fund?

Despite dire economic forecasts, the sub-advisor currently finds the U.S. equity market attractively priced and sees a wide dispersion of opportunity within the market. Though the consumer discretionary and industrial sectors have been directly impacted by the global slowdown, the sub-advisor believes the market has overreacted and engaged in indiscriminate selling, providing them with attractive investment opportunities going forward, including the greatest potential for positive absolute return of the past 25 years.

30

What contributed to or detracted from Fund performance during the fiscal year?

The Fund benefited from effective security selection among large leading software and technology companies. A top contributor was computer and peripheral maker Hewlett-Packard. Its stock rose on signs that its acquisition of outsourcing giant Electronic Data Systems may be advantageous. In health care, a significant holding was Abbott Laboratories, which develops and manufactures laboratory diagnostics, medical devices, and pharmaceutical therapies. Abbott reported strong sales across its entire product line, including Humira (a drug that treats autoimmune diseases). Holdings in consumer staples added to relative performance as well. Wal-Mart Stores was a notable contributor. The retailer’s low-price strategy paid off as higher prices at the pump and the sluggish U.S. economy put pressure on consumers.

On the negative side, despite being underweighted in the Fund, the financial sector was the largest source of relative underperformance. Although the sub-advisor continues to be selective about holdings, the Fund was hampered by its mix of stocks in the insurance and mortgage finance segments. Freddie Mac declined on greater-than-expected losses due to exposure to subprime loans and the need for additional capital. Also, shares of AIG fell significantly after the Federal Reserve stepped in to rescue the company from bankruptcy. (Both positions subsequently were eliminated.) The industrial sector was another source of relative weakness. A key detractor was Ingersoll-Rand Co., which designs and manufactures industrial and commercial products. The company cited the uncertain global economic outlook and the ongoing credit crisis for its earnings decline.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor pursues long-term capital growth by seeking large, fundamentally sound businesses that, because of transitory issues, are selling at prices they believe to be below fair-market value. A bottom-up investment manager, the sub-advisor evaluates each company individually and builds the Fund one stock at a time.

What is the outlook for the Fund?

The sub-advisor believes volatility and uncertainty are likely to persist in the equity markets over the near term. In this environment, they continue to seek stocks that are undervalued by the market. The Fund was broadly diversified at the end of the period, with ongoing overweighted positions in the information technology and energy sectors. The sub-advisor’s valuation work also resulted in smaller relative weightings in utilities and consumer staples stocks. Because they believe value opportunities remain among mega-cap stocks, the Fund continues to maintain a bias toward them.

31

What contributed to or detracted from Fund performance during the fiscal year?

Despite negative stock selection overall, stock selection was positive in the information technology sector. Having a slight underweighting in the financial sector was beneficial, as this was one of the worst-performing sectors in the benchmark Russell 1000^® Value Index. Although stock selection was poor in the financial sector, the Fund avoided several companies that severely underperformed, such as Lehman Brothers and Bear Stearns.

On a negative note, stock selection was negative for the period. Poor stock selection was led by the financial sector, as the Fund held some of the worst-performing stocks, including AIG, Fannie Mae, and Freddie Mac. Stock selection was also negative in the energy sector. An underweighting in the utilities sector detracted from performance as well, as this was one of the better-performing sectors in the index.

Were there any changes to the Fund’s composition during the fiscal year?

Westwood Management Corp. was added to the Fund in mid-July. The Fund is now co-sub-advised by AllianceBernstein and Westwood. AllianceBernstein is responsible for approximately 65% of overall portfolio assets. AllianceBernstein seeks to take advantage of pricing distortions due to short-term events. Value investing requires in-depth research into companies and industries and the discipline to stand by a company while it addresses temporary problems — even when others are avoiding it. AllianceBernstein identifies value by using a dividend discount model, which compares the present value of each company’s projected cash flows to its current stock price to calculate the stock’s long-term expected return. Westwood is responsible for approximately 35% of overall portfolio assets. Westwood seeks to capture price anomalies that stem from operational improvements that they believe will result in significantly stronger earnings and long-term outperformance for the stock. Analysts focus on ideas that have limited downside risk and the opportunity to generate earnings and cash flows that are higher than what is implied by the current stock price.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors for the Fund that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

32

What contributed to or detracted from Fund performance during the fiscal year?

Though an overweighting in health care and an underweighting in telecommunications aided performance, in general the net effect of various sector allocations was neutral to performance. Stock selection was a positive during the year, with UnionBanCal Corp. adding value due to its purchase by Mitsubishi UFJ Financial Group Inc., Japan's largest bank. Performance was helped further by the pending sale of Genentech to Roche Holding. While the Fund’s stock selection in the financial sector was not positive in absolute terms versus the passive Russell 3000^® Index, in relative terms the Fund’s holdings outperformed the sector — as evidenced by Wells Fargo’s performance. On the negative side, an underweighting in energy hurt returns. From an individual holdings perspective, Nabors Industries was a poor performer due to falling natural gas prices, while Red Lion Hotels took a hit as a result of the slowing economy.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Using a unique approach that blends a regional investment focus with the flexibility to invest in companies of any size, the Seattle-based sub-advisor invests in companies located (or doing significant business) in Alaska, California, Oregon, or Washington — a region ranking among the largest economies in the world. With the ability to invest in companies of any size, the sub-advisor seeks high-quality businesses trading at reasonable prices, possessing competitive advantages, and competing in industries with barriers to entry.

What is the outlook for the Fund?

For some time the sub-advisor was optimistic that a recession could be avoided. It now appears to them that the breadth and depth of the recent credit crisis has severely impacted real economic conditions and may take until the middle of 2009 to dissipate. However, they believe there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The sub-advisor is assessing the opportune time to adjust the Fund’s risk position, increasing equity exposures from neutral to overweight as negative credit and economic conditions become discounted in market prices.

33

What contributed to or detracted from Fund performance during the fiscal year?

The Fund benefited from owning Valeant Pharmaceuticals, a specialty pharmaceutical company. Valeant had changed management, and the new management team made steady progress in streamlining the company’s product lines and core focus. The Fund also benefited from owning EOG Resources, an energy company focused mainly on natural gas production. EOG has an experienced management team, a low-cost structure, and a disciplined culture focused on maximizing returns. Additionally, owning UST Incorporated, a leader in the smokeless tobacco market, added to returns. UST rose on news that the company received an offer to be acquired by Altria Group Incorporated.

On the negative note, Coventry Health Care detracted from Fund performance. Coventry, a leading managed-care company, declined substantially during the period. Though Coventry continued to emphasize pricing over increased volume, they were hurt by the higher costs plaguing the managed-care industry. Forest City Enterprises Inc., a real estate operating company, detracted from the Fund as well. Forest City, which has a long track record of value creation in property development and management, fell as pressures in the real estate markets increased sharply. Dish Network Corporation also hurt returns. Dish, one of the two satellite television companies, declined as slowing subscriber growth and concerns about a weakening economy weighed on the company.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The investment strategy includes superior stock selection combined with disciplined risk management as the key to consistent outperformance. Superior stock selection is achieved through systematic evaluation of company fundamentals to produce in-depth original research. By focusing on fundamental research, four critical drivers of stock selection are emphasized: 1) sustainable competitive advantages, 2) market dominance in niche industries, 3) ability to generate high returns on invested capital consistently, and 4) attractive valuation.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

34

What contributed to or detracted from Fund performance during the fiscal year?

Strong stock selection in the industrial sector added the most value during the period, led by the biggest positive contributor to the Fund for the period, UAL Corp, which was helped by declining oil prices, consolidation, and capacity cuts. The Fund remained overweighted in industrials, health care, and consumer staples, which benefited from favorable secular trends, lower commodity costs, and stable demand. The Fund outperformed its benchmark, the Russell Midcap Growth Index, in almost all sectors as industrials, energy, and consumer staples were the primary contributors to outperformance. Energy companies such as Southwestern Energy, Sandridge Energy, and Quicksilver Resources performed well during the period.

On the negative side, holdings in the consumer discretionary and information technology sectors underperformed for the period. SPX Corp., Cameron International Corp., and Salesforce.com were the biggest detractors from performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies are based on the premise that companies doing better than expected will have rising securities prices, while companies producing less-than-expected results will not. This discipline is referred to as positive momentum and positive surprise. Through in-depth analysis of company fundamentals in the context of the prevailing economic environment, the sub-advisor selects companies that meet the criteria of positive momentum and positive surprise.

What is the outlook for the Fund?

The sub-advisor believes that although rapid action may prevent the credit crisis from depriving sound businesses and consumers of credit, keeping a recession mild, the potential for a severe recession with high unemployment rates is growing rapidly as the financial crisis deepens and spreads abroad. Further, they believe that because the deteriorating economic environment has made bottom-up stock selection difficult, maintaining a strong focus on high-quality companies possessing stable business models is prudent.

35

What contributed to or detracted from Fund performance during the fiscal year?

Specialty retail holdings within the consumer cyclical sector had a positive impact on performance. Within this sector, value-oriented retailers provided strong results. Holdings among technology-based companies added value as well. Within this sector, strong stock selection among computer hardware and electronic equipment investments benefited performance. Holdings within the consumer hard goods sector also had a positive impact. Leisure and entertainment-based holdings such as Marvel Entertainment and Hasbro provided competitive results as well.

On the negative side, health care-related holdings hurt returns. Within this sector, holdings among medical service providers were disappointing. Medical insurers such as Humana and Coventry Health Care appeared under pressure based on rising costs and growing political uncertainty. Holdings among industrial-based companies detracted as well. Within this sector, industrial parts and component companies and trucking and freight firms provided disappointing results. Variances in sector weightings relative to its benchmark, the Russell Midcap Growth Index, were kept to a minimum. A modest overweighting in energy-related names detracted from performance, as commodity prices fell sharply beginning in June 2008.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure.

What is the outlook for the Fund?

The MidCap Growth Fund I, sub-advised by Mellon Capital Management, will be merged into the MidCap Growth Fund III, sub-advised by Turner Investment Parnters. Following the merger, Turner and Mellon will be co-sub-advisors on the MidCap Growth Fund III. We expect the merger to be completed on November 21, 2008.

36

What contributed to or detracted from Fund performance during the fiscal year?

Sector positioning relative to its benchmark, the Russell Midcap Growth Index, contributed positively to relative returns, led by an overweighting in the health care sector. Also, an underweighting in the semiconductor industry proved beneficial as this industry underperformed during the period. The Fund had a lower price-to-earnings ratio than the index as well, which benefited returns.

On the negative side, stock selection was poor, most noticeably in the energy sector. Also, the Fund had a lower price-to-book ratio than the index, which detracted from relative returns. Additionally, owning stocks that, in aggregate, exhibited higher volatility than stocks held in the index detracted from relative returns.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Jacobs Levy is responsible for approximately 50% of the overall Fund assets. This firm believes the market is permeated with inefficiencies that are substantial enough in number and effect to offer opportunities for profitable active investment. They use intensive statistical modeling of a wide range of stocks and a variety of proprietary factors to detect and exploit these opportunities. Jacobs Levy uses a quantitative approach to build a diversified portfolio of mid-cap stocks. MacKay Shields is responsible for approximately 50% of the overall Fund assets. They believe that styles and factors will cycle in and out of favor, but that superior security selection will constantly add value over time. This is implemented by using a team of highly experienced investment professionals who are committed to exhaustive fundamental analysis.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors for the Fund that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

37

What contributed to or detracted from Fund performance during the fiscal year?

The materials and processing sector contributed the most to positive relative performance as fertilizer producer Mosaic posted a double-digit return for the period, benefiting primarily from a strong agricultural cycle and the growing demand from developing countries for soybeans, corn, and wheat. The financial sector also added value, as Hudson City Bancorp Inc., a recent addition to the Fund, enjoyed attractive spreads on jumbo mortgages and a widening yield curve. Energy holdings also contributed to excess return relative to the Fund’s benchmark, the Russell Midcap Growth Index, due primarily to rising commodity prices during the first eight months of the period. The Fund reduced its exposure to companies specializing in oil and gas production, coal, and drillers in favor of offshore oil service and equipment companies.

On the negative side, the technology sector, and specifically semi-conductors such as NVIDIA and Cypress Semiconductor, detracted the most from relative performance. Utility holding NII Holdings, a digital wireless communication services provider, was the worst individual detractor from relative performance, as the company reported a disappointing quarter in late 2007. (The position has since been sold.) Additionally, the consumer discretionary sector was the second-worst detractor from relative performance. Holdings with greater exposure to the consumer, such as printing company VistaPrint Inc., suffered from the slowdown in consumer spending.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure.

What is the outlook for the Fund?

The MidCap Growth Fund I, sub-advised by Mellon Capital Management, will be merged into the MidCap Growth Fund III, sub-advised by Turner Investment Parnters. Following the merger, Turner and Mellon will be co-sub-advisors on the MidCap Growth Fund III. We expect the merger to be completed on November 21, 2008.

38

What contributed to or detracted from Fund performance during the fiscal year?

The Fund underperformed the S&P MidCap 400 Index for the year, primarily due to transaction costs, timing of cash flows, and portfolio fees. The Fund seeks investment performance that corresponds to the results of the S&P MidCap 400 Index. Within the Fund, the percentage exposure to securities is closely aligned to the stocks within the index. The Fund continues to maintain exposures near the index with a goal of replicating index performance. The Fund maintains positions in the underlying securities and uses other replicating securities for short-term investments and liquidity. All 10 economic sectors in the index posted negative returns during the 12-month period; the financial and health care sectors provided the least negative returns for the period, while the telecommunication services and information technology sectors provided the largest negative returns.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund employs a passive investment approach.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals. Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

39

What contributed to or detracted from Fund performance during the fiscal year?

The largest contributor to outperformance was stock selection within the energy sector. Two exploration and production companies, Cimarex Energy and Noble Energy, were positive contributors due to higher production results. Stock selection in the health care sector was the next largest contributor to outperformance. Within that sector, Express Scripts and Edwards Lifesciences were positive performers, as earnings surpassed expectations. Finally, Estee Lauder, a cosmetic manufacturer, helped make stock selection within the consumer staples sector the third-largest positive contributor to outperformance.

On the negative side, the biggest detractor was stock selection within the industrial sector. HNI Corp, an office furniture manufacturer, and AMR Corp, a legacy airline, were negative contributors. HNI saw a sharp decline in home office sales, while AMR was faced with a substantial increase in year-over-year fuel prices. The second-largest detractor was stock selection in the materials sector. OM Group, a manufacturer of cobalt, and Rockwood Holdings, a manufacturer of specialty chemicals, were negative performers as demand for their products moderated. Stock selection within the financial sector was the third-largest detractor. Ambac Financial Group, a financial guarantee provider, and PMI Group, a mortgage insurer, hurt returns due to the meltdown within the credit markets.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. To construct the Fund, the sub-advisor looks for those mid-capitalization firms they believe compete in a dynamic industry with long-term growth potential, possess a sustainable competitive advantage, exhibit strong positive cash flows, are led by shareholder-oriented management, and trade at undervalued prices. The goal of this process is to produce a portfolio of 40 to 60 holdings with the potential to grow faster than the S&P MidCap 400 Index at lower risk levels.

What is the outlook for the Fund?

The effect of a deteriorating global economy over the 12-month period is reflected in substantially lower stock prices. However, the sub-advisor believes that many stocks held in the Fund potentially offer compelling value. While it is impossible to predict the direction of the stock market over the near term, historically the stock market bottoms out ahead of the trough in the economy. Furthermore, valuations suggest the possibility of strong performance for investors who have a three-to-five-year investment time horizon. The Fund’s philosophy of investing in quality mid-sized companies historically has served investors well over the long term.

40

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection was strong, led by the financial sector. Sector positioning was also beneficial, led by an overweighting in the energy sector. Additionally, the Fund had a higher price-to-book ratio during the period than the Russell Midcap Value Index, which contributed to relative returns.

On the negative side, despite stock selection being positive overall, the materials and utilities sectors saw negative stock selection. Also, an underweighting in the materials sector detracted from relative performance, as this was the strongest-performing sector during the period. Additionally, owning stocks that, in aggregate, exhibited higher volatility than the stocks held in the index detracted from relative performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Goldman Sachs is responsible for approximately 65% of the overall Fund assets. The firm builds a portfolio using in-depth fundamental research and attempts to invest in good companies opportunistically when they are undervalued. The investment team of 14 investment professionals is organized by industry, with portfolio managers and research analysts focusing on a particular area of expertise. LA Capital is responsible for approximately 35% of the overall Fund assets. This firm uses a quantitative approach to build a diversified portfolio of mid-cap stocks. LA Capital believes that investor preferences for specific risk characteristics evolve with changing market conditions. The firm’s Dynamic Alpha stock selection model calculates expected returns from a universe of mid-capitalization securities.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors for the Fund that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

41

What contributed to or detracted from Fund performance during the fiscal year?

Although stock selection was poor overall, it was very strong in the information technology sector. Also, having a slight underweighting in the consumer discretionary sector benefited returns. Additionally, the Fund had a lower price-to-earnings ratio than its benchmark, the Russell Midcap Value Index, which contributed positively to relative returns.

Stock selection was negative for the period; specifically, the materials and industrial sectors saw the worst stock selection. An overweighting in the information technology sector also detracted from relative performance. In addition, owning stocks that in aggregate exhibited higher volatility than the stocks held in the index hurt relative performance.

Were there any changes to the Fund’s composition during the fiscal year?

Effective October 31, 2008, Neuberger Berman was removed as a sub-advisor due to quantitative concerns. Jacobs Levy is now the sole sub-advisor for this investment option.

What is the outlook for the Fund?

The investment models used by Jacobs Levy focus mainly on company-level, bottom-up information. This investment approach results in portfolios that are diversified across stocks, industries, sectors, and numerous potential opportunities. Among industries, the Fund is moderately overweighted in electric and gas utilities, commercial banks, and computer hardware, and is underweighted in alcohol and tobacco.

42

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection was strong for the period, led by stock selection in the consumer discretionary and financial sectors. An overweighting in the health care sector added value, as this was one of the strongest-performing sectors in its benchmark, the Russell Midcap Value Index. Also, the Fund had a higher price-to-book ratio than did the index, which helped relative performance.

On the negative side, although overall stock selection was positive, it was negative in the health care and materials sectors. An underweighting in the materials sector detracted from returns as well, as this was one of the strongest-performing sectors in the index during the period. In addition, an overweighting in the consumer discretionary sector detracted from relative performance as this was the worst-performing sector in the index.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Principal Global Investors is responsible for approximately 55% of the overall Fund assets. Their investment approach seeks to create a well-diversified portfolio of mid-cap stocks that are not only attractively valued, but also have above-average growth characteristics. This is done through both fundamental and quantitative valuation. Barrow Hanley is responsible for approximately 45% of the overall Fund assets. This firm builds a fairly concentrated portfolio of stocks that favors factors such as low price-to-book, low price-to-earnings, and above-average dividend yield compared to the overall mid-capitalization market.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

43

What contributed to or detracted from Fund performance during the fiscal year?

Security selection in large regional mall owners was a positive contributor. Also, avoiding/underweighting companies with balance sheet challenges and lower quality assets benefited performance. This included avoiding Macerich, CBL & Associates, and Glimcher Realty, and underweighting General Growth Properties. The decision to underweight the position in industrial owner and large index constituent Prologis proved beneficial as well, as the stock was off since April 30, 2008. Prologis owns and develops industrial property for sale on a worldwide basis, and fears of a global slowdown weighed on its stock price during the period. Favorable security selection involving the owners of a strip mall shopping center was a contributor as well. In addition, a large underweighting in Developers Diversified Realty and a large overweighting in Federal Realty aided performance.

On the negative side, the decision to underweight HCP, the largest publicly traded owner of health care facilities, was a large drag on performance as the stock outperformed. Also, stock selection in the diversified sector detracted from performance. This underperformance was tied to four stocks that were less subject to selling pressure from large institutions as their investor base was dominated by individuals less prone to sell into the market weakness. An underweighting in multi-family apartment owner Equity Residential was a drag on returns as well. Equity Residential benefited from the availability of government-sponsored agency debt through Fannie Mae and Freddie Mac, while financing in most sectors had dried up.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s philosophy is that superior returns are achieved by investing in — but not overpaying for — high-quality companies expected to experience favorable trends. Their strategy encompasses a bottom-up, fundamental research-based process that includes index-relative portfolio construction with a quality bias.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

44

What contributed to or detracted from Fund performance during the fiscal year?

While the consumer discretionary sector was one of the weak performers in the Fund’s benchmark, the Russell 2000^® Index, the Fund’s holdings in this sector fared much better. The Fund had below-average exposure to companies involved in automotive manufacturing and home building, which were especially weak during the period. Meanwhile, the Fund’s holdings in educational services and casino gaming performed well. Holdings in the consumer staples sector also helped offset some of the period’s weak performance. The stock selection process used in the Fund favored companies with strong business fundamentals that could increase market share even in a weakening economy.

On a negative note, the Fund had above-average exposure to the commercial aerospace industry. These holdings were adversely affected by a combination of capacity reduction at the airlines and potential order delays caused by a labor dispute at Boeing and development delays in their new 787 Dreamliner. In addition, the Fund had above-average exposure to companies with global end markets, and those companies were especially weak during the financial crisis. In the financial sector, several real estate investment trust holdings with exposure to mortgage-backed securities and commercial mortgages hurt returns. Regional banks performed poorly for the Fund, as its holdings were more adversely affected by deteriorating credit quality compared with other banks.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

45

What contributed to or detracted from Fund performance during the fiscal year?

Technology-related names contributed to performance. Sybase, the enterprise software and services company, witnessed strong growth in 2008 due to its risk analytics platform and banking and payment solutions. The information sector also added value. Investors cheered the global consulting firm Watson Wyatt Worldwide Inc. as the company beat second-quarter earnings estimates, citing strong demand for its benefits management services. Utilities showed strength throughout the latter half of the period as market volatility, slowing economic growth, and resilience in returns were rewarded by investors. Nicor, a gas distribution company, reported a positive earnings surprise and outperformed the benchmark for the period.

On the negative side, industrial names detracted as the slowing economy increased pressure on earnings and increased investor concern. Most notably, trucking company Arkansas Best missed earnings as the company battled both rising fuel costs and decreased demand. Selection in financials also detracted as banks, financials services, and asset management-related names underperformed. Concerns in the sector — including a weakening consumer, credit crunch, and housing slump — led downward pressure on earnings and share prices of several holdings. In addition, selection within the oil and gas sector detracted as spot prices of oil and gas fell sharply since June 2008. Oil services companies like Dawson Geophysical Co. witnessed share pressure due to investor concerns about a global economic slowdown.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure.

What is the outlook for the Fund?

The SmallCap Blend Fund I, sub-advised by Mellon Capital Management, will be merged into the SmallCap S&P 600 Index Fund, sub-advised by Principal Global Investors, on November 21, 2008.

46

What contributed to or detracted from Fund performance during the fiscal year?

Consumer discretionary holdings posted relative outperformance. Lack of exposure to Auto Component, and the strong relative performance of DeVry Inc. within the diversified consumer services sector and G-III Apparel Group in textile, apparel, and luxury goods, all contributed to good relative performance. Within health care providers and services, the Fund enjoyed very strong stock selection with the robust performance of LHC Group and Amedisys, Inc. The Fund also benefited from an acquisition in the pharmaceutical industry. Sciele Pharma, Inc. was acquired by Japanese-based Shionogi at a 60% premium.

On the negative side, a good portion of the underperformance is attributable to the industrial sector, especially in commercial aerospace. After peaking around year-end 2007, the aerospace group’s performance was pressured by increasingly negative investor sentiment. Information technology also weighed on underperformance. The worst portion of this sector was the semiconductor industry, where a weak consumer electronics environment affected several portfolios holdings. Within the energy sector, the Fund was penalized for not owning two coal companies, Alpha Natural Resources, Inc. and Walter Industries, in the first half of 2008.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

47

What contributed to or detracted from Fund performance during the fiscal year?

Sector allocation was a positive contributor to relative performance during the period. An overweighting in the energy sector and underweighting in financials helped relative returns the most. Stock-picking was a positive contributor in the consumer staples and health care services sectors. Top individual stock contributors across the Fund were LHC Group and Strayer Education. A small allocation to cash — held strictly for transactional purposes — had a positive impact due to the falling market.

On the negative side, hurt by poor stock selection, the Fund trailed its benchmark, the Russell 2000^® Growth Index, for the period. Stock-picking was broadly negative, but most significantly so in the consumer cyclicals and financial sectors. The largest negative stock contributors across the Fund included Dealer Track, Orient Express Hotels, and Silicon Motion Technology. The outperformance of value, especially in the first and third quarters of 2008, had a large negative impact on relative returns.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor team is comprised of four portfolio analyst/managers, a senior portfolio manager, and a dedicated quantitative analyst. Each analyst/manager is responsible for stock selection within a particular sector of expertise. In selecting stocks for the Fund, the analyst/managers use fundamental research and a quantitative model to identify faster-growing companies with positive earnings estimate revisions.

What is the outlook for the Fund?

The sub-advisor believes the market has afforded them significant opportunities to improve the Fund by adding good growth companies with strong fundamentals at attractive prices. They believe a representation of their holdings’ ability to deliver upside surprise has been upward earnings revisions, which often reflect the analyst community’s rush to adjust earnings forecasts in light of a company’s outpacing previous expectations. They state that consistently over time, a higher percentage of their holdings have enjoyed upward revisions compared to the benchmark constituents’ holdings. Further, they believe that relationship is in full force today as evidenced by the Fund’s positive-to-negative earning revisions ratio of 1.6 -to-1, compared to a ratio of 1.1 -to-1 in the Russell 2000^® Growth Index. The sub-advisor also references that their holdings have a faster expected growth rate and a price-to-earnings multiple that is approximately in line with that of the benchmark. It is the sub-advisor’s strong opinion that their portfolio holdings will achieve or come close to achieving the current earnings forecasts at a much higher rate than will the typical company in the index, as this has historically been the case. Finally, the sub-advisor believes the portfolio holdings are positioned to deliver earnings acceleration in the current economic environment that is more than twice what is expected from the average company in the index.

48

SmallCap Growth Fund II

Sub-Advisors: UBS Global Asset Management (Americas) Inc., Emerald Advisers, Inc., and Essex Investment Management Company, LLC

What contributed to or detracted from Fund performance during the fiscal year?

An underweighting in the most volatile stocks in the index and an underweighting in the troubled consumer discretionary sector benefited results. On the negative side, security selection hindered performance. The Fund struggled mightily in the information technology sector and to a lesser degree in the industrial sector. Within information technology, an underweighting in Nuance Communications and an overweighting in Ultimate Software Group were the primary detractors. Within industrials, a lack of exposure to Walter Industries and an overweighting in Taser International detracted the most. Additionally, an up-in-market-capitalization bias was a further hindrance to performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. UBS is responsible for approximately 43% of overall portfolio assets. A quantitative valuation model is used to identify a targeted buy list of stocks using three primary factors: earnings revisions, analyst diffusion ((up estimates - down estimates)/total estimates), and the 12-month stock price return. Each stock is ranked in quintiles, with the top quintile as the targeted buy list. More traditional in-depth fundamental analysis is applied to provide confirmation of the earnings growth story. Emerald is responsible for approximately 42% of overall portfolio assets. Emerald is a small-cap growth stock specialist that uses in-depth research to identify attractive small-cap growth companies. Essex is responsible for approximately 15% of overall portfolio assets. Essex uses a focused and disciplined level of fundamental security analysis. They identify companies in the early stages of positive business and earnings change. Essex focuses on micro-cap stocks in addition to small caps. This micro-cap focus should help to reduce the market capitalization of the overall portfolio.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

49

What contributed to or detracted from Fund performance during the fiscal year?

One bright spot within otherwise disappointing security selection was the industrial sector, where timely overweightings in Delta and Axsys Technologies boosted results.

On the negative side, security selection was extremely poor within the Fund. Much of the weakness was concentrated in the consumer discretionary, information technology, and financial sectors. An overweighting in information technology, one of the weaker sectors in the index, was a further detractor. On an individual basis, overweighting in Crocs and QuikSilver, and an out-of-index exposure to Blackstone Group hampered results the most.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Mazama is responsible for approximately 60% of the overall Fund assets. Mazama believes that exceptional investment returns can be made by investing in a diversified portfolio of quality companies that have made recent investments in people, products, plant and/or services. They use their proprietary Price Performance Model to identify and track the growth companies that they believe represent the best opportunities in the market. The portfolio managers focus on small to mid-cap stocks for the strategy. Columbus Circle Investors is now responsible for approximately 40% of the overall Fund assets. The firm’s investment strategies are based on the premise that companies doing better than expected will have rising securities prices, while companies producing less than expected results will not. This discipline is referred to as positive momentum and positive surprise. Through in-depth analysis of company fundamentals in the context of the prevailing economic environment, the portfolio management team selects companies that meet the criteria of positive momentum and positive surprise.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

50

What contributed to or detracted from Fund performance during the fiscal year?

The Fund underperformed the S&P SmallCap 600 Index for the year, primarily due to transaction costs, timing of cash flows, and portfolio fees. Nine of the 10 economic sectors in the index posted negative returns during the fiscal year, with the telecommunication services and materials sectors providing the largest negative returns. The Fund seeks investment performance that corresponds to the results of the S&P SmallCap 600 Index. Within the Fund, the percentage of exposure to securities is closely aligned to the stocks within the index. The utilities sector provided the lone positive return during the period. The Fund maintains exposures near the index with a goal of replicating index performance. The Fund maintains positions in the underlying securities and uses other replicating securities for short-term investments and liquidity.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund uses a passive indexing strategy and does not attempt to manage market volatility, use defensive strategies, or reduce the effect of any long-term periods of negative stock market performance.

What is the outlook for the Fund?

The SmallCap Blend Fund I, sub-advised by Mellon Capital Management, will be merged into the SmallCap S&P 600 Index Fund, sub-advised by Principal Global Investors, on November 21, 2008.

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals. Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

51

What contributed to or detracted from Fund performance during the fiscal year?

Within the consumer discretionary sector, many of the stocks that were avoided in the Fund fell rapidly throughout the year. These stocks were hammered by persistent concerns about the consumer’s ability to spend, given higher food and fuel costs, and the prospect of recession. Financials were at the forefront of much of the news over the period. The Fund’s positive relative performance was driven by success in the real estate investment trust industry, where the Fund benefited from positive stock selection and a small relative underweighting. This outperformance was slightly offset by some holdings that were maintained for risk-control purposes as the government began to intervene. Also, several holdings in consumer staples, while relatively small, posted positive returns during the timeframe they were held.

On the negative side, holdings in industrials and technology lagged the benchmark Russell 2000^® Value Index. Holdings in the machinery sector were negatively impacted by end-market weakness and order cutbacks as the economy stalled. Also, an overweighted position was held in the aerospace and defense sector, which hurt returns due initially to delays in the rollout of the next-generation airplane by Boeing, and later by a machinists’ strike at Boeing. Within technology, an inaccurate assumption that consumers would be willing to pay for better televisions detracted from performance. While sales of large screen plasma and LCD televisions were strong, the best-selling brands were the lower-end models that used cheaper parts than those produced by firms held within the Fund.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

52

What contributed to or detracted from Fund performance during the fiscal year?

A higher price-to-book profile was rewarded, as investors generally preferred companies with a growth tilt. Although security selection overall was negative, results within consumer discretionary aided performance. Underweightings in A.H. Belo Corp and Quicksilver were the primary positive contributors in the sector.

On the negative side, security selection detracted the most from results. Selection within the industrial and financial sectors was particularly poor. Within industrials, an overweighting in Deluxe Corporation and Graftech International hindered returns, whereas in financials overweightings in Lexington Corp and Pennsylvania Real Estate were the primary detractors.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. JP Morgan is responsible for approximately 70% of the overall Fund assets. JP Morgan’s investment process starts with a disciplined quantitative ranking methodology that identifies stocks in each economic sector that have positive trends in price momentum with attractive relative valuations. Management then uses a quadratic optimization to create a portfolio of well-diversified, compensated risks that seeks to deliver consistent returns. For each trade suggested by the optimization, the portfolio managers do in-depth fundamental research. Finally, sophisticated trading techniques ensure that the trades are executed in a cost-effective manner. Mellon Capital is responsible for approximately 30% of the overall Fund assets. Mellon employs a structured process that utilizes 18 quantitative models whose respective weightings are rotated over time. Mellon’s research indicates that the breadth of fundamental characteristics included in the quantitative valuation model and the adaptive nature of the valuation model in shifting emphasis among those factors as investor preferences change, provide a framework for consistent outperformance.

What is the outlook for the Fund?

This is a multi-managed Fund constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

53

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection weighed on performance. Results were particularly poor in the consumer discretionary and industrial sectors. Within consumer discretionary, overweightings in Scholastic, American Axle & Manufacturing, and Cumulus Media detracted the most from results. Within industrials, an out-of-index exposure to General Cable and an overweighting in Skywest Inc. were the primary detractors. Also, a lower price-to-book profile and a lower market capitalization relative to the benchmark Russell 2000^® Value Index were not rewarded. Sector allocation hurt performance as well, due to an overweighting in the laggard consumer discretionary and information technology sectors. At the industry level, an underweighting in the strong-performing real estate investment trusts and an overweighting in semiconductors held back returns.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Dimensional Fund Advisors (DFA) is responsible for approximately 20% of the overall Fund assets. DFA manages a highly diverse portfolio focusing on the bottom quintile of market capitalization and, within that segment, on stocks that have a low price/book value from an accounting valuations perspective. Vaughan Nelson is responsible for approximately 80% of the overall Fund assets and is currently receiving all new cash flows. Vaughan Nelson’s process focuses on identifying the economic value of a firm’s equity through quantitative tools and then utilizing fundamental analysis to make final portfolio construction decisions. This process tends to steer Vaughan Nelson toward stocks with higher traditional price/book ratios relative to the index.

What is the outlook for the Fund?

This is a multi-managed Fund constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

54

What contributed to or detracted from Fund performance during the fiscal year?

The Fund benefited from an underweighting in the most volatile stocks in the benchmark Russell 2000^® Value Index. A higher price-to-book bias relative to the index was also rewarded. Security selection was favorable, led by consumer discretionary, where an underweighting in Lear Corporation and a lack of exposure to Quiksilver boosted results. Selection within health care was also favorable, due in part to an overweighting in Sciele Pharma and a lack of exposure to HealthSouth Corp. On the negative side, sector allocation hampered results due to overweightings in information technology and energy and an underweighting in financials. An up-in-market-capitalization bias was a further hindrance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Ark Asset Management is responsible for approximately 80% of the overall Fund assets. Ark combines a systematic quantitative approach with traditional fundamental analysis to construct their portfolio. LA Capital (LA) is responsible for approximately 20% of the overall Fund assets. LA is a purely quantitative firm that includes a large variety of inputs into their model. Rather than emphasizing a fixed set of weights, LA’s model emphasizes those factors that are currently being rewarded in the market.

What is the outlook for the Fund?

This is a multi-managed Fund constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying sub-advisors. The objective was to find sub-advisors that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of sub-advisors in the Fund.

55

What contributed to or detracted from Fund performance during the fiscal year?

The Fund maintains an exposure to emerging markets of about 10%, compared to the emerging-market weighting within its benchmark, the MSCI ACWI (ex-U.S.) Index, of about 19% over the 12-month period. This underweighting in emerging markets added value to the Fund, as emerging markets declined more than developed international markets over the period (as measured, respectively, by the MSCI EMF Index and MSCI EAFE Index). Stock selection in financials was positive as the Fund benefited from owning strongly capitalized and liquid banks as well as relatively defensive non-life insurance companies. This positioning led the Fund away from U.K. banks, investment banks, and certain diversified financials. Also, stock selection in the telecommunication services sector was positive in the 12-month period. NTT DoCoMo and Koninklijke KPN performed well. NTT DoCoMo benefited from a change in the way handsets are sold in Japan, while KPN exceeded earnings expectations.

Stock selection was negative in the industrial sector. Capital goods companies, such as Komatsu, suffered from weakening commodity prices due to worries about the economic growth outlook. This investor concern drove down prices of Japanese trading companies such as Itochu and Mitsui & Co. Additionally, stock selection was negative in the consumer discretionary sector. The biggest detractor was not holding Volkswagen AG in the Fund, as it was the best performer in the group. Also, stock selection in the materials sector was negative. An overweighted position in Xstrata PLC, as well as an underweighting in Rio Tinto PLC, hurt performance; Rio Tinto benefited from a takeover offer from BHP Billiton, while Xstrata suffered due to lower commodity prices.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

56

What contributed to or detracted from Fund performance during the fiscal year?

Stock selection in the Pacific Rim and exposure to stocks in emerging markets both contributed positively to returns. With regard to specific sectors, information technology and financials helped returns. Within technology, Taiwan Semiconductor contributed to performance. Though its shares fell, the company held up better than its peers as the demand for flat screen televisions, personal computers, and smart phones drove chip sales. On an individual stock level, Swiss pharmaceutical company Roche was a major contributor. Though the company’s shares fell, the stock held up versus the market as investors sought defensive names in the uncertain market environment.

On the negative side, weak stock selection in the U. K. and Continental Europe detracted from performance. Stock selection in materials and an underweighting in health care hurt returns. Within materials, Vedanta Resources, a U.K mining company, was a major detractor; the company’s shares fell as commodity prices declined in 2008. Another major detractor for the period was Prudential. Shares of the U.S. life insurer plummeted on the release of first-quarter earnings, which suffered due to continued subprime-related losses.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure.

What is the outlook for the Fund?

The Global Equity Fund I, sub-advised by JP Morgan Investment Management, will be merged into the International Fund I, sub-advised by Fidelity (Pyramis Global Adv.) on November 21, 2008.

57

What contributed to or detracted from Fund performance during the fiscal year?

Security selection within North America was a positive contributor to relative performance. Strong selection within the retail mall, industrial, and shopping center sectors were the key drivers of performance in the region. Security selection within Europe was a large positive contributor to relative performance. The Fund continued to benefit from owning higher-quality, less-leveraged companies through the credit market crisis — which led to strong selection through a bear market, particularly in the United Kingdom. An underweighted allocation to Japan and security selection among Japanese stocks also added value. Positive security selection was attributed to underweighting both those property owners suffering from increasing vacancies within the office sector and the soft residential market.

On the negative side, security selection in Australia was a detractor from relative performance. Especially harmful were portfolio positions within Australia involving companies with both above-average balance sheet leverage and a material portion of earnings derived from managing assets jointly owned with third parties. Also detracting from performance was the lack of exposure to HCP, a member of the health care sector in the United States, due to concerns regarding its ability to successfully assimilate recent acquisitions and finance them; this decision proved unfavorable as HCP widely outperformed. An underweighting in United States multi-family apartment owner Equity Residential hurt returns as well. Equity Residential and all apartment owners benefited from the availability of government-sponsored agency debt through Fannie Mae and Freddie Mac when financing in most other sectors had dried up.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor invests at least 80% of the Fund’s net assets in equity securities of U.S. and non-U.S. companies principally engaged in the real estate industry. A real estate company has at least 50% of its assets, income, or profits derived from products or services related to the real estate industry. Real estate companies include real estate investment trusts and companies with substantial real estate holdings such as paper, lumber, hotel, and entertainment companies. Companies whose products and services relate to the real estate industry include building supply manufacturers, mortgage lenders, and mortgage servicing companies.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

58

International Emerging Markets Fund

Sub-Advisor: Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Asset allocation was positive on a country and sector basis. In particular, Israel, Brazil, and India contributed positively to performance. In Israel, the Fund benefited from an overweighted position in Teva Pharmaceutical Industries. The Fund outperformed in the telecommunication services, information technology, and health care sectors. An overweighted position in Cellcom Israel led the outperformance in telecommunication services for the 12-month period.

On a negative note, stock selection was negative on a country and a sector basis. In particular, materials, financials, and consumer staples contributed negatively to performance. In materials, an overweighted position in Evraz Group hurt relative performance. On a country basis, South Africa, Malaysia, and South Korea detracted from performance. In South Africa, performance suffered from an overweighted position in African Rainbow Minerals.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

59

What contributed to or detracted from Fund performance during the fiscal year?

The overweighting in integrated gas company BG PLC was the largest contributor to positive performance. BG shares gained from the increase in natural gas prices over the 12-month period. BG also gained from the discovery of a massive oil and gas reserve at Brazil’s Tupi oil field, in which it owns a 25% stake. In the materials sector, an overweighting in agricultural chemicals company K+S AG was the second-largest positive contributor. K+S AG shares appreciated thanks to rising potash and fertilizer prices, driven by global food demand. Among health care stocks, an overweighting in biotechnology firm Actelion was the third-best contributor to performance. Actelion shares rose thanks to better-than-expected revenues from its pulmonary arterial hypertension (PAH) treatment, Tracleer.

On the negative side, in the consumer discretionary sector, an underweighting in automobile manufacturer Volkswagen was the largest detractor from performance. Volkswagen shares rose, largely due to technical factors related to a takeover bid from Porsche and better sales volume trends than its peers. Among health care stocks, an underweighting in pharmaceutical company GlaxoSmithKline was the second-largest detractor from performance. GlaxoSmithKline shares outperformed the benchmark as investors sought out high-quality, defensive names amid the market turmoil and credit crisis. In the energy sector, an underweighting in integrated oil firm BP was the third-largest hindrance to performance. BP shares fell but outperformed the benchmark MSCI EAFE Index, thanks to earnings that exceeded consensus expectations as falling oil prices helped refining margins, which balanced out flat upstream production volumes.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund follows an innovative approach that capitalizes on the sub-advisor’s fundamental research by combining qualitative stock selection with quantitative risk control. The available investment universe is comprised of stocks rated attractive by analysts in Japan, the United Kingdom, Europe (ex- U.K.), and Pacific (ex-Japan). The discipline uses a quantitative model to match the regional weights of the Fund to the index. This approach diversifies specific risk, reduces tracking error, and factors risk and controls transaction costs.

What is the outlook for the Fund?

The sub-advisor strives to manage the Fund so that it consistently remains a well-diversified portfolio where the best ideas within each sector in each region are held at all times, based on the underlying fundamental research. They focus on maintaining a portfolio that continues to provide a consistent core exposure with low relative volatility. The primary focus remains on stock selection, while minimizing non-stock-specific risks within the Fund. The sub-advisor believes increased volatility in the markets and greater dispersion of returns and valuations in fact works favorably for a fundamental stock-selection-based Fund such as the International Fund I.

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What contributed to or detracted from Fund performance during the fiscal year?

Stock selection was most effective in the energy, consumer staples, and health care sectors, and specifically, in the food and staples, retailing, and pharmaceuticals industries. From a country perspective, stock selection was most effective in Italy and the Netherlands. Fast Retailing Co., a Japanese casual clothing retailer; Nestle, the Swiss food and beverage provider, and Family Mart Co., a Japanese convenience store operator, were among the stocks that met stock selection requirements and generated outperformance during the 12-month period.

On the negative side, stock selection among capital goods stocks was especially weak during the period. From a country perspective, stock selection was least effective in Japan, the United Kingdom, and Germany. The largest negative contributors to performance included Vestas Wind Systems, the Danish manufacturer of wind power systems and turbines, Komatsu, the Japanese manufacturer of earth-moving equipment, and ABB, the Swiss manufacturer of electrical equipment. The stocks of these and many other companies were negatively impacted by market uncertainties and fear of a potential global economic slowdown that threatened future profitability.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment philosophy is based on the belief that superior stock selection and disciplined risk management provide consistent outperformance. The sub-advisor focuses on companies with improving and sustainable business fundamentals, rising investor expectations, and attractive relative valuations. Stock selection is the primary driver of relative performance, and unintended portfolio risks are neutralized.

What is the outlook for the Fund?

The sub-advisor believes the best course of action in every type of market is to maintain broadly diversified portfolios, utilize a disciplined investment process, control risk, and commit to a long-term investment horizon. From their perspective, the recent market environment has been driven primarily by fear and uncertainty surrounding macroeconomic events — and by significant deleveraging by financial institutions and hedge funds — rather than by considerations of company-specific business fundamentals.

Further, they believe the extreme market volatility has resulted in indiscriminate selling by many investors and, as such, does not reward the fundamental relationships that typically differentiate stock price performance, which are the core of their investment beliefs and process. The sub-advisor cannot predict with any precision when the heightened market volatility will subside. However, as the market begins to stabilize and fundamental change once again re-asserts its reliability in contributing to long-term outperformance, they are confident their process will once again be rewarded. They believe their approach has demonstrated its effectiveness in both up and down markets, but is susceptible to marginal underperformance at major inflection points in general investor sentiment. From their perspective, these periods historically have tended to be both infrequent and generally short in duration.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

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What contributed to or detracted from Fund performance during the fiscal year?

Over the 12-month period the Fund maintained a long duration, which contributed positively to performance as interest rates fell in response to a lower federal funds target rate, a slowing economy, and risk aversion. The Fund also benefited from an overweighting in the mortgage-backed securities (MBS) sector, which was the only spread (i.e., non-U.S. Treasury) sector to outperform the benchmark Barclays Capital Aggregate Bond Index. On the negative side, the remaining spread sectors underperformed the benchmark index during the period. Also, the Fund’s overweighting in investment-grade credit, asset-backed securities, and commercial mortgage-backed securities — along with an out-of-index allocation to below-investment-grade credit — hindered performance. An underweighting in U.S. Treasuries and agencies negatively contributed to performance as well, as these sectors outperformed the benchmark index.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s investment management process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented, and need to be given time to fully work through the financial system. Further, the sub-advisor believes that the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

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Government & High Quality Bond Fund

Sub-Advisor: Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Duration contributed positively to performance during the fiscal year. Portfolio duration was longer than that of its benchmark, the Barclays Capital Government/Mortgage Index, specifically in the front-end of the yield curve. (Duration is a measure of a bond’s price sensitivity to changes in interest rates.) Overweighted positions to higher-coupon fixed-rate agency mortgage-backed securities (MBS) and agency adjustable-rate MBS also contributed positively to performance. On the negative side, the primary cause of the Fund’s underperformance was exposure to floating-rate asset-backed securities, which were utilized for asset replication strategies. Additionally, sector allocation contributed to underperformance due to holdings of commercial mortgage-backed securities, which are not in the index, and to an underweighting in U.S. Treasuries and agencies.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

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High Quality Intermediate-Term Bond Fund

Sub-Advisor: Principal Global Investors, LLC

What contributed to or detracted from Fund performance during the fiscal year?

Over the 12-month period the Fund was long in duration, which contributed positively to performance as interest rates fell in response to a lower federal funds target rate, a slowing economy, and risk aversion. The Fund benefited from an overweighting in the mortgage-backed securities sector, which was the only spread (i.e., non-U.S. Treasury) sector to outperform the benchmark Barclays Capital Aggregate Bond Index.

On the negative side, the remaining spread sectors underperformed the index during the period. As a result, the Fund’s overweighting in investment-grade credit, asset-backed securities, and commercial mortgage-backed securities hindered performance. Also, an underweighting in U.S. Treasuries and agencies hurt returns as these sectors outperformed the benchmark index.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

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What contributed to or detracted from Fund performance during the fiscal year?

Because of its non-cyclical profile, the health care sector performed extremely well in the turbulent 12-month period. As a result, the Fund’s overweighting in health care supply and pharmaceuticals was a major positive contributor to performance. Additionally, an underweighting in auto manufacturing and parts helped performance as companies continued to grapple with the combined negative effects of a troubled economy, high gas prices, and decreasing credit available to customers. Also aiding performance was an underweighting in diversified media, a sector that did poorly, combined with an outperformance by individual companies held within that sector.

The largest negative factor was the overwhelming underperformance of various holdings in the financial sector. The acceleration of market turmoil and customer concern drove the sector down substantially and forced some companies out of business. Positions in Washington Mutual, Freddie Mac, and Lehman Brothers produced substantial losses. Also, Sirius Radio underperformed due to concern about the decline in auto sales and consumer discretionary spending.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund is constructed with a long-term focus and a value-oriented philosophy. It emphasizes sectors the sub-advisor views as favorable on a long-term basis, such as health care, finance, technology, telecom/media, gaming, and services. Opportunities are also sought among the best companies in out-of-favor sectors. Also, the sub-advisor may utilize alternative investments — such as broken convertibles, emerging market securities, and real estate investment trusts— to enhance diversification and return potential.

What is the outlook for the Fund?

For some time the sub-advisor was optimistic that a recession could be avoided. It now appears to them that the breadth and depth of the recent credit crisis has severely impacted real economic conditions and may take until the middle of 2009 to dissipate. However, they believe there are still distinct positives for the U.S. economy: oil prices are down, interest rates have fallen, homes are more affordable, and productivity is still good. The sub-advisor is assessing the opportune time to adjust the Fund’s risk position, increasing equity exposures from neutral to overweighted as negative credit and economic conditions become discounted in market prices.

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What contributed to or detracted from Fund performance during the fiscal year?

An emphasis on higher-quality issuers within the high-yield space benefited 12-month performance. Security selection and an underweighting in consumer cyclicals also were rewarded. Additionally, an overweighted position and security selection within the energy sector boosted returns, as did an underweighting in the beleaguered financial services industry. Security selection within financials helped as well. An underweighting in the gaming sector, which struggled, and strong security selection within the segment were favorable.

On the negative side, the Fund's underweighted position in non-captive diversified financial services (primarily General Motors Acceptance Corporation) hindered results. An overweighting in — and poor security selection within — the technology sector also detracted from performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. Lehman Brothers believes that successful high-yield investing is driven by a strict discipline that seeks to avoid credit deterioration, selects securities in which the spread is attractive on a relative value basis, and rotates across credit tiers and industry sectors. JP Morgan’s rigorous fundamental investment process, driven by the portfolio managers working with the large investment staff, seeks to generate positive alpha through the selection of undervalued securities and sectors that offer relatively attractive total return and risk characteristics.

What is the outlook for the Fund?

This multi-managed Fund was constructed by Principal Management Corporation to take advantage of the unique characteristics of the underlying investment managers. The objective was to find investment managers that would complement each other by exhibiting a low correlation of excess returns relative to the benchmark index and a diversity of investment process. Principal Management Corporation does not anticipate any significant changes to the mix of asset managers in the Fund.

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What contributed to or detracted from Fund performance during the fiscal year?

An overweighting in U.S. Treasuries helped performance, as they were the best performer of all fixed-income asset classes during the period. Investors gravitated toward the safest investments as risky securities plunged in value. Within the Fund, mortgages outperformed, as the type of mortgage securities held in the Fund — primarily low-coupon, agency-backed pass-through mortgages — are generally considered safe and relatively liquid. As the economy slumped, investments considered safe and of high quality have done well. An underweighting in the financial services/bank sector also helped performance, as it was one of the worst-performing sectors in the benchmark Citigroup Broad Investment-Grade Bond Index. A continued write-down of bad assets, a furthering slump in real estate, and an erosion in bank liquidity conspired to reduce value in the sector.

On the negative side, security selection in the financial sector was a detractor. Freddie Mac lost value after the U.S. government took it over, while Wachovia and Morgan Stanley underperformed as credit market turmoil reduced liquidity. Additionally, Lehman Brothers lost value due to bankruptcy, while Washington Mutual declined following to the company’s takeover by the federal regulators. High-yield securities also underperformed during the 12-month period as investors avoided risky securities. The asset class performed poorly due to investors’ belief that the U.S. is in a severe economic slowdown and that default rates on high-yield securities therefore will rise considerably. Finally, the gaming sector underperformed as most gaming markets experienced negative year-over-year revenue growth. The continued economic slowdown appears to be eroding consumer discretionary spending on such items as gaming.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund is invested in a diversified pool of fixed-income securities selected with a long-term focus and a value-oriented philosophy. The sub-advisor favors securities and sectors they believe could perform well over one or more economic cycles. They also look for opportunities among the best companies in out-of-favor sectors and typically keep the Fund’s duration close to that of the Fund’s benchmark.

What is the outlook for the Fund?

The sub-advisor has based its outlook on the following perspective: The U.S. and much of the global economy are in the middle of a severe credit crunch and potentially long recession, and massive government policy actions — including a $700 billion rescue plan for the financial industry and a continued lowering of interest rates by the Federal Reserve — have been used to help revive the economy. They believe that it remains to be seen how quickly these actions may stimulate bank lending and consumer spending. However, they also believe that corporate bond prices are at historic lows and are already incorporating a deep recession. As a result, the sub-advisor is selectively increasing the Fund’s exposure to companies they believe have solid balance sheets and the ability to withstand a long downturn.

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What contributed to or detracted from Fund performance during the fiscal year?

The underweighting in treasury inflation-protected securities (TIPS) in favor of commercial mortgage-backed securities and asset-backed securities hurt the Fund as these sectors underperformed both nominal and inflation-protected securities. Portfolio performance was also hurt by its use of a strategy of entering into secured lending agreements for more than 20% of the Fund. The Fund engaged in a strategy of entering into a significant amount of total rate-of-return swaps. This strategy detracted from returns due to the poor price performance of the securities the Fund purchased with collateral it received in connection with total rate-of-return swaps. In addition, the Fund’s duration was slightly longer compared to the index, which hurt performance as TIPS rates rose. (Duration is a measure of a bond's price sensitivity to changes in interest rates).

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

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What contributed to or detracted from Fund performance during the fiscal year?

The best-performing bonds were the most liquid bonds. 30-year agency mortgage-backed securities (MBS) were the most liquid bonds (outside of U.S. Treasuries) and contributed the most to performance. Lower-coupon 30-year MBS benefited from falling interest rates due to their longer duration. For the period, the agency collateralized mortgage obligations (CMOs) held in the Fund also helped performance. The acceptable structure of the CMOs in the Fund helped mitigate the recent lack of liquidity experienced in these types of securities. Also, the Fund benefited slightly from its underweighting in 15-year agency MBS. In a historically normal market, these bonds would be expected to perform well. However, in the steepening interest-rate-curve environment over the period, typical buyers of the bonds, such as banks, turned mainly to sellers, which hurt performance.

On the negative side, the worst-performing sector was non-agency CMOs, which investors shunned. Although these bonds continued to have good underlying collateral performance, forced selling from leveraged investors and no demand from new investors drove prices down. The Fund’s duration was, on average, slightly below the benchmark Citigroup Mortgage Index duration over the period, which led to a small underperformance as interest rates fell. Although the overall 30-year agency MBS sector performed well, premiums on the Fund’s specified 30-year MBS dropped as investors looked only for liquidity, which slightly hurt performance.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor emphasizes a value-based, bottom-up approach to picking individual securities. Mortgage-backed securities and collateralized mortgage obligations comprise the majority of holdings, while a small allocation to Treasury and agency securities is used to manage liquidity and duration. The sub-advisor strives to keep the Fund’s duration close to that of its benchmark to prevent performance from being whipsawed or left behind by large interest-rate movements.

What is the outlook for the Fund?

The sub-advisor believes the mortgage market, as well as the overall economy, may continue to struggle for at least the near term. They believe the Fund is well-positioned to ride out the markets, with plenty of liquidity in the agency mortgage-backed security sector and potentially acceptable underlying performance of the non-agency bonds held in the Fund. When the overall economy and housing market begin to recover, the sub-advisor believes the Fund is positioned to be able to take advantage of anticipated spread-tightening in mortgage products.

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What contributed to or detracted from Fund performance during the fiscal year?

Deeply-discounted securities purchased during the recent market turmoil — such as DB Capital, FPL Group, and Arch Capital — performed the best as the $25 par market rebounded in October from the historic sell-off experienced in September. Given the positive cash flow into the Fund, the sub-advisor was able to take advantage of the new-issue market, where securities were priced at large concessions and subsequently held up better than secondary issues when the market turned down. The volatility and inefficiency experienced in the markets provided many trading and swap opportunities that helped total return.

On a negative note, the Fund’s investments in AIG, Fannie Mae, Freddie Mac, and Wachovia Corp. hurt returns as all four firms suffered dramatic losses resulting from the unprecedented credit crisis. The U.S. government took control of AIG and the U.S. Federal Reserve agreed to lend $85 billion to the insurer. Fannie Mae and Freddie Mac fell significantly as the U.S. government seized control of the companies and placed them into a conservatorship. Wachovia Corp.’s value plummeted under the weight of overdue mortgages, and the firm ultimately agreed to a takeover by Wells Fargo.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s strategy emphasizes a rigorous credit approach with a primary emphasis on investment-grade hybrid preferred securities offering superior, risk-adjusted yield premiums.

What is the outlook for the Fund?

The sub-advisor believes the preferred securities market may ultimately benefit from the Emergency Economic Stabilization Act (EESA), the heart of which establishes the Troubled Asset Relief Program (TARP). While it is impossible to predict exactly how the plan will work, who will participate, and what it might mean for the preferred shareholders of companies that do sell assets to the government, the sub-advisor believes the program may provide a boost to investor confidence in the financial system and positively impact the preferred securities market.

3      This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.

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What contributed to or detracted from Fund performance during the fiscal year?

Duration was the primary contributor to performance over the period. The Fund was positioned with a longer duration than that of the benchmark Barclays Capital 1-3 Year Government/Credit Index. This was beneficial as interest rates fell during the period. The Fund also benefited from changes in sector allocation. An increase in weighting in U.S. Treasuries and a decrease in weighting in spread (i.e., non-U.S. Treasury) sectors improved the overall quality of the Fund. In general, higher-quality securities outperformed lower-quality securities.

On the negative side, the Fund’s out-of-index weighting in securitized assets was the major detractor during the period. These sectors were severely impacted by deleveraging taking place in the market as well as by rating agency actions resulting from continued housing market declines. The Fund’s position in investment-grade corporate bonds also hurt returns as risk premiums elevated. Additionally, an underweighted position in U.S. Treasuries versus the index contributed negatively, as Treasuries were one of the best-performing sectors. An out-of-index weighting to below-investment-grade corporate bonds also contributed negatively to performance. The flight to quality was primarily into U.S. Treasuries and out of all spread sectors.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies share a consistent focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

Portfolio management believes that the reasonably strong underlying fundamentals of corporations and consumers, coupled with a friendly Federal Reserve, will provide the support to ensure that the financial market turmoil is relatively short-lived and contained. They believe growth will slow, but the U.S. economy should avoid recession. Defaults and losses will continue as a result of the subprime crisis, but current valuations reflect extreme losses that the portfolio management team does not believe will ultimately be realized. Fundamentals of corporations remain strong, but will gradually decline over the next two years (defaults have remained around 1% for the past 12 months). However, current risk premiums reflect the fundamental risks, plus the potential of a steep increase in defaults/credit deterioration, which the team does not believe will materialize. Despite unfavorable technicals (commercial mortgage-backed securities are now being shorted aggressively by macro hedge funds), the team believes that underlying commercial mortgages will continue to perform and do not have the same fundamental risk as subprime residential mortgage-backed securities. The portfolio management team believes this market environment represents numerous long-term opportunities, which offer necessary value to withstand the short-term volatility of risk premiums.

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What contributed to or detracted from Fund performance during the fiscal year?

The top positive contributor was an overweighting in liquid, less-credit-sensitive sectors such as U.S. Treasury and agency bonds. Though Fannie Mae and Freddie Mac were placed into conservatorship, the resulting stronger U.S. government backing kept their debt from widening as much as other credit-related sectors. An underweighting in the bank/finance sector aided performance as well. This sector widened as the credit crunch unfolded and many financials failed or were on the brink of doing so. As this sector typically makes up a large portion of many indices, the underweighting had a significant positive impact on performance. An underweighting in asset-backed securities (ABS) added value as well. When the market began to realize the credit crisis was going to hurt consumers, spreads on consumer-related ABS, like credit card and auto ABS, widened. Having almost no exposure to this sector helped the Fund greatly.

On a negative note, although the Fund overall was underweighted in the bank/finance sector, several individual issues within the sector hurt performance. Most significantly, a small position in Washington Mutual and a larger position in International Lease Finance (a subsidiary of AIG) detracted from returns. An overweighting in the real estate investment trust (REIT) sector also hurt performance as investors began to believe that the problems seen in the residential mortgage market would begin to spill over to the commercial mortgage market. The underperformance was felt across all sectors within the REIT category. In addition, non-agency mortgage securities hurt performance. One bond was marked to below-investment-grade and priced accordingly. Several other bonds saw dramatic price declines mainly from a lack of liquidity in the sector.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor takes a flexible investment approach, selecting securities from multiple fixed-income asset classes that are arrayed along the front part of the yield curve. They also look for value in lower-rated corporate securities while maintaining the Fund’s high overall credit rating. Comprehensive credit research is conducted to identify opportunities among out-of-favor sectors and securities.

What is the outlook for the Fund?

The sub-advisor believes that over the near term the front part of the interest-rate curve is likely to remain fairly low, although credit spreads may remain at high levels until the credit crisis eases. Once liquidity begins to return to the market and the economy shows signs of picking up, they believe spreads on corporates and mortgages may improve and have positioned the Fund to be able to take advantage of these potential improvements in the credit market.

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What contributed to or detracted from Fund performance during the fiscal year?

Duration was the primary contributor to performance over the 12-month period. The Fund was positioned with a longer duration than that of the benchmark 6-month LIBOR Index, which was beneficial as interest rates fell, especially at the front end of the yield curve. Also, the Fund’s weightings to U.S. Treasuries, U.S. agencies, and cash were increased over the period, adding to performance as investors sought the safest investments available.

On the negative side, the Fund’s weighting in securitized assets was the major detractor to performance over the period. Specifically, the Fund’s weighting in collateralized mortgage obligations was the largest detractor to performance, followed by asset-backed securities and commercial mortgage-backed securities. The Fund’s weighting in investment-grade corporate bonds also hindered performance due to widening risk premiums. Additionally, exposure to below-investment-grade bonds hurt returns as prices declined due to investors’ flight to quality.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The Fund’s investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process. Value is added through multiple sources, with a primary emphasis on sector and subsector as well as yield-curve positioning and individual selection.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

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Money Market Fund
Sub-Advisor: Principal Global Investors, LLC
Average Annual Total Returns1 as of October 31, 2008
		1-Year	3-Year	5-Year	Since	Inception Extended Performance
					Inception	Date	Inception Date
J Shares	Excluding Sales Charge	2.67%	3.65%	2.55%	2.13%	03/01/2001	12/06/2000
	Including Sales Charge	1.67%	3.65%	2.55%	2.13%
Institutional Shares		3.17%	4.27%	3.23%	2.87%	03/01/2001	12/06/2000
R1 Shares		2.26%	3.36%	2.35%	2.00%	11/01/2004	12/06/2000
R2 Shares		2.40%	3.49%	2.47%	2.13%	12/06/2000	–
R3 Shares		2.58%	3.69%	2.66%	2.31%	12/06/2000	–
R4 Shares		2.78%	3.88%	2.85%	2.50%	12/06/2000	–
R5 Shares		2.90%	4.00%	2.97%	2.62%	12/06/2000	–

What contributed to or detracted from Fund performance during the fiscal year?

The Fund’s allocation to variable rate demand notes added value.* Also, the Fund benefited from having a consistently shorter average-days-to-maturity measurement than did its peers (although the average for the peer group did decline over the period). On a negative note, the prime money market industry saw large outflows in September, resulting from one money market fund falling below $1.00 net asset value per share. Throughout the year, the Fund’s exposures to asset-backed commercial paper and financial credits were adjusted due to the continued stress in the market.

Were there any changes to the Fund’s composition during the fiscal year?

No material changes occurred in the Fund’s structure. The sub-advisor’s investment strategies consistently focus on relative value and disciplined risk management. The investment process is research-driven, with an emphasis on bottom-up portfolio construction techniques. While macroeconomic research is an integral part of the Fund’s process, aggressive shifts in portfolio duration based on expectations for short-term movements in interest rates are not part of the overall process.

What is the outlook for the Fund?

The sub-advisor believes that although there has been significant volatility in the capital markets, the unprecedented worldwide central bank actions to backstop the credit crunch and limit its harm to the overall economy are now being implemented and need to be given time to fully work through the financial system. Further, the sub-advisor believes the current market environment represents numerous opportunities for investors who have a longer-term time horizon, and who can withstand the current volatility of risk premiums in order to realize value on assets that are currently priced for the most severe economic conditions in history.

*      Variable rate demand notes are debt instruments representing borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate.

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Glossary

6-Month LIBOR (London Interbank Offered Rate) Index:

An average of the interest rate of U.S. dollar deposits, known as Eurodollars, of a stated maturity.

Barclays Capital 1–3 Year Government/Credit Index:

(Formerly known as Lehman Brothers 1–3 Year Government/ Credit Index.) A combination of the Barclays Capital Government and Corporate Bond indices with maturities between one year and three years.

Barclays Capital Aggregate Bond Index:

(Formerly known as Lehman Brothers Aggregate Bond Index.) A broad-based index intended to represent the U.S. fixed-income market.

Barclays Capital Government/Mortgage Index:

(Formerly known as Lehman Brothers Government/Mortgage Index.) A combination of the Barclays Capital Government Index and the Barclays Capital Mortgage-Backed Securities (MBS) Index. The Government Index includes all government bonds including, but not limited to, U.S. Treasury bonds and government-sponsored agency securities, with no maturity restrictions. The MBS Index includes all securitized mortgage pools by GNMA, FNMA, and the FHLMC.

Barclays Capital U.S. Corporate High Yield 2% Issuer Capped Index:

An unmanaged index comprised of fixed rate, non-investment grade debt securities that are dollar denominated. The index limits the maximum exposure to any one issuer to 2%.

Barclays Capital U.S. Treasury TIPS (Treasury Inflation Protection Securities) Index:

(Formerly known as Lehman Brothers U.S. Treasury TIPS (Treasury Inflation Protection Securities) Index.) An index of inflation-protected U.S. Treasury securities that will mature in one year or longer.

Capital Market Benchmark (20/80):

Is intended to represent a relevant proxy for market and Portfolio performance. It is allocated as follows: 20% S&P 500 and 80% Barclays Capital Aggregate Bond Index.

Capital Market Benchmark (40/60):

Is intended to represent a relevant proxy for market and Portfolio performance. It is allocated as follows: 40% S&P 500 and 60% Barclays Capital Aggregate Bond Index.

Capital Market Benchmark (60/40):

Is intended to represent a relevant proxy for market and Portfolio performance. It is allocated as follows: 60% S&P 500 and 40% Barclays Capital Aggregate Bond Index.

Capital Market Benchmark (80/20):

Is intended to represent a relevant proxy for market and Portfolio performance. It is allocated as follows: 80% S&P 500 and 20% Barclays Capital Aggregate Bond Index.

Citigroup Broad Investment-Grade Bond Index:

Measures the performance of bonds, including U.S. and non-U.S. corporate securities and non-U.S. sovereign and provincial securities. It includes institutionally traded U.S. Treasury, government-sponsored, mortgage, asset-backed, and investment-grade securities.

Citigroup Broad Investment-Grade Credit 1–3 Years Index:

Measures the performance of bonds, including U.S. and non-U.S. corporate securities and non-U.S. sovereign and provincial securities, with maturities between one and three years.

Citigroup Broad Market (BMI) World ex-US Index:

A float-weighted, rules-based benchmark of the institutionally investable universe of all companies (excluding companies domiciled in the U.S.) with an available free float market cap of U.S. $100 million and above.

Citigroup Mortgage Index:

Represents the mortgage-backed securities component of Citigroup’s Broad Investment-Grade Bond Index. It consists of 30- and 15-year agency-issued (GNMA, FNMA, and FHLMC) pass-through securities as well as FNMA and FHLMC balloon mortgages.

Citigroup U.S. High-Yield Market Capped Index:

Measures the performance of below-investment-grade debt issued by corporations domiciled in the U.S. or Canada, with the imposition of a cap on the par amount of each issuer and delayed entry of fallen angels following their downgrade.

FTSE EPRA/NAREIT Global Real Estate Index:

Is designed to represent general trends in eligible real estate equities worldwide.

Merrill Lynch Hybrid Preferred Securities Index:

An index of investment-grade, exchange-traded preferred stocks with outstanding market values of at least $30 million and at least one year to maturity.

Morgan Stanley Capital International All Country World ex-US Index (MSCI ACWI ex-US Index):

A market capitalization-weighted index designed to measure equity market performance in 47 global developed and emerging markets, excluding the U.S.

Morgan Stanley Capital International (MSCI) —EAFE Index NDTR D:

Is listed for foreign stock funds (EAFE refers to Europe, Australia, and Far East). Widely accepted as a benchmark for international stock performance, the EAFE Index is an aggregate of 21 individual country indexes.

75

Glossary

Morgan Stanley Capital International (MSCI) EMF (Emerging Markets Free) Index:

Measures the stock returns of companies in 27 developing countries.

Morgan Stanley Capital International (MSCI) U.S. REIT Index:

A total-return index comprised of the most actively traded real estate investment trusts and designed to be a measure of real estate equity performance.

Morgan Stanley Capital International (MSCI) World Index:

A free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

Morningstar Conservative Allocation Category Average:

An average of the net asset value (NAV) returns of domestic mutual funds with 20–50% invested in equities and 50–80% invested in fixed income and cash.

Morningstar Diversified Emerging Markets Category Average:

Diversified emerging-markets portfolios tend to divide their assets among 20 or more nations, although they tend to focus on the emerging markets of Asia and Latin America rather than on those of the Middle East, Africa, or Europe. These portfolios invest at least 70% of total assets in equities and invest at least 50% of stock assets in emerging markets.

Morningstar Foreign Large Blend Category Average:

Foreign large-blend portfolios invest in a variety of big international stocks. Most of these portfolios divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These portfolios primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex-Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios typically will have less than 20% of assets invested in U.S. stocks.

Morningstar Foreign Large Growth Category Average:

Foreign large-growth portfolios focus on high-priced growth stocks, mainly outside of the United States. Most of these portfolios divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These portfolios primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex-Japan). Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields). These portfolios typically will have less than 20% of assets invested in U.S. stocks.

Morningstar Global Real Estate Category Average:

These funds invest primarily in non-U.S. real estate securities, but may also include U.S. real estate securities. Such securities include debt and equity securities, convertible securities, and securities issued by Real Estate Investment Trusts (REITs). At least 40 percent of the fund’s holdings must be non-U.S. securities.

Morningstar High Yield Bond Category Average:

High-yield bond portfolios concentrate on lower-quality bonds, which are riskier than those of higher-quality companies. These portfolios generally offer higher yields than other types of portfolios, but they are also more vulnerable to economic and credit risk. These portfolios primarily invest in U.S. high-income debt securities where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor’s or Moody’s at the level of BB (considered speculative for taxable bonds) and below.

Morningstar Inflation-Protected Bond Category Average:

Inflation-protected bond portfolios primarily invest in fixed-income securities that increase coupon and/or principal payments at the rate of inflation. These bonds can be issued by any organization, but the U.S. Treasury is currently the largest issuer of these types of securities. Most of these portfolios buy bonds with intermediate- to long-term maturities

Morningstar Intermediate Bond Category Average:

Intermediate-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of 3.5 to six years (or, if duration is unavailable, average effective maturities of four to 10 years). These portfolios are less sensitive to interest rates, and therefore less volatile, than portfolios that have longer durations.

Morningstar Intermediate Government Category Average:

Intermediate-government portfolios have at least 90% of their bond holdings in bonds backed by the U.S. government or by government-linked agencies. This backing minimizes the credit risk of these portfolios, as the U.S. government is unlikely to default on its debt. These portfolios have durations between 3.5 and six years (or, if duration is unavailable, average effective maturities between four and 10 years). Consequently, the group’s performance — and its level of volatility — tends to fall between that of the short government and long government bond categories.

Morningstar Large Blend Category Average:

An average of the net asset value (NAV) returns of domestic mutual funds that focus on large companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries.

76

Glossary

Morningstar Large Growth Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest in large U.S companies that are projected to grow faster than other large-cap stocks.

Morningstar Large Value Category Average:

An average of the net asset value (NAV) returns of mutual funds that invest primarily in big U.S. companies that are less expensive or growing more slowly than other large-cap stocks.

Morningstar Mid-Cap Blend Category Average:

The typical mid-cap blend portfolio invests in U.S. stocks of various sizes and styles, giving it a middle-of-the-road profile. Most shy away from high-priced growth stocks, but aren’t so price-conscious that they land in value territory. The U.S. mid-cap range for market capitalization typically falls between $1 billion–$8 billion and represents 20% of the total capitalization of the U.S. equity market. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.

Morningstar Mid-Cap Growth Category Average:

Some mid-cap growth portfolios invest in stocks of all sizes, thus leading to a mid-cap profile, but others focus on midsize companies. Mid-cap growth portfolios target U.S. firms that are projected to grow faster than other mid-cap stocks, therefore commanding relatively higher prices. The U.S. mid-cap range for market capitalization typically falls between $1 billion–$8 billion and represents 20% of the total capitalization of the U.S. equity market. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Morningstar Mid-Cap Value Category Average:

Some mid-cap value portfolios focus on medium-size companies while others land here because they own a mix of small-, mid-, and large-cap stocks. All look for U.S. stocks that are less expensive or growing more slowly than the market. The U.S. mid-cap range for market capitalization typically falls between $1 billion–$8 billion and represents 20% of the total capitalization of the U.S. equity market. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

Morningstar Moderate Allocation Category Average:

An average of the net asset value (NAV) returns of mutual funds with 50–70% invested in equities and the remainder invested in fixed income and cash.

Morningstar Short-Term Bond Category Average:

Short-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of one to 3.5 years (or, if duration is unavailable, average effective maturities of one to four years). These portfolios are attractive to fairly conservative investors, because they are less sensitive to interest rates than portfolios with longer durations.

Morningstar Small Blend Category Average:

Small-blend portfolios favor U.S. firms at the smaller end of the market-capitalization range. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages. Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as small-cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.

Morningstar Small Growth Category Average:

Small-growth portfolios focus on faster-growing companies whose shares are at the lower end of the market-capitalization range. These portfolios tend to favor companies in up-and-coming industries or young firms in their early growth stages. Because these businesses are fast-growing and often richly valued, their stocks tend to be volatile. Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as small-cap. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Morningstar Small Value Category Average:

Small-value portfolios invest in small U.S. companies with valuations and growth rates below other small-cap peers. Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as small-cap. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

Morningstar Specialty — Real Estate Category Average:

Specialty-real estate portfolios invest primarily in real-estate investment trusts (REITs) of various types. REITs are companies that develop and manage real-estate properties. There are several different types of REITs, including apartment, factory-outlet, health-care, hotel, industrial, mortgage, office, and shopping center REITs. Some portfolios in this category also invest in real-estate operating companies.

Primary Index: Standard & Poor’s 500 Secondary Index: Wilshire REIT

Morningstar Target-Date 2000–2014 Category Average:

Target-date portfolios provide diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind (in this case, the years 2000–2014) for retirement or another goal. These portfolios aim to provide investors with an optimal level of return and risk, based solely on the target date. These portfolios get more conservative as the goal date approaches by investing more in bonds and cash. Investment managers structure these portfolios differently; two funds with the same goal year may have different allocations to equities and therefore different levels of return and risk.

77

Glossary

Morningstar Target-Date 2015–2029 Category Average:

Target-date portfolios provide diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind (in this case, the years 2015–2029) for retirement or another goal. These portfolios aim to provide investors with an optimal level of return and risk, based solely on the target date. These portfolios get more conservative as the goal date approaches by investing more in bonds and cash. Investment managers structure these portfolios differently; two funds with the same goal year may have different allocations to equities and therefore different levels of return and risk.

Morningstar Target-Date 2030+ Category Average:

Target-date portfolios provide diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind (in this case, the year 2030 and beyond) for retirement or another goal. These portfolios aim to provide investors with an optimal level of return and risk, based solely on the target date. These portfolios get more conservative as the goal date approaches by investing more in bonds and cash. Investment managers structure these portfolios differently; two funds with the same goal year may have different allocations to equities and therefore different levels of return and risk.

Morningstar Ultrashort Bond Category Average:

Ultrashort bond portfolios invest primarily in investment-grade U.S. fixed-income issues and have durations of less than one year (or, if duration is unavailable, average effective maturities of less than one year). This category can include corporate or government ultrashort bond portfolios, but it excludes international, convertible, multisector, and high yield bond portfolios. Due to their focus on bonds with very short durations, these portfolios offer minimal interest-rate sensitivity and therefore low risk and total return potential.

Morningstar World Stock Category Average:

World-stock portfolios have few geographical limitations. It is common for these portfolios to invest the majority of their assets in the U.S., Europe, and Japan, with the remainder divided among the globe’s smaller markets. These portfolios typically have 20%–60% of assets in U.S. stocks.

Preferreds Blended Index:

Is composed of 65% Merrill Lynch Fixed Rate Preferred Securities Index and 35% Barclays Capital U.S. Tier I Capital Securities Index.

Principal LifeTime 2010 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2010 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2015 Blended Index:

Composed of underlying indices that represent the target allocation weightings of the Principal LifeTime 2015 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2020 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2020 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2025 Blended Index:

Composed of underlying indices that represent the target allocation weightings of the Principal LifeTime 2025 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2030 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2030 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2035 Blended Index:

Composed of underlying indices that represent the target allocation weightings of the Principal LifeTime 2035 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2040 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2040 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2045 Blended Index:

Composed of underlying indices that represent the target allocation weightings of the Principal LifeTime 2045 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2050 Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime 2050 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

Principal LifeTime 2055 Blended Index:

Composed of underlying indices that represent the target allocation weightings of the Principal LifeTime 2055 Fund. The index weightings adjust over time as the portfolio changes to become gradually more conservative.

78

Glossary

Principal LifeTime Strategic Income Blended Index:

Composed of underlying indices that represent the target asset allocation weightings of the Principal LifeTime Strategic Income Fund.

Russell 1000^® Growth Index:

Measures the performance of those Russell 1000^® Index securities with higher price-to-book ratios and higher forecasted growth values

Russell 1000^® Value Index:

Measures the performance of those Russell 1000^® Index securities with lower price-to-book ratios and lower forecasted growth values

Russell 2000^® Index:

Measures the performance of the 2,000 smallest stocks in the Russell 3000^® Index.

Russell 2000^® Growth Index:

Measures the performance of those Russell 2000^® Index securities with higher price-to-book ratios and higher forecasted growth values

Russell 2000^® Value Index:

Measures the performance of those Russell 2000^® Index securities with lower price-to-book ratios and lower forecasted growth values

Russell 2500^® Growth Index:

Measures the performance of the 2,500 smallest companies in the Russell 3000^® Growth Index with higher price-to-book ratios and higher forecasted growth values.

Russell 3000^® Index:

Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

Russell Midcap^® Index:

Measures the performance of the 800 smallest stocks in the Russell 1000^® Index.

Russell Midcap^® Growth Index:

Measures the performance of those Russell Midcap^® Index securities with higher price-to-book ratios and higher forecasted growth values.

Russell Midcap^® Value Index:

Measures the performance of those Russell Midcap^® Index securities with lower price-to-book ratios and lower forecasted growth values.

S&P 500 Index:

A broad-based index intended to represent the U.S. equity market

S&P 500/Citigroup Value Index:

A float-adjusted market-capitalization-weighted index comprised of stocks representing approximately half the market capitalization of the S&P 500 that have been identified as being on the value end of the growth-value spectrum.

.

S&P MidCap 400 Index:

A weighted index of the common stocks of 400 mid-size companies.

S&P SmallCap 600 Index:

A small cap index that consists of 600 domestic stocks chosen for market size, liquidity, and industry group representation.

NOTE: S&P 500, S&P MidCap 400, and S&P 600 Index are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Principal Life Insurance Company and Principal Management Corporation. The products are not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of investing in the products.

79

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)

As a shareholder of Principal Funds, Inc., you incur two types of costs: (1) transaction costs (for Class J shares only), including contingent deferred sales charges; and under certain limited circumstances redemption fees or exchange fees; and (2) ongoing costs, including management fees; distribution fees (for certain share classes); and other fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in Principal Funds, Inc. and to compare these costs with the ongoing costs of investing in other mutual funds. As a shareholder of Principal LifeTime 2010 Fund, Principal LifeTime 2015 Fund, Principal LifeTime 2020 Fund, Principal LifeTime 2025 Fund, Principal LifeTime 2030 Fund, Principal LifeTime 2035 Fund, Principal LifeTime 2040 Fund, Principal LifeTime 2045 Fund, Principal LifeTime 2050 Fund, Principal LifeTime 2055 Fund, Principal LifeTime Strategic Income Fund, SAM Balanced Portfolio, SAM Conservative Balanced Portfolio, SAM Conservative Growth Portfolio, SAM Flexible Income Portfolio, or SAM Strategic Growth Portfolio, your fund will indirectly bear its pro rata share of the expenses incurred by the investment companies in which the fund invests. These expenses are not included in the fund’s annualized expense ratio used to calculate the expenses paid in this example. If they were, the expenses paid would be higher.

The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (May 1, 2008 to October 31, 2008), unless otherwise noted.

Actual Expenses

The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. An annual fee of $15.00 or $30.00 may apply to IRA or 403(b) accounts within Class J shares, respectively. R-1, R-2, R-3, R-4, and R-5 classes of shares may be purchased only through retirement plans. Such plans may impose fees in addition to those charged by the Fund. These fees are not included in the table below. If they were, the estimate of expenses you paid during the period would be higher, and your ending account value lower, by this amount.

Hypothetical Example for Comparison Purposes

The second section of the table below provides information about hypothetical account values and hypothetical expenses based on each funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in Principal Funds, Inc. and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as contingent deferred sales charges, redemption fees or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
Bond & Mortgage Securities Fund
Class J	$1,000.00	$872.77	$5.04	$1,000.00	$1,019.76	$5.43	1.07%
Institutional	1,000.00	875.78	2.40	1,000.00	1,022.57	2.59	0.51
R-1	1,000.00	871.69	6.54	1,000.00	1,018.15	7.05	1.39
R-2	1,000.00	872.42	5.93	1,000.00	1,018.80	6.39	1.26
R-3	1,000.00	873.64	5.09	1,000.00	1,019.71	5.48	1.08
R-4	1,000.00	874.25	4.19	1,000.00	1,020.66	4.52	0.89
R-5	1,000.00	874.19	3.63	1,000.00	1,021.27	3.91	0.77
Core Plus Bond Fund I
Institutional(b)	1,000.00	995.00	0.55(b)	1,000.00	1,021.87	3.30	0.65
R-1(b)	1,000.00	994.00	1.29(b)	1,000.00	1,017.44	7.76	1.53
R-2(b)	1,000.00	994.00	1.18(b)	1,000.00	1,018.10	7.10	1.40
R-3(b)	1,000.00	994.00	1.03(b)	1,000.00	1,019.00	6.19	1.22
R-4(b)	1,000.00	994.00	0.87(b)	1,000.00	1,019.96	5.23	1.03
R-5(b)	1,000.00	994.00	0.77(b)	1,000.00	1,020.56	4.62	0.91

80

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
Disciplined LargeCap Blend Fund
Institutional	$1,000.00	$701.69	$2.44	$1,000.00	$1,022.27	$2.90	0.57%
R-1	1,000.00	698.09	6.19	1,000.00	1,017.85	7.35	1.45
R-2	1,000.00	699.00	5.64	1,000.00	1,018.50	6.70	1.32
R-3	1,000.00	699.36	4.87	1,000.00	1,019.41	5.79	1.14
R-4	1,000.00	700.21	4.06	1,000.00	1,020.36	4.82	0.95
R-5	1,000.00	700.85	3.55	1,000.00	1,020.96	4.22	0.83
Diversified International Fund
Class J	1,000.00	563.89	5.90	1,000.00	1,017.60	7.61	1.50
Institutional	1,000.00	564.92	3.74	1,000.00	1,020.36	4.82	0.95
R-1	1,000.00	562.50	7.19	1,000.00	1,015.94	9.27	1.83
R-2	1,000.00	563.32	6.68	1,000.00	1,016.59	8.62	1.70
R-3	1,000.00	563.59	5.97	1,000.00	1,017.50	7.71	1.52
R-4	1,000.00	564.24	5.23	1,000.00	1,018.45	6.75	1.33
R-5	1,000.00	564.92	4.76	1,000.00	1,019.05	6.14	1.21
Equity Income Fund
Institutional	1,000.00	731.50	2.26	1,000.00	1,022.52	2.64	0.52
Global Equity Fund I
Institutional	1,000.00	620.11	4.85	1,000.00	1,019.15	6.04	1.19
R-1	1,000.00	617.38	8.42	1,000.00	1,014.73	10.48	2.07
R-2	1,000.00	617.99	7.89	1,000.00	1,015.38	9.83	1.94
R-3	1,000.00	618.54	7.16	1,000.00	1,016.29	8.92	1.76
R-4	1,000.00	618.88	6.39	1,000.00	1,017.24	7.96	1.57
R-5	1,000.00	619.09	5.90	1,000.00	1,017.85	7.35	1.45
Global Real Estate Securities Fund
Institutional	1,000.00	588.02	3.75	1,000.00	1,020.41	4.77	0.94
Government & High Quality Bond
Fund
Class J	1,000.00	962.08	4.98	1,000.00	1,020.06	5.13	1.01
Institutional	1,000.00	968.02	2.08	1,000.00	1,023.03	2.14	0.42
R-1	1,000.00	960.64	6.41	1,000.00	1,018.60	6.60	1.30
R-2	1,000.00	961.11	5.77	1,000.00	1,019.25	5.94	1.17
R-3	1,000.00	962.00	4.88	1,000.00	1,020.16	5.03	0.99
R-4	1,000.00	962.04	3.95	1,000.00	1,021.11	4.06	0.80
R-5	1,000.00	962.63	3.35	1,000.00	1,021.72	3.46	0.68
High Quality Intermediate-Term Bond
Fund
Class J	1,000.00	869.22	5.12	1,000.00	1,019.66	5.53	1.09
Institutional	1,000.00	871.74	2.07	1,000.00	1,022.92	2.24	0.44
R-1	1,000.00	867.47	6.20	1,000.00	1,018.50	6.70	1.32
R-2	1,000.00	868.29	5.59	1,000.00	1,019.15	6.04	1.19
R-3	1,000.00	868.55	4.74	1,000.00	1,020.06	5.13	1.01
R-4	1,000.00	869.43	3.85	1,000.00	1,021.01	4.17	0.82
R-5	1,000.00	870.71	3.29	1,000.00	1,021.62	3.56	0.70
High Yield Fund
Institutional	1,000.00	772.85	2.36	1,000.00	1,022.47	2.69	0.53
High Yield Fund I
Institutional	1,000.00	799.02	2.94	1,000.00	1,021.87	3.30	0.65
Income Fund
Institutional	1,000.00	896.24	2.38	1,000.00	1,022.62	2.54	0.50
Inflation Protection Fund
Class J	1,000.00	836.44	5.31	1,000.00	1,019.36	5.84	1.15
Institutional	1,000.00	839.32	1.90	1,000.00	1,023.08	2.08	0.41
R-1	1,000.00	835.34	5.95	1,000.00	1,018.65	6.55	1.29
R-2	1,000.00	836.83	5.36	1,000.00	1,019.30	5.89	1.16
R-3	1,000.00	836.74	4.52	1,000.00	1,020.21	4.98	0.98
R-4	1,000.00	837.47	3.65	1,000.00	1,021.17	4.01	0.79
R-5	1,000.00	838.12	3.10	1,000.00	1,021.77	3.40	0.67

81

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
International Emerging Markets Fund
Class J	$1,000.00	$475.04	$6.82	$1,000.00	$1,015.89	$9.32	1.84%
Institutional	1,000.00	476.32	4.79	1,000.00	1,018.65	6.55	1.29
R-1	1,000.00	474.03	8.04	1,000.00	1,014.23	10.99	2.17
R-2	1,000.00	474.52	7.56	1,000.00	1,014.88	10.33	2.04
R-3	1,000.00	474.68	6.89	1,000.00	1,015.79	9.42	1.86
R-4	1,000.00	475.23	6.19	1,000.00	1,016.74	8.47	1.67
R-5	1,000.00	475.61	5.75	1,000.00	1,017.34	7.86	1.55
International Fund I
Institutional	1,000.00	577.70	4.40	1,000.00	1,019.56	5.63	1.11
R-1	1,000.00	575.10	7.88	1,000.00	1,015.13	10.08	1.99
R-2	1,000.00	575.68	7.37	1,000.00	1,015.79	9.42	1.86
R-3	1,000.00	576.24	6.66	1,000.00	1,016.69	8.52	1.68
R-4	1,000.00	576.97	5.91	1,000.00	1,017.65	7.56	1.49
R-5	1,000.00	576.97	5.43	1,000.00	1,018.25	6.95	1.37
International Growth Fund
Class J	1,000.00	559.97	6.08	1,000.00	1,017.34	7.86	1.55
Institutional	1,000.00	561.84	3.97	1,000.00	1,020.06	5.13	1.01
R-1	1,000.00	558.99	7.41	1,000.00	1,015.63	9.58	1.89
R-2	1,000.00	559.53	6.90	1,000.00	1,016.29	8.92	1.76
R-3	1,000.00	560.00	6.20	1,000.00	1,017.19	8.01	1.58
R-4	1,000.00	561.02	5.45	1,000.00	1,018.15	7.05	1.39
R-5	1,000.00	561.17	4.98	1,000.00	1,018.75	6.44	1.27
International Value Fund I
Institutional(b)	1,000.00	862.00	0.89(b)	1,000.00	1,019.46	5.74	1.13
LargeCap Blend Fund I
Class J	1,000.00	711.26	4.39	1,000.00	1,020.01	5.18	1.02
Institutional	1,000.00	713.81	1.94	1,000.00	1,022.87	2.29	0.45
R-1	1,000.00	710.00	5.72	1,000.00	1,018.45	6.75	1.33
R-2	1,000.00	711.28	5.16	1,000.00	1,019.10	6.09	1.20
R-3	1,000.00	711.45	4.39	1,000.00	1,020.01	5.18	1.02
R-4	1,000.00	711.77	3.57	1,000.00	1,020.96	4.22	0.83
R-5	1,000.00	713.50	3.06	1,000.00	1,021.57	3.61	0.71
LargeCap Blend Fund II
Class J	1,000.00	704.11	5.35	1,000.00	1,018.85	6.34	1.25
Institutional	1,000.00	705.37	3.22	1,000.00	1,021.37	3.81	0.75
R-1	1,000.00	702.25	6.97	1,000.00	1,016.94	8.26	1.63
R-2	1,000.00	702.27	6.42	1,000.00	1,017.60	7.61	1.50
R-3	1,000.00	703.05	5.65	1,000.00	1,018.50	6.70	1.32
R-4	1,000.00	703.81	4.84	1,000.00	1,019.46	5.74	1.13
R-5	1,000.00	704.90	4.33	1,000.00	1,020.06	5.13	1.01
LargeCap Growth Fund
Class J	1,000.00	691.67	5.70	1,000.00	1,018.40	6.80	1.34
Institutional	1,000.00	694.22	2.64	1,000.00	1,022.02	3.15	0.62
R-1	1,000.00	691.24	6.38	1,000.00	1,017.60	7.61	1.50
R-2	1,000.00	692.31	5.83	1,000.00	1,018.25	6.95	1.37
R-3	1,000.00	692.98	5.06	1,000.00	1,019.15	6.04	1.19
R-4	1,000.00	693.16	4.26	1,000.00	1,020.11	5.08	1.00
R-5	1,000.00	694.29	3.75	1,000.00	1,020.71	4.47	0.88
LargeCap Growth Fund I
Class J	1,000.00	671.14	5.80	1,000.00	1,018.20	7.00	1.38
Institutional	1,000.00	672.84	3.07	1,000.00	1,021.47	3.71	0.73
R-1	1,000.00	669.20	6.76	1,000.00	1,017.04	8.16	1.61
R-2	1,000.00	669.70	6.21	1,000.00	1,017.70	7.51	1.48
R-3	1,000.00	671.28	5.46	1,000.00	1,018.60	6.60	1.30
R-4	1,000.00	671.30	4.66	1,000.00	1,019.56	5.63	1.11
R-5	1,000.00	671.66	4.16	1,000.00	1,020.16	5.03	0.99

82

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
LargeCap Growth Fund II
Class J	$1,000.00	$702.56	$6.51	$1,000.00	$1,017.50	$7.71	1.52%
Institutional	1,000.00	704.57	3.98	1,000.00	1,020.46	4.72	0.93
R-1	1,000.00	701.33	7.74	1,000.00	1,016.04	9.17	1.81
R-2	1,000.00	702.50	7.19	1,000.00	1,016.69	8.52	1.68
R-3	1,000.00	703.20	6.42	1,000.00	1,017.60	7.61	1.50
R-4	1,000.00	703.39	5.61	1,000.00	1,018.55	6.65	1.31
R-5	1,000.00	703.84	5.10	1,000.00	1,019.15	6.04	1.19
LargeCap S&P 500 Index Fund
Class J	1,000.00	705.09	2.91	1,000.00	1,021.72	3.46	0.68
Institutional	1,000.00	706.79	0.69	1,000.00	1,024.33	0.81	0.16
R-1	1,000.00	703.51	4.45	1,000.00	1,019.91	5.28	1.04
R-2	1,000.00	704.43	3.90	1,000.00	1,020.56	4.62	0.91
R-3	1,000.00	704.01	3.13	1,000.00	1,021.47	3.71	0.73
R-4	1,000.00	705.94	2.32	1,000.00	1,022.42	2.75	0.54
R-5	1,000.00	705.70	1.80	1,000.00	1,023.03	2.14	0.42
LargeCap Value Fund
Class J	1,000.00	710.53	4.86	1,000.00	1,019.46	5.74	1.13
Institutional	1,000.00	712.37	1.94	1,000.00	1,022.87	2.29	0.45
R-1	1,000.00	709.91	5.72	1,000.00	1,018.45	6.75	1.33
R-2	1,000.00	709.27	5.16	1,000.00	1,019.10	6.09	1.20
R-3	1,000.00	710.29	4.39	1,000.00	1,020.01	5.18	1.02
R-4	1,000.00	711.45	3.57	1,000.00	1,020.96	4.22	0.83
R-5	1,000.00	712.37	3.06	1,000.00	1,021.57	3.61	0.71
LargeCap Value Fund I
Institutional	1,000.00	686.77	3.35	1,000.00	1,021.17	4.01	0.79
R-1	1,000.00	683.96	7.07	1,000.00	1,016.74	8.47	1.67
R-2	1,000.00	684.54	6.52	1,000.00	1,017.39	7.81	1.54
R-3	1,000.00	685.29	5.76	1,000.00	1,018.30	6.90	1.36
R-4	1,000.00	685.78	4.96	1,000.00	1,019.25	5.94	1.17
R-5	1,000.00	685.49	4.45	1,000.00	1,019.86	5.33	1.05
LargeCap Value Fund II
Institutional	1,000.00	698.33	3.76	1,000.00	1,020.71	4.47	0.88
R-1	1,000.00	695.18	7.50	1,000.00	1,016.29	8.92	1.76
R-2	1,000.00	696.17	6.95	1,000.00	1,016.94	8.26	1.63
R-3	1,000.00	696.76	6.18	1,000.00	1,017.85	7.35	1.45
R-4	1,000.00	696.38	5.37	1,000.00	1,018.80	6.39	1.26
R-5	1,000.00	697.36	4.86	1,000.00	1,019.41	5.79	1.14
LargeCap Value Fund III
Class J	1,000.00	662.44	5.43	1,000.00	1,018.60	6.60	1.30
Institutional	1,000.00	663.80	3.26	1,000.00	1,021.22	3.96	0.78
R-1	1,000.00	661.42	6.93	1,000.00	1,016.79	8.42	1.66
R-2	1,000.00	661.65	6.39	1,000.00	1,017.44	7.76	1.53
R-3	1,000.00	662.07	5.64	1,000.00	1,018.35	6.85	1.35
R-4	1,000.00	662.74	4.85	1,000.00	1,019.30	5.89	1.16
R-5	1,000.00	663.27	4.35	1,000.00	1,019.91	5.28	1.04
MidCap Blend Fund
Class J	1,000.00	704.63	5.14	1,000.00	1,019.10	6.09	1.20
Institutional	1,000.00	706.71	2.79	1,000.00	1,021.87	3.30	0.65
R-1	1,000.00	703.84	6.55	1,000.00	1,017.44	7.76	1.53
R-2	1,000.00	704.29	6.00	1,000.00	1,018.10	7.10	1.40
R-3	1,000.00	704.31	5.23	1,000.00	1,019.00	6.19	1.22
R-4	1,000.00	705.41	4.42	1,000.00	1,019.96	5.23	1.03
R-5	1,000.00	705.54	3.90	1,000.00	1,020.56	4.62	0.91
MidCap Growth Fund
Class J	1,000.00	681.08	6.04	1,000.00	1,017.95	7.25	1.43
Institutional	1,000.00	682.16	3.09	1,000.00	1,021.47	3.71	0.73
R-1	1,000.00	680.52	6.80	1,000.00	1,017.04	8.16	1.61
R-2	1,000.00	681.01	6.25	1,000.00	1,017.70	7.51	1.48
R-3	1,000.00	682.04	5.50	1,000.00	1,018.60	6.60	1.30
R-4	1,000.00	681.43	4.69	1,000.00	1,019.56	5.63	1.11
R-5	1,000.00	682.10	4.19	1,000.00	1,020.16	5.03	0.99

83

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
MidCap Growth Fund I
Institutional	$1,000.00	$637.27	$4.28	$1,000.00	$1,019.91	$5.28	1.04%
R-1	1,000.00	634.91	7.89	1,000.00	1,015.48	9.73	1.92
R-2	1,000.00	634.91	7.36	1,000.00	1,016.14	9.07	1.79
R-3	1,000.00	635.51	6.62	1,000.00	1,017.04	8.16	1.61
R-4	1,000.00	635.86	5.84	1,000.00	1,018.00	7.20	1.42
R-5	1,000.00	636.03	5.35	1,000.00	1,018.60	6.60	1.30
MidCap Growth Fund II
Institutional	1,000.00	596.66	4.09	1,000.00	1,020.01	5.18	1.02
R-1	1,000.00	594.57	7.62	1,000.00	1,015.58	9.63	1.90
R-2	1,000.00	594.59	7.09	1,000.00	1,016.24	8.97	1.77
R-3	1,000.00	595.06	6.38	1,000.00	1,017.14	8.06	1.59
R-4	1,000.00	595.52	5.61	1,000.00	1,018.10	7.10	1.40
R-5	1,000.00	596.60	5.14	1,000.00	1,018.70	6.50	1.28
MidCap Growth Fund III
Class J	1,000.00	614.91	3.90	1,000.00	1,020.31	4.88	0.96
Institutional	1,000.00	616.65	2.56	1,000.00	1,021.97	3.20	0.63
R-1	1,000.00	614.23	6.13	1,000.00	1,017.55	7.66	1.51
R-2	1,000.00	614.24	5.60	1,000.00	1,018.20	7.00	1.38
R-3	1,000.00	615.16	4.87	1,000.00	1,019.10	6.09	1.20
R-4	1,000.00	616.12	4.10	1,000.00	1,020.06	5.13	1.01
R-5	1,000.00	615.89	3.62	1,000.00	1,020.66	4.52	0.89
MidCap S&P 400 Index Fund
Class J	1,000.00	681.39	3.34	1,000.00	1,021.17	4.01	0.79
Institutional	1,000.00	683.05	0.72	1,000.00	1,024.28	0.87	0.17
R-1	1,000.00	680.03	4.43	1,000.00	1,019.86	5.33	1.05
R-2	1,000.00	680.79	3.89	1,000.00	1,020.51	4.67	0.92
R-3	1,000.00	681.69	3.13	1,000.00	1,021.42	3.76	0.74
R-4	1,000.00	681.66	2.32	1,000.00	1,022.37	2.80	0.55
R-5	1,000.00	682.55	1.82	1,000.00	1,022.97	2.19	0.43
MidCap Stock Fund
Institutional	1,000.00	727.16	3.30	1,000.00	1,021.32	3.86	0.76
MidCap Value Fund I
Institutional	1,000.00	688.10	4.24	1,000.00	1,020.11	5.08	1.00
R-1	1,000.00	685.71	7.97	1,000.00	1,015.69	9.53	1.88
R-2	1,000.00	685.41	7.41	1,000.00	1,016.34	8.87	1.75
R-3	1,000.00	686.13	6.65	1,000.00	1,017.24	7.96	1.57
R-4	1,000.00	687.15	5.85	1,000.00	1,018.20	7.00	1.38
R-5	1,000.00	687.90	5.35	1,000.00	1,018.80	6.39	1.26
MidCap Value Fund II
Class J	1,000.00	641.18	6.64	1,000.00	1,017.04	8.16	1.61
Institutional	1,000.00	643.20	4.21	1,000.00	1,020.01	5.18	1.02
R-1	1,000.00	640.16	7.83	1,000.00	1,015.58	9.63	1.90
R-2	1,000.00	640.66	7.30	1,000.00	1,016.24	8.97	1.77
R-3	1,000.00	640.68	6.56	1,000.00	1,017.14	8.06	1.59
R-4	1,000.00	641.13	5.78	1,000.00	1,018.10	7.10	1.40
R-5	1,000.00	642.40	5.28	1,000.00	1,018.70	6.50	1.28
MidCap Value Fund III
Class J	1,000.00	697.56	5.12	1,000.00	1,019.10	6.09	1.20
Institutional	1,000.00	699.44	2.95	1,000.00	1,021.67	3.51	0.69
R-1	1,000.00	695.91	6.69	1,000.00	1,017.24	7.96	1.57
R-2	1,000.00	697.17	6.14	1,000.00	1,017.90	7.30	1.44
R-3	1,000.00	697.83	5.38	1,000.00	1,018.80	6.39	1.26
R-4	1,000.00	697.56	4.57	1,000.00	1,019.76	5.43	1.07
R-5	1,000.00	698.41	4.06	1,000.00	1,020.36	4.82	0.95

84

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
Money Market Fund
Class J	$1,000.00	$1,009.84	$4.34	$1,000.00	$1,020.81	$4.37	0.86%
Institutional	1,000.00	1,012.20	1.97	1,000.00	1,023.18	1.98	0.39
R-1	1,000.00	1,007.69	6.41	1,000.00	1,018.75	6.44	1.27
R-2	1,000.00	1,008.35	5.76	1,000.00	1,019.41	5.79	1.14
R-3	1,000.00	1,009.27	4.85	1,000.00	1,020.31	4.88	0.96
R-4	1,000.00	1,010.25	3.89	1,000.00	1,021.27	3.91	0.77
R-5	1,000.00	1,010.87	3.29	1,000.00	1,021.87	3.30	0.65
Mortgage Securities Fund
Institutional	1,000.00	996.00	2.51	1,000.00	1,022.62	2.54	0.50
Preferred Securities Fund
Class J	1,000.00	718.83	6.52	1,000.00	1,017.55	7.66	1.51
Institutional	1,000.00	721.85	2.94	1,000.00	1,021.72	3.46	0.68
R-1	1,000.00	718.41	6.74	1,000.00	1,017.29	7.91	1.56
R-2	1,000.00	717.99	6.18	1,000.00	1,017.95	7.25	1.43
R-3	1,000.00	718.90	5.40	1,000.00	1,018.85	6.34	1.25
R-4	1,000.00	719.60	4.58	1,000.00	1,019.81	5.38	1.06
R-5	1,000.00	720.32	4.06	1,000.00	1,020.41	4.77	0.94
Principal LifeTime 2010 Fund
Class J	1,000.00	738.92	2.45	1,000.00	1,022.32	2.85	0.56
Institutional	1,000.00	739.97	0.57	1,000.00	1,024.48	0.66	0.13
R-1	1,000.00	737.10	4.41	1,000.00	1,020.06	5.13	1.01
R-2	1,000.00	737.44	3.84	1,000.00	1,020.71	4.47	0.88
R-3	1,000.00	738.08	3.06	1,000.00	1,021.62	3.56	0.70
R-4	1,000.00	739.31	2.23	1,000.00	1,022.57	2.59	0.51
R-5	1,000.00	739.73	1.71	1,000.00	1,023.18	1.98	0.39
Principal LifeTime 2015 Fund
Institutional	1,000.00	729.39	0.74	1,000.00	1,024.28	0.87	0.17
R-1	1,000.00	722.33	4.55	1,000.00	1,019.86	5.33	1.05
R-2(b)	1,000.00	723.30	3.99(b)	1,000.00	1,020.51	4.67	0.92
R-3(b)	1,000.00	724.27	3.21(b)	1,000.00	1,021.42	3.76	0.74
R-4	1,000.00	724.54	2.38	1,000.00	1,022.37	2.80	0.55
R-5	1,000.00	725.24	1.86	1,000.00	1,022.97	2.19	0.43
Principal LifeTime 2020 Fund
Class J	1,000.00	708.17	2.49	1,000.00	1,022.22	2.95	0.58
Institutional	1,000.00	709.28	0.56	1,000.00	1,024.48	0.66	0.13
R-1	1,000.00	706.65	4.33	1,000.00	1,020.06	5.13	1.01
R-2	1,000.00	706.61	3.78	1,000.00	1,020.71	4.47	0.88
R-3	1,000.00	707.50	3.00	1,000.00	1,021.62	3.56	0.70
R-4	1,000.00	708.49	2.19	1,000.00	1,022.57	2.59	0.51
R-5	1,000.00	708.94	1.68	1,000.00	1,023.18	1.98	0.39
Principal LifeTime 2025 Fund
Institutional	1,000.00	700.39	0.73	1,000.00	1,024.28	0.87	0.17
R-1	1,000.00	696.24	4.48	1,000.00	1,019.86	5.33	1.05
R-2	1,000.00	697.20	3.92	1,000.00	1,020.51	4.67	0.92
R-3	1,000.00	697.20	3.16	1,000.00	1,021.42	3.76	0.74
R-4	1,000.00	698.46	2.35	1,000.00	1,022.37	2.80	0.55
R-5	1,000.00	699.42	1.84	1,000.00	1,022.97	2.19	0.43
Principal LifeTime 2030 Fund
Class J	1,000.00	688.26	2.63	1,000.00	1,022.02	3.15	0.62
Institutional	1,000.00	690.26	0.55	1,000.00	1,024.48	0.66	0.13
R-1	1,000.00	686.78	4.28	1,000.00	1,020.06	5.13	1.01
R-2	1,000.00	686.83	3.73	1,000.00	1,020.71	4.47	0.88
R-3	1,000.00	688.02	2.97	1,000.00	1,021.62	3.56	0.70
R-4	1,000.00	688.06	2.16	1,000.00	1,022.57	2.59	0.51
R-5	1,000.00	688.74	1.66	1,000.00	1,023.18	1.98	0.39

85

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
Principal LifeTime 2035 Fund
Institutional	$1,000.00	$683.60	$0.72	$1,000.00	$1,024.28	$0.87	0.17%
R-1	1,000.00	682.04	4.44	1,000.00	1,019.86	5.33	1.05
R-2	1,000.00	681.38	3.89	1,000.00	1,020.51	4.67	0.92
R-3	1,000.00	681.38	3.13	1,000.00	1,021.42	3.76	0.74
R-4	1,000.00	683.30	2.33	1,000.00	1,022.37	2.80	0.55
R-5	1,000.00	683.60	1.82	1,000.00	1,022.97	2.19	0.43
Principal LifeTime 2040 Fund
Class J	1,000.00	673.88	2.95	1,000.00	1,021.62	3.56	0.70
Institutional	1,000.00	674.83	0.55	1,000.00	1,024.48	0.66	0.13
R-1	1,000.00	672.39	4.25	1,000.00	1,020.06	5.13	1.01
R-2	1,000.00	672.40	3.70	1,000.00	1,020.71	4.47	0.88
R-3	1,000.00	673.39	2.94	1,000.00	1,021.62	3.56	0.70
R-4	1,000.00	673.64	2.15	1,000.00	1,022.57	2.59	0.51
R-5	1,000.00	674.11	1.64	1,000.00	1,023.18	1.98	0.39
Principal LifeTime 2045 Fund
Institutional	1,000.00	672.40	0.71	1,000.00	1,024.28	0.87	0.17
R-1	1,000.00	666.99	4.40	1,000.00	1,019.86	5.33	1.05
R-2	1,000.00	667.94	3.86	1,000.00	1,020.51	4.67	0.92
R-3	1,000.00	668.26	3.10	1,000.00	1,021.42	3.76	0.74
R-4	1,000.00	669.22	2.31	1,000.00	1,022.37	2.80	0.55
R-5	1,000.00	670.17	1.81	1,000.00	1,022.97	2.19	0.43
Principal LifeTime 2050 Fund
Class J	1,000.00	666.41	0.71	1,000.00	1,024.28	0.87	0.17
Institutional	1,000.00	668.72	0.55	1,000.00	1,024.48	0.66	0.13
R-1	1,000.00	665.12	4.23	1,000.00	1,020.06	5.13	1.01
R-2	1,000.00	665.89	3.68	1,000.00	1,020.71	4.47	0.88
R-3	1,000.00	666.41	2.93	1,000.00	1,021.62	3.56	0.70
R-4	1,000.00	667.18	2.14	1,000.00	1,022.57	2.59	0.51
R-5	1,000.00	666.92	1.63	1,000.00	1,023.18	1.98	0.39
Principal LifeTime 2055 Fund
Institutional	1,000.00	667.62	0.71	1,000.00	1,024.28	0.87	0.17
R-1	1,000.00	664.44	4.39	1,000.00	1,019.86	5.33	1.05
R-2	1,000.00	664.44	3.85	1,000.00	1,020.51	4.67	0.92
R-3	1,000.00	665.39	3.10	1,000.00	1,021.42	3.76	0.74
R-4	1,000.00	665.71	2.30	1,000.00	1,022.37	2.80	0.55
R-5	1,000.00	666.67	1.80	1,000.00	1,022.97	2.19	0.43
Principal LifeTime Strategic Income
Fund
Class J	1,000.00	810.60	2.55	1,000.00	1,022.32	2.85	0.56
Institutional	1,000.00	812.45	0.59	1,000.00	1,024.48	0.66	0.13
R-1	1,000.00	808.33	4.59	1,000.00	1,020.06	5.13	1.01
R-2	1,000.00	809.40	4.00	1,000.00	1,020.71	4.47	0.88
R-3	1,000.00	810.10	3.18	1,000.00	1,021.62	3.56	0.70
R-4	1,000.00	810.60	2.32	1,000.00	1,022.57	2.59	0.51
R-5	1,000.00	811.42	1.78	1,000.00	1,023.18	1.98	0.39
Real Estate Securities Fund
Class J	1,000.00	690.74	5.91	1,000.00	1,018.15	7.05	1.39
Institutional	1,000.00	692.96	3.53	1,000.00	1,020.96	4.22	0.83
R-1	1,000.00	689.98	7.26	1,000.00	1,016.54	8.67	1.71
R-2	1,000.00	690.66	6.71	1,000.00	1,017.19	8.01	1.58
R-3	1,000.00	691.24	5.95	1,000.00	1,018.10	7.10	1.40
R-4	1,000.00	691.68	5.15	1,000.00	1,019.05	6.14	1.21
R-5	1,000.00	691.85	4.64	1,000.00	1,019.66	5.53	1.09
SAM Balanced Portfolio
Class J	1,000.00	774.37	4.24	1,000.00	1,020.36	4.82	0.95
Institutional	1,000.00	776.72	1.47	1,000.00	1,023.48	1.68	0.33
R-1	1,000.00	773.15	5.39	1,000.00	1,019.05	6.14	1.21
R-2	1,000.00	773.66	4.82	1,000.00	1,019.71	5.48	1.08
R-3	1,000.00	774.34	4.01	1,000.00	1,020.61	4.57	0.90
R-4	1,000.00	775.22	3.17	1,000.00	1,021.57	3.61	0.71
R-5	1,000.00	775.70	2.63	1,000.00	1,022.17	3.00	0.59

86

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
SAM Conservative Balanced Portfolio
Class J	$1,000.00	$822.73	$4.35	$1,000.00	$1,020.36	$4.82	0.95%
Institutional	1,000.00	825.45	1.51	1,000.00	1,023.48	1.68	0.33
R-1	1,000.00	821.84	5.54	1,000.00	1,019.05	6.14	1.21
R-2	1,000.00	822.35	4.95	1,000.00	1,019.71	5.48	1.08
R-3	1,000.00	823.07	4.12	1,000.00	1,020.61	4.57	0.90
R-4	1,000.00	823.87	3.26	1,000.00	1,021.57	3.61	0.71
R-5	1,000.00	824.36	2.71	1,000.00	1,022.17	3.00	0.59
SAM Conservative Growth Portfolio
Class J	1,000.00	723.63	4.12	1,000.00	1,020.36	4.82	0.95
Institutional	1,000.00	725.60	1.43	1,000.00	1,023.48	1.68	0.33
R-1	1,000.00	722.19	5.24	1,000.00	1,019.05	6.14	1.21
R-2	1,000.00	722.82	4.68	1,000.00	1,019.71	5.48	1.08
R-3	1,000.00	723.81	3.90	1,000.00	1,020.61	4.57	0.90
R-4	1,000.00	723.98	3.08	1,000.00	1,021.57	3.61	0.71
R-5	1,000.00	724.16	2.56	1,000.00	1,022.17	3.00	0.59
SAM Flexible Income Portfolio
Class J	1,000.00	855.59	4.43	1,000.00	1,020.36	4.82	0.95
Institutional	1,000.00	858.52	1.54	1,000.00	1,023.48	1.68	0.33
R-1	1,000.00	853.86	5.64	1,000.00	1,019.05	6.14	1.21
R-2	1,000.00	855.30	5.04	1,000.00	1,019.71	5.48	1.08
R-3	1,000.00	855.16	4.20	1,000.00	1,020.61	4.57	0.90
R-4	1,000.00	855.97	3.31	1,000.00	1,021.57	3.61	0.71
R-5	1,000.00	856.49	2.75	1,000.00	1,022.17	3.00	0.59
SAM Strategic Growth Portfolio
Class J	1,000.00	693.72	4.04	1,000.00	1,020.36	4.82	0.95
Institutional	1,000.00	696.55	1.41	1,000.00	1,023.48	1.68	0.33
R-1	1,000.00	692.80	5.15	1,000.00	1,019.05	6.14	1.21
R-2	1,000.00	693.37	4.60	1,000.00	1,019.71	5.48	1.08
R-3	1,000.00	694.30	3.83	1,000.00	1,020.61	4.57	0.90
R-4	1,000.00	694.88	3.02	1,000.00	1,021.57	3.61	0.71
R-5	1,000.00	695.23	2.51	1,000.00	1,022.17	3.00	0.59
Short-Term Bond Fund
Class J	1,000.00	929.15	4.85	1,000.00	1,020.11	5.08	1.00
Institutional	1,000.00	931.17	2.09	1,000.00	1,022.97	2.19	0.43
R-1	1,000.00	926.85	6.34	1,000.00	1,018.55	6.65	1.31
R-2	1,000.00	927.64	5.72	1,000.00	1,019.20	5.99	1.18
R-3	1,000.00	926.66	4.84	1,000.00	1,020.11	5.08	1.00
R-4	1,000.00	928.70	3.93	1,000.00	1,021.06	4.12	0.81
R-5	1,000.00	929.74	3.35	1,000.00	1,021.67	3.51	0.69
Short-Term Income Fund
Institutional	1,000.00	979.09	2.39	1,000.00	1,022.72	2.44	0.48
SmallCap Blend Fund
Class J	1,000.00	729.87	4.44	1,000.00	1,020.01	5.18	1.02
Institutional	1,000.00	730.90	3.35	1,000.00	1,021.27	3.91	0.77
R-1	1,000.00	727.53	7.17	1,000.00	1,016.84	8.36	1.65
R-2	1,000.00	728.18	6.60	1,000.00	1,017.50	7.71	1.52
R-3	1,000.00	728.81	5.82	1,000.00	1,018.40	6.80	1.34
R-4	1,000.00	729.35	5.00	1,000.00	1,019.36	5.84	1.15
R-5	1,000.00	729.71	4.48	1,000.00	1,019.96	5.23	1.03
SmallCap Blend Fund I
Institutional	1,000.00	740.83	4.64	1,000.00	1,019.81	5.38	1.06
R-1	1,000.00	738.02	8.48	1,000.00	1,015.38	9.83	1.94
R-2	1,000.00	738.47	7.91	1,000.00	1,016.04	9.17	1.81
R-3	1,000.00	738.63	7.12	1,000.00	1,016.94	8.26	1.63
R-4	1,000.00	740.20	6.30	1,000.00	1,017.90	7.30	1.44
R-5	1,000.00	739.87	5.77	1,000.00	1,018.50	6.70	1.32

87

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
SmallCap Growth Fund
Class J	$1,000.00	$667.54	$5.91	$1,000.00	$1,018.05	$7.15	1.41%
Institutional	1,000.00	669.91	3.23	1,000.00	1,021.27	3.91	0.77
R-1	1,000.00	667.09	6.91	1,000.00	1,016.84	8.36	1.65
R-2	1,000.00	667.49	6.37	1,000.00	1,017.50	7.71	1.52
R-3	1,000.00	667.89	5.62	1,000.00	1,018.40	6.80	1.34
R-4	1,000.00	669.87	4.83	1,000.00	1,019.36	5.84	1.15
R-5	1,000.00	669.85	4.32	1,000.00	1,019.96	5.23	1.03
SmallCap Growth Fund I
Class J	1,000.00	682.32	8.20	1,000.00	1,015.38	9.83	1.94
Institutional	1,000.00	686.73	4.79	1,000.00	1,019.46	5.74	1.13
R-1	1,000.00	682.81	8.50	1,000.00	1,015.03	10.18	2.01
R-2	1,000.00	684.02	7.96	1,000.00	1,015.69	9.53	1.88
R-3	1,000.00	684.52	7.20	1,000.00	1,016.59	8.62	1.70
R-4	1,000.00	684.63	6.39	1,000.00	1,017.55	7.66	1.51
R-5	1,000.00	684.75	5.89	1,000.00	1,018.15	7.05	1.39
SmallCap Growth Fund II
Class J	1,000.00	692.09	7.66	1,000.00	1,016.09	9.12	1.80
Institutional	1,000.00	694.48	4.30	1,000.00	1,020.06	5.13	1.01
R-1	1,000.00	691.62	8.04	1,000.00	1,015.63	9.58	1.89
R-2	1,000.00	691.70	7.48	1,000.00	1,016.29	8.92	1.76
R-3	1,000.00	693.20	6.72	1,000.00	1,017.19	8.01	1.58
R-4	1,000.00	694.16	5.92	1,000.00	1,018.15	7.05	1.39
R-5	1,000.00	694.24	5.41	1,000.00	1,018.75	6.44	1.27
SmallCap Growth Fund III
Institutional	1,000.00	678.68	4.73	1,000.00	1,019.51	5.69	1.12
R-1	1,000.00	676.01	8.43	1,000.00	1,015.08	10.13	2.00
R-2	1,000.00	675.98	7.88	1,000.00	1,015.74	9.48	1.87
R-3	1,000.00	677.29	7.13	1,000.00	1,016.64	8.57	1.69
R-4	1,000.00	677.19	6.32	1,000.00	1,017.60	7.61	1.50
R-5	1,000.00	677.81	5.82	1,000.00	1,018.20	7.00	1.38
SmallCap S&P 600 Index Fund
Class J	1,000.00	762.28	3.77	1,000.00	1,020.86	4.32	0.85
Institutional	1,000.00	764.93	0.71	1,000.00	1,024.33	0.81	0.16
R-1	1,000.00	760.83	4.60	1,000.00	1,019.91	5.28	1.04
R-2	1,000.00	761.97	4.03	1,000.00	1,020.56	4.62	0.91
R-3	1,000.00	762.51	3.23	1,000.00	1,021.47	3.71	0.73
R-4	1,000.00	763.37	2.39	1,000.00	1,022.42	2.75	0.54
R-5	1,000.00	763.67	1.86	1,000.00	1,023.03	2.14	0.42
SmallCap Value Fund
Class J	1,000.00	796.12	6.23	1,000.00	1,018.20	7.00	1.38
Institutional	1,000.00	799.10	3.44	1,000.00	1,021.32	3.86	0.76
R-1	1,000.00	795.42	7.40	1,000.00	1,016.89	8.31	1.64
R-2	1,000.00	795.95	6.82	1,000.00	1,017.55	7.66	1.51
R-3	1,000.00	796.12	6.00	1,000.00	1,018.45	6.75	1.33
R-4	1,000.00	797.17	5.15	1,000.00	1,019.41	5.79	1.14
R-5	1,000.00	797.44	4.61	1,000.00	1,020.01	5.18	1.02
SmallCap Value Fund I
Institutional	1,000.00	760.74	4.51	1,000.00	1,020.01	5.18	1.02
R-1	1,000.00	757.09	8.39	1,000.00	1,015.58	9.63	1.90
R-2	1,000.00	758.04	7.82	1,000.00	1,016.24	8.97	1.77
R-3	1,000.00	758.84	7.03	1,000.00	1,017.14	8.06	1.59
R-4	1,000.00	759.78	6.19	1,000.00	1,018.10	7.10	1.40
R-5	1,000.00	760.27	5.66	1,000.00	1,018.70	6.50	1.28
SmallCap Value Fund II
Institutional	1,000.00	725.29	4.47	1,000.00	1,019.96	5.23	1.03
R-1	1,000.00	721.93	8.27	1,000.00	1,015.53	9.68	1.91
R-2	1,000.00	722.99	7.71	1,000.00	1,016.19	9.02	1.78
R-3	1,000.00	723.52	6.93	1,000.00	1,017.09	8.11	1.60
R-4	1,000.00	723.45	6.11	1,000.00	1,018.05	7.15	1.41
R-5	1,000.00	724.61	5.59	1,000.00	1,018.65	6.55	1.29

88

SHAREHOLDER EXPENSE EXAMPLE
PRINCIPAL INVESTORS FUND, INC.
October 31, 2008 (unaudited)
		Actual			Hypothetical
			Expenses Paid			Expenses Paid
		Ending	During Period		Ending	During Period
	Beginning	Account Value	May 1, 2008	Beginning	Account Value	May 1, 2008
	Account Value	October 31,	to October 31,	Account Value	October 31,	to October 31,	Annualized
	May 1, 2008	2008	2008(a)	May 1, 2008	2008	2008	Expense Ratio
SmallCap Value Fund III
Class J	$1,000.00	$759.45	$7.78	$1,000.00	$1,016.29	$8.92	1.76%
Institutional	1,000.00	761.81	4.65	1,000.00	1,019.86	5.33	1.05
R-1	1,000.00	758.89	8.53	1,000.00	1,015.43	9.78	1.93
R-2	1,000.00	759.79	7.96	1,000.00	1,016.09	9.12	1.80
R-3	1,000.00	759.56	7.17	1,000.00	1,016.99	8.21	1.62
R-4	1,000.00	761.11	6.33	1,000.00	1,017.95	7.25	1.43
R-5	1,000.00	760.66	5.80	1,000.00	1,018.55	6.65	1.31
Ultra Short Bond Fund
Class J	1,000.00	923.52	5.13	1,000.00	1,019.81	5.38	1.06
Institutional	1,000.00	927.26	2.03	1,000.00	1,023.03	2.14	0.42
R-1	1,000.00	922.36	6.28	1,000.00	1,018.60	6.60	1.30
R-2	1,000.00	924.11	5.66	1,000.00	1,019.25	5.94	1.17
R-3	1,000.00	925.20	4.79	1,000.00	1,020.16	5.03	0.99
R-4	1,000.00	924.72	3.87	1,000.00	1,021.11	4.06	0.80
R-5	1,000.00	925.86	3.29	1,000.00	1,021.72	3.46	0.68
West Coast Equity Fund
Institutional	1,000.00	747.72	2.33	1,000.00	1,022.47	2.69	0.53

^(a) Expenses are equal to a fund's annualized expense ratio multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

^(b) Expenses are equal to a fund's annualized expense ratio multiplied by the average account value over the period (September 30, 2008 to October 31, 2008), multiplied by 31/365 (to reflect the period since inception).

89

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
			Disciplined
	Bond & Mortgage	Core Plus Bond	LargeCap Blend
Amounts in thousands, except per share amounts	Securities Fund	Fund I	Fund
Investment in securities--at cost	$ 3,817,715	$ 85,114	$ 2,462,870
Foreign currency--at cost	$ –	$ 10	$ –
Assets
Investment in securities--at value	$ 3,273,985 (a)	$ 84,435	$ 2,022,950
Foreign currency--at value	–	11	–
Cash	12,117	3,311	20
Receivables:
Capital Shares sold	7,867	2,870	2,011
Dividends and interest	27,309	143	2,602
Expense reimbursement from Manager	23	2	1
Expense reimbursement from Underwriter	8	–	–
Investment securities sold	34,083	10,580	15,400
Swap premiums paid	405	–	–
Variation margin on futures contracts	–	–	579
Other assets	7	–	5
Total Assets	3,355,804	101,352	2,043,568
Liabilities
Accrued management and investment advisory fees	1,114	24	997
Accrued administrative service fees	23	–	2
Accrued distribution fees	138	1	73
Accrued service fees	27	–	2
Accrued transfer agent fees	207	–	227
Accrued directors' expenses	–	–	1
Accrued other expenses	101	4	149
Payables:
Capital Shares reacquired	1,278	–	691
Dividends payable	7,194	–	–
Foreign currency contracts	–	10	–
Investment securities purchased	574,274	42,648	18,473
Options and swaptions contracts written (premiums received $0, $7 and $0)	–	3	–
Unrealized loss on swap agreements	2,387	–	–
Variation margin on futures contracts	63	–	–
Collateral obligation on securities loaned, at value	304,575	–	–
Total Liabilities	891,381	42,690	20,615
Net Assets Applicable to Outstanding Shares	$ 2,464,423	$ 58,662	$ 2,022,953
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 3,077,555	$ 58,895	$ 2,780,442
Accumulated undistributed (overdistributed) net investment income (operating loss)	5,426	67	31,050
Accumulated undistributed (overdistributed) net realized gain (loss)	(72,165 )	(142 )	(349,618 )
Net unrealized appreciation (depreciation) of investments	(546,393 )	(148)	(438,921 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency	–	(10 )	–
Total Net Assets	$ 2,464,423	$ 58,662	$ 2,022,953
Capital Stock (par value: $.01 a share):
Shares authorized	715,000	380,000	905,000
Net Asset Value Per Share:
Class A: Net Assets	$ 116,109	N/A	$ 218,451
Shares Issued and Outstanding	13,633		22,006
Net Asset Value per share	$ 8.52		$ 9.93
Maximum Offering Price	$ 8.92 (b)		$ 10.51 (c)
Class B: Net Assets	$ 14,841	N/A	$ 25,190
Shares Issued and Outstanding	1,742		2,579
Net Asset Value per share	$ 8.52 (d)		$ 9.77 (d)
Class C: Net Assets	$ 2,263	N/A	$ 1,526
Shares Issued and Outstanding	266		155
Net Asset Value per share	$ 8.51 (d)		$ 9.85 (d)
Class J: Net Assets	$ 186,176	N/A	N/A
Shares Issued and Outstanding	21,743
Net Asset Value per share	$ 8.56 (d)
Institutional: Net Assets	$ 1,971,313	$ 58,587	$ 1,763,971
Shares Issued and Outstanding	231,528	5,891	177,360
Net Asset Value per share	$ 8.51	$ 9.95	$ 9.95
R-1: Net Assets	$ 6,999	$ 15	$ 1,148
Shares Issued and Outstanding	822	2	117
Net Asset Value per share	$ 8.51	$ 9.94	$ 9.85
R-2: Net Assets	$ 28,127	$ 15	$ 1,668
Shares Issued and Outstanding	3,328	2	170
Net Asset Value per share	$ 8.45	$ 9.94	$ 9.80
R-3: Net Assets	$ 48,733	$ 15	$ 6,630
Shares Issued and Outstanding	5,750	2	674
Net Asset Value per share	$ 8.48	$ 9.94	$ 9.84
R-4: Net Assets	$ 22,799	$ 15	$ 3,006
Shares Issued and Outstanding	2,651	2	304
Net Asset Value per share	$ 8.60	$ 9.94	$ 9.88
R-5: Net Assets	$ 67,063	$ 15	$ 1,363
Shares Issued and Outstanding	7,905	2	137
Net Asset Value per share	$ 8.48	$ 9.94	$ 9.91

(a)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

90

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	Diversified		Equity Income	Global Equity Fund
Amounts in thousands, except per share amounts	International Fund		Fund(a)	I(b)
Investment in securities--at cost	$ 1,783,789		$ 2,591,513	$ 26,962
Foreign currency--at cost	$ 339		$ –	$ –
Assets
Investment in securities--at value	$ 1,247,667		$ 2,165,298	$ 17,722
Foreign currency--at value		335	–	–
Cash		–	10	143
Receivables:
Capital Shares sold		972	830	143
Dividends and interest		3,818	6,633	47
Expense reimbursement from Manager		6	–	–
Expense reimbursement from Underwriter		7	–	–
Foreign tax refund		74	–	–
Investment securities sold		10,072	–	164
Other assets		5	1	–
Total Assets	1,262,956		2,172,772	18,219
Liabilities
Accrued management and investment advisory fees		962	965	15
Accrued administrative service fees		22	–	1
Accrued distribution fees		175	428	1
Accrued service fees		27	–	1
Accrued transfer agent fees		407	600	–
Accrued directors' expenses		2	3	–
Accrued other expenses		572	394	27
Cash overdraft		2,024	–	–
Payables:
Capital Shares reacquired		506	3,530	1
Investment securities purchased		16,772	10,292	165
Total Liabilities		21,469	16,212	211
Net Assets Applicable to Outstanding Shares	$ 1,241,487		$ 2,156,560	$ 18,008
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,988,324		$ 2,868,807	$ 28,229
Accumulated undistributed (overdistributed) net investment income (operating loss)		29,054	12,493	284
Accumulated undistributed (overdistributed) net realized gain (loss)		(239,793 )	(298,525)	(1,264 )
Net unrealized appreciation (depreciation) of investments		(536,122 )	(426,215)	(9,240 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		24	–	(1 )
Total Net Assets	$ 1,241,487		$ 2,156,560	$ 18,008
Capital Stock (par value: $.01 a share):
Shares authorized		910,000	650,000	330,000
Net Asset Value Per Share:
Class A: Net Assets	$ 257,621		$ 712,089	N/A
Shares Issued and Outstanding		34,651	51,572
Net Asset Value per share	$ 7.43		$ 13.81
Maximum Offering Price	$ 7.86 (c)		$ 14.61(c)
Class B: Net Assets	$ 27,621		$ 177,768	N/A
Shares Issued and Outstanding		3,750	12,998
Net Asset Value per share	$ 7.37 (d)		$ 13.68(d)
Class C: Net Assets	$ 11,322		$ 134,522	N/A
Shares Issued and Outstanding		1,533	9,928
Net Asset Value per share	$ 7.39 (d)		$ 13.55(d)
Class J: Net Assets	$ 145,271		N/A	N/A
Shares Issued and Outstanding		19,724
Net Asset Value per share	$ 7.37 (d)
Institutional: Net Assets	$ 621,394		$ 1,132,181	$ 13,469
Shares Issued and Outstanding		83,486	81,902	1,933
Net Asset Value per share	$ 7.44		$ 13.82	$ 6.97
R-1: Net Assets	$ 6,336		N/A	$ 451
Shares Issued and Outstanding		858		66
Net Asset Value per share	$ 7.38			$ 6.89
R-2: Net Assets	$ 18,080		N/A	$ 1,046
Shares Issued and Outstanding		2,464		151
Net Asset Value per share	$ 7.34			$ 6.94
R-3: Net Assets	$ 57,078		N/A	$ 975
Shares Issued and Outstanding		7,714		140
Net Asset Value per share	$ 7.40			$ 6.94
R-4: Net Assets	$ 36,959		N/A	$ 2,048
Shares Issued and Outstanding		4,920		295
Net Asset Value per share	$ 7.51			$ 6.95
R-5: Net Assets	$ 59,805		N/A	$ 19
Shares Issued and Outstanding		8,043		3
Net Asset Value per share	$ 7.44			$ 6.94

(a)	Effective June 13, 2008, Equity Income Fund I changed its name to Equity Income Fund.
(b)	Effective June 13, 2008, Partners Global Equity Fund changed its name to Global Equity Fund I.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

91

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
			Government &	High Quality
	Global Real Estate		High Quality Bond	Intermediate-Term
Amounts in thousands, except per share amounts	Securities Fund		Fund	Bond Fund
Investment in securities--at cost	$ 6,921		$ 477,302	$ 163,814
Foreign currency--at cost	$ 134		$ –	$ –
Assets
Investment in securities--at value	$ 4,450		$ 442,152(a)	$ 140,653 (a)
Foreign currency--at value		132	–	–
Cash		8	920	567
Receivables:
Capital Shares sold		–	1,384	55
Dividends and interest		17	2,321	833
Expense reimbursement from Manager		30	–	–
Expense reimbursement from Underwriter		–	5	1
Foreign currency contracts		133	–	–
Investment securities sold		–	20,038	2,073
Swap premiums paid		–	–	19
Variation margin on futures contracts		–	70	–
Other assets		–	19	–
Total Assets		4,770	466,909	144,201
Liabilities
Accrued management and investment advisory fees		4	128	31
Accrued administrative service fees		–	6	3
Accrued distribution fees		1	117	15
Accrued service fees		–	7	4
Accrued transfer agent fees		3	157	13
Accrued other expenses		22	75	27
Payables:
Capital Shares reacquired		–	361	208
Dividends payable		–	1,115	–
Foreign currency contracts		79	–	–
Investment securities purchased		19	79,660	35,230
Unrealized loss on swap agreements		–	53	169
Variation margin on futures contracts		–	16	–
Collateral obligation on securities loaned, at value		–	24,823	23,128
Total Liabilities		128	106,518	58,828
Net Assets Applicable to Outstanding Shares	$ 4,642		$ 360,391	$ 85,373
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 8,778		$ 404,780	$ 108,947
Accumulated undistributed (overdistributed) net investment income (operating loss)		(14 )	844	5,101
Accumulated undistributed (overdistributed) net realized gain (loss)		(1,703 )	(10,448 )	(5,345 )
Net unrealized appreciation (depreciation) of investments		(2,471 )	(34,785 )	(23,330 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		52	–	–
Total Net Assets	$ 4,642		$ 360,391	$ 85,373
Capital Stock (par value: $.01 a share):
Shares authorized		300,000	730,000	305,000
Net Asset Value Per Share:
Class A: Net Assets	$ 2,704		$ 170,968	N/A
Shares Issued and Outstanding		537	18,304
Net Asset Value per share	$ 5.04		$ 9.34
Maximum Offering Price	$ 5.33 (b)		$ 9.78(c)
Class B: Net Assets		N/A	$ 32,602	N/A
Shares Issued and Outstanding			3,490
Net Asset Value per share			$ 9.34(d)
Class C: Net Assets	$ 932		$ 7,666	N/A
Shares Issued and Outstanding		187	819
Net Asset Value per share	$ 4.99 (d)		$ 9.36(d)
Class J: Net Assets		N/A	$ 101,922	$ 26,729
Shares Issued and Outstanding			10,868	3,095
Net Asset Value per share			$ 9.38(d)	$ 8.64 (d)
Institutional: Net Assets	$ 1,006		$ 3,955	$ 34,727
Shares Issued and Outstanding		200	423	3,992
Net Asset Value per share	$ 5.03		$ 9.36	$ 8.70
R-1: Net Assets		N/A	$ 1,291	$ 1,407
Shares Issued and Outstanding			138	163
Net Asset Value per share			$ 9.34	$ 8.64
R-2: Net Assets		N/A	$ 10,801	$ 3,630
Shares Issued and Outstanding			1,163	424
Net Asset Value per share			$ 9.29	$ 8.57
R-3: Net Assets		N/A	$ 12,471	$ 9,053
Shares Issued and Outstanding			1,342	1,054
Net Asset Value per share			$ 9.29	$ 8.59
R-4: Net Assets		N/A	$ 4,726	$ 2,401
Shares Issued and Outstanding			508	279
Net Asset Value per share			$ 9.31	$ 8.59
R-5: Net Assets		N/A	$ 13,989	$ 7,426
Shares Issued and Outstanding			1,502	862
Net Asset Value per share			$ 9.31	$ 8.62

(a)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

92

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
Amounts in thousands, except per share amounts	High Yield Fund(a)	High Yield Fund I(b)	Income Fund
Investment in securities--at cost	$ 1,835,679	$ 848,826	$ 1,075,116
Investment in affiliated securities--at cost	$ 33,507	$ –	$ –
Foreign currency--at cost	$ 4,542	$ –	$ –
Assets
Investment in securities--at value	$ 1,330,724	$ 659,249(c)	$ 915,378 (c)
Investment in affiliated securities--at value	$ 29,942	–	–
Foreign currency--at value	4,197	–	–
Cash	277	1,105	10
Receivables:
Capital Shares sold	14,502	821	5,507
Dividends and interest	34,432	18,230	15,190
Expense reimbursement from Manager	–	–	9
Investment securities sold	–	1,178	–
Unrealized gain on swap agreements	9	–	–
Total Assets	1,414,083	680,583	936,094
Liabilities
Accrued management and investment advisory fees	639	375	414
Accrued distribution fees	324	–	86
Accrued transfer agent fees	256	–	79
Accrued directors' expenses	1	–	1
Accrued other expenses	189	16	54
Payables:
Capital Shares reacquired	5,023	80	1,808
Dividends payable	9,462	–	5,522
Line of credit	–	820	–
Investment securities purchased	12,302	16,613	8,382
Swap premiums received	5,598	–	–
Collateral obligation on securities loaned, at value	–	600	1,497
Total Liabilities	33,794	18,504	17,843
Net Assets Applicable to Outstanding Shares	$ 1,380,289	$ 662,079	$ 918,251
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,896,368	$ 834,438	$ 1,092,051
Accumulated undistributed (overdistributed) net investment income (operating loss)	(1,354 )	48,046	(8,726 )
Accumulated undistributed (overdistributed) net realized gain (loss)	(5,508 )	(30,828 )	(5,336 )
Net unrealized appreciation (depreciation) of investments	(508,511 )	(189,577)	(159,738 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency	(706 )	–	–
Total Net Assets	$ 1,380,289	$ 662,079	$ 918,251
Capital Stock (par value: $.01 a share):
Shares authorized	600,000	150,000	600,000
Net Asset Value Per Share:
Class A: Net Assets	$ 765,971	N/A	$ 122,603
Shares Issued and Outstanding	126,070		15,662
Net Asset Value per share	$ 6.08		$ 7.83
Maximum Offering Price	$ 6.37 (d)		$ 8.20 (d)
Class B: Net Assets	$ 49,140	N/A	$ 51,278
Shares Issued and Outstanding	8,045		6,528
Net Asset Value per share	$ 6.11 (e)		$ 7.85 (e)
Class C: Net Assets	$ 120,324	N/A	$ 15,103
Shares Issued and Outstanding	19,702		1,924
Net Asset Value per share	$ 6.11 (e)		$ 7.85 (e)
Institutional: Net Assets	$ 444,854	$ 662,079	$ 729,267
Shares Issued and Outstanding	73,379	80,802	92,958
Net Asset Value per share	$ 6.06	$ 8.19	$ 7.85

(a)	Effective June 13, 2008, High Yield Fund II changed its name to High Yield Fund.
(b)	Effective June 13, 2008, High Yield Fund changed its name to High Yield Fund I.
(c)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(d)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(e)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

93

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
			International
	Inflation Protection		Emerging Markets	International Fund
Amounts in thousands, except per share amounts	Fund		Fund	I(a)
Investment in securities--at cost	$ 602,604		$ 1,138,943	$ 1,285,221
Foreign currency--at cost	$ –		$ 1,063	$ 3,945
Assets
Investment in securities--at value	$ 492,979 (b)		$ 703,262	$ 866,238
Foreign currency--at value		–	1,052	3,910
Cash		406	–	36,100
Receivables:
Capital Shares sold		2,869	1,428	1,995
Dividends and interest		2,363	2,421	3,394
Expense reimbursement from Manager		3	–	–
Expense reimbursement from Underwriter		–	5	–
Foreign tax refund		–	285	–
Investment securities sold		795	775	6,676
Unrealized gain on swap agreements		47	–	–
Total Assets		499,462	709,228	918,313
Liabilities
Accrued management and investment advisory fees		148	735	991
Accrued administrative service fees		–	7	6
Accrued distribution fees		8	90	6
Accrued service fees		1	8	8
Accrued transfer agent fees		8	220	–
Accrued directors' expenses		–	1	5
Accrued other expenses		29	573	194
Cash overdraft		–	108	–
Payables:
Capital Shares reacquired		22	448	196
Dividends payable		119	–	–
Investment securities purchased		–	2,797	10,316
Unrealized loss on swap agreements		12,457	–	–
Collateral obligation on securities loaned, at value		78,811	–	–
Total Liabilities		91,603	4,987	11,722
Net Assets Applicable to Outstanding Shares	$ 407,859		$ 704,241	$ 906,591
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 543,452		$ 1,325,644	$ 1,632,563
Accumulated undistributed (overdistributed) net investment income (operating loss)		(29 )	8,091	30,129
Accumulated undistributed (overdistributed) net realized gain (loss)		(13,529 )	(193,663 )	(338,980 )
Net unrealized appreciation (depreciation) of investments		(122,035 )	(435,681)	(417,224 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		–	(150)	103
Total Net Assets	$ 407,859		$ 704,241	$ 906,591
Capital Stock (par value: $.01 a share):
Shares authorized		680,000	455,000	330,000
Net Asset Value Per Share:
Class A: Net Assets	$ 6,167		$ 85,229	N/A
Shares Issued and Outstanding		863	6,196
Net Asset Value per share	$ 7.15		$ 13.76
Maximum Offering Price	$ 7.49 (c)		$ 14.56(d)
Class B: Net Assets		N/A	$ 12,272	N/A
Shares Issued and Outstanding			917
Net Asset Value per share			$ 13.39(e)
Class C: Net Assets	$ 1,808		$ 6,248	N/A
Shares Issued and Outstanding		253	460
Net Asset Value per share	$ 7.17 (e)		$ 13.58(e)
Class J: Net Assets	$ 7,961		$ 113,241	N/A
Shares Issued and Outstanding		1,126	8,502
Net Asset Value per share	$ 7.08 (e)		$ 13.32(e)
Institutional: Net Assets	$ 388,931		$ 435,442	$ 859,383
Shares Issued and Outstanding		54,939	31,609	97,509
Net Asset Value per share	$ 7.08		$ 13.78	$ 8.81
R-1: Net Assets	$ 430		$ 3,515	$ 3,137
Shares Issued and Outstanding		61	258	359
Net Asset Value per share	$ 7.05		$ 13.60	$ 8.73
R-2: Net Assets	$ 642		$ 6,741	$ 7,877
Shares Issued and Outstanding		91	499	904
Net Asset Value per share	$ 7.05		$ 13.50	$ 8.71
R-3: Net Assets	$ 904		$ 15,136	$ 9,728
Shares Issued and Outstanding		128	1,113	1,114
Net Asset Value per share	$ 7.06		$ 13.59	$ 8.73
R-4: Net Assets	$ 378		$ 11,432	$ 9,358
Shares Issued and Outstanding		54	833	1,068
Net Asset Value per share	$ 7.06		$ 13.72	$ 8.77
R-5: Net Assets	$ 638		$ 14,985	$ 17,108
Shares Issued and Outstanding		91	1,090	1,950
Net Asset Value per share	$ 7.07		$ 13.75	$ 8.77

(a)	Effective June 13, 2008, Partners International Fund changed its name to International Fund I.
(b)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(d)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(e)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

94

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	International		International Value	LargeCap Blend
Amounts in thousands, except per share amounts	Growth Fund		Fund I	Fund I(a)
Investment in securities--at cost	$ 1,906,704		$ 371,170	$ 901,846
Foreign currency--at cost	$ –		$ 820	$ –
Assets
Investment in securities--at value	$ 1,303,899		$ 354,195	$ 691,592
Foreign currency--at value		–	817	–
Cash		10,862	8,163	1,239
Receivables:
Capital Shares sold		1,789	1,526	1,116
Dividends and interest		4,277	109	952
Expense reimbursement from Manager		7	16	–
Expense reimbursement from Underwriter		2	–	1
Investment securities sold		23,018	38	–
Variation margin on futures contracts		368	–	–
Other assets		–	–	3
Total Assets	1,344,222		364,864	694,903
Liabilities
Accrued management and investment advisory fees		1,155	233	262
Accrued administrative service fees		6	–	1
Accrued distribution fees		23	–	37
Accrued service fees		7	–	1
Accrued transfer agent fees		22	–	142
Accrued directors' expenses		1	1	–
Accrued other expenses		278	21	60
Payables:
Capital Shares reacquired		131	1	86
Investment securities purchased		19,514	146	–
Total Liabilities		21,137	402	589
Net Assets Applicable to Outstanding Shares	$ 1,323,085		$ 364,462	$ 694,314
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 2,241,576		$ 382,734	$ 1,013,116
Accumulated undistributed (overdistributed) net investment income (operating loss)		29,625	(90 )	10,046
Accumulated undistributed (overdistributed) net realized gain (loss)		(344,324 )	(1,200)	(116,533 )
Net unrealized appreciation (depreciation) of investments		(604,000 )	(16,975)	(212,315 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		208	(7 )	–
Total Net Assets	$ 1,323,085		$ 364,462	$ 694,314
Capital Stock (par value: $.01 a share):
Shares authorized		590,000	100,000	455,000
Net Asset Value Per Share:
Class A: Net Assets	$ 1,760		N/A	$ 82,298
Shares Issued and Outstanding		253		12,779
Net Asset Value per share	$ 6.95			$ 6.44
Maximum Offering Price	$ 7.35 (b)			$ 6.81 (b)
Class B: Net Assets		N/A	N/A	$ 5,947
Shares Issued and Outstanding				944
Net Asset Value per share				$ 6.30 (c)
Class C: Net Assets	$ 246		N/A	$ 581
Shares Issued and Outstanding		36		91
Net Asset Value per share	$ 6.95 (c)			$ 6.38 (c)
Class J: Net Assets	$ 36,673		N/A	$ 32,309
Shares Issued and Outstanding		5,418		5,062
Net Asset Value per share	$ 6.77 (c)			$ 6.38 (c)
Institutional: Net Assets	$ 1,236,938		$ 364,462	$ 565,475
Shares Issued and Outstanding		178,071	42,316	87,600
Net Asset Value per share	$ 6.95		$ 8.62	$ 6.46
R-1: Net Assets	$ 1,733		N/A	$ 746
Shares Issued and Outstanding		252		117
Net Asset Value per share	$ 6.87			$ 6.39
R-2: Net Assets	$ 6,325		N/A	$ 1,988
Shares Issued and Outstanding		941		309
Net Asset Value per share	$ 6.72			$ 6.43
R-3: Net Assets	$ 19,243		N/A	$ 1,463
Shares Issued and Outstanding		2,694		227
Net Asset Value per share	$ 7.14			$ 6.46
R-4: Net Assets	$ 8,349		N/A	$ 1,694
Shares Issued and Outstanding		1,220		262
Net Asset Value per share	$ 6.85			$ 6.47
R-5: Net Assets	$ 11,818		N/A	$ 1,813
Shares Issued and Outstanding		1,719		279
Net Asset Value per share	$ 6.88			$ 6.50

(a)	Effective June 13, 2008, Partners LargeCap Blend Fund I changed its name to LargeCap Blend Fund I.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

95

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	LargeCap Blend		LargeCap Growth	LargeCap Growth
Amounts in thousands, except per share amounts	Fund II(a)		Fund	Fund I(b)
Investment in securities--at cost	$ 822,511		$ 2,464,970	$ 1,605,058
Assets
Investment in securities--at value	$ 644,215		$ 2,050,124	$ 1,191,624
Cash		4,689	10	10
Receivables:
Capital Shares sold		734	8,902	1,131
Dividends and interest		813	802	777
Expense reimbursement from Underwriter		4	2	1
Investment securities sold		6,052	70,887	5,659
Variation margin on futures contracts		38	–	–
Other assets		–	12	–
Total Assets		656,545	2,130,739	1,199,202
Liabilities
Accrued management and investment advisory fees		417	1,165	757
Accrued administrative service fees		10	21	5
Accrued distribution fees		67	140	28
Accrued service fees		12	25	6
Accrued transfer agent fees		91	475	94
Accrued directors' expenses		–	1	1
Accrued other expenses		63	199	59
Payables:
Capital Shares reacquired		253	1,259	756
Line of Credit		–	–	2,580
Investment securities purchased		4,103	25,762	659
Total Liabilities		5,016	29,047	4,945
Net Assets Applicable to Outstanding Shares	$ 651,529		$ 2,101,692	$ 1,194,257
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 874,462		$ 2,620,769	$ 1,713,501
Accumulated undistributed (overdistributed) net investment income (operating loss)		7,188	–	–
Accumulated undistributed (overdistributed) net realized gain (loss)		(52,308 )	(104,231 )	(105,810 )
Net unrealized appreciation (depreciation) of investments		(177,813 )	(414,846)	(413,434 )
Total Net Assets	$ 651,529		$ 2,101,692	$ 1,194,257
Capital Stock (par value: $.01 a share):
Shares authorized		490,000	1,120,000	640,000
Net Asset Value Per Share:
Class A: Net Assets	$ 37,841		$ 321,555	$ 30,125
Shares Issued and Outstanding		5,239	52,832	5,661
Net Asset Value per share	$ 7.22		$ 6.09	$ 5.32
Maximum Offering Price	$ 7.64 (c)		$ 6.44(c)	$ 5.63 (c)
Class B: Net Assets	$ 14,273		$ 31,802	$ 5,467
Shares Issued and Outstanding		2,009	5,381	1,060
Net Asset Value per share	$ 7.10 (d)		$ 5.91(d)	$ 5.16 (d)
Class C: Net Assets	$ 922		$ 9,311	$ 415
Shares Issued and Outstanding		129	1,551	78
Net Asset Value per share	$ 7.13 (d)		$ 6.00(d)	$ 5.32 (d)
Class J: Net Assets	$ 93,445		$ 38,641	$ 28,875
Shares Issued and Outstanding		13,319	6,645	5,772
Net Asset Value per share	$ 7.02 (d)		$ 5.81(d)	$ 5.00 (d)
Institutional: Net Assets	$ 431,434		$ 1,531,200	$ 1,089,367
Shares Issued and Outstanding		59,658	249,659	199,974
Net Asset Value per share	$ 7.23		$ 6.13	$ 5.45
R-1: Net Assets	$ 2,511		$ 9,129	$ 1,049
Shares Issued and Outstanding		350	1,521	199
Net Asset Value per share	$ 7.17		$ 6.00	$ 5.28
R-2: Net Assets	$ 13,952		$ 15,819	$ 7,234
Shares Issued and Outstanding		1,964	2,626	1,404
Net Asset Value per share	$ 7.10		$ 6.03	$ 5.15
R-3: Net Assets	$ 21,349		$ 48,883	$ 13,763
Shares Issued and Outstanding		2,985	7,733	2,585
Net Asset Value per share	$ 7.15		$ 6.32	$ 5.33
R-4: Net Assets	$ 11,356		$ 28,378	$ 3,767
Shares Issued and Outstanding		1,577	4,519	709
Net Asset Value per share	$ 7.20		$ 6.28	$ 5.31
R-5: Net Assets	$ 24,446		$ 66,974	$ 14,195
Shares Issued and Outstanding		3,402	10,806	2,638
Net Asset Value per share	$ 7.19		$ 6.20	$ 5.38

(a)	Effective June 13, 2008, Partners LargeCap Blend Fund changed its name to LargeCap Blend Fund II.
(b)	Effective June 13, 2008, Partners LargeCap Growth Fund I changed its name to LargeCap Growth Fund I.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

96

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	LargeCap Growth		LargeCap S&P 500	LargeCap Value
Amounts in thousands, except per share amounts	Fund II(a)		Index Fund	Fund
Investment in securities--at cost	$ 1,736,128		$ 953,444	$ 749,166
Assets
Investment in securities--at value	$ 1,372,899		$ 788,982	$ 621,143
Cash		21,430	14		10
Receivables:
Capital Shares sold		98	1,115		821
Dividends and interest		668	1,131	1,045
Expense reimbursement from Underwriter		1	11		1
Foreign currency contracts		713	–		–
Investment securities sold		6,954	170	1,791
Variation margin on futures contracts		199	167		120
Other assets		–	–		28
Total Assets	1,402,962		791,590	624,959
Liabilities
Accrued management and investment advisory fees		1,049	102		237
Accrued administrative service fees		4	44		1
Accrued distribution fees		12	148		62
Accrued service fees		6	54		1
Accrued transfer agent fees		11	153		194
Accrued directors' expenses		–	1		1
Accrued other expenses		34	101		80
Payables:
Capital Shares reacquired		464	435		296
Investment securities purchased		12,505	459	1,754
Total Liabilities		14,085	1,497	2,626
Net Assets Applicable to Outstanding Shares	$ 1,388,877		$ 790,093	$ 622,333
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,867,883		$ 971,362	$ 858,790
Accumulated undistributed (overdistributed) net investment income (operating loss)		5,743	13,357	12,939
Accumulated undistributed (overdistributed) net realized gain (loss)		(124,015 )	(30,926)	(119,214 )
Net unrealized appreciation (depreciation) of investments		(361,447 )	(163,700)	(130,182 )
Net unrealized appreciation (depreciation) on translation of assets and liabilities in foreign
currency		713	–		–
Total Net Assets	$ 1,388,877		$ 790,093	$ 622,333
Capital Stock (par value: $.01 a share):
Shares authorized		570,000	585,000	455,000
Net Asset Value Per Share:
Class A: Net Assets	$ 1,107		$ 53,542	$ 171,897
Shares Issued and Outstanding		189	7,811	21,679
Net Asset Value per share	$ 5.87		$ 6.85	$ 7.93
Maximum Offering Price	$ 6.21 (b)		$ 6.95(c)	$ 8.39 (b)
Class B: Net Assets		N/A	N/A	$ 9,598
Shares Issued and Outstanding				1,221
Net Asset Value per share				$ 7.87 (d)
Class C: Net Assets	$ 374		$ 2,428	$ 1,130
Shares Issued and Outstanding		64	357		144
Net Asset Value per share	$ 5.78 (d)		$ 6.81(d)	$ 7.89 (d)
Class J: Net Assets	$ 19,225		$ 247,433	$ 38,836
Shares Issued and Outstanding		3,510	36,446	4,960
Net Asset Value per share	$ 5.48 (d)		$ 6.79(d)	$ 7.83 (d)
Institutional: Net Assets	$ 1,330,829		$ 112,221	$ 392,068
Shares Issued and Outstanding		221,551	16,338	49,321
Net Asset Value per share	$ 6.01		$ 6.87	$ 7.95
R-1: Net Assets	$ 889		$ 7,825	$ 647
Shares Issued and Outstanding		153	1,149		82
Net Asset Value per share	$ 5.80		$ 6.81	$ 7.88
R-2: Net Assets	$ 7,131		$ 41,405	$ 1,735
Shares Issued and Outstanding		1,270	6,056		220
Net Asset Value per share	$ 5.62		$ 6.84	$ 7.88
R-3: Net Assets	$ 5,857		$ 118,216	$ 1,969
Shares Issued and Outstanding		1,027	17,246		251
Net Asset Value per share	$ 5.71		$ 6.85	$ 7.87
R-4: Net Assets	$ 6,937		$ 67,528	$ 1,438
Shares Issued and Outstanding		1,194	9,806		182
Net Asset Value per share	$ 5.81		$ 6.89	$ 7.89
R-5: Net Assets	$ 16,528		$ 139,495	$ 3,015
Shares Issued and Outstanding		2,816	20,137		379
Net Asset Value per share	$ 5.87		$ 6.93	$ 7.95

(a)	Effective June 13, 2008, Partners LargeCap Growth Fund II changed its name to LargeCap Growth Fund II.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 1.50% of the offering price or 1.52% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

97

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	LargeCap Value		LargeCap Value	LargeCap Value
Amounts in thousands, except per share amounts	Fund I(a)		Fund II(b)	Fund III(c)
Investment in securities--at cost	$ 1,303,370		$ 152,679	$ 2,458,193
Assets
Investment in securities--at value	$ 895,532		$ 114,836	$ 1,836,191 (d)
Cash		1,000	3,450	18,413
Receivables:
Capital Shares sold		992	212	1,233
Dividends and interest		1,449	226	3,517
Expense reimbursement from Underwriter		–	–	3
Investment securities sold		3,022	–	16,215
Variation margin on futures contracts		–	107	300
Total Assets		901,995	118,831	1,875,872
Liabilities
Accrued management and investment advisory fees		610	86	1,175
Accrued administrative service fees		3	–	20
Accrued distribution fees		3	–	65
Accrued service fees		4	1	25
Accrued transfer agent fees		–	–	93
Accrued directors' expenses		–	1	3
Accrued other expenses		15	15	74
Payables:
Capital Shares reacquired		3	–	308
Investment securities purchased		6,393	–	8,336
Collateral obligation on securities loaned, at value		–	–	1,085
Total Liabilities		7,031	103	11,184
Net Assets Applicable to Outstanding Shares	$ 894,964		$ 118,728	$ 1,864,688
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 1,297,648		$ 161,409	$ 2,577,346
Accumulated undistributed (overdistributed) net investment income (operating loss)		15,968	3,130	37,209
Accumulated undistributed (overdistributed) net realized gain (loss)		(10,814 )	(7,721 )	(131,168 )
Net unrealized appreciation (depreciation) of investments		(407,838 )	(38,090)	(618,699 )
Total Net Assets	$ 894,964		$ 118,728	$ 1,864,688
Capital Stock (par value: $.01 a share):
Shares authorized		380,000	505,000	550,000
Net Asset Value Per Share:
Class A: Net Assets		N/A	N/A	$ 32,423
Shares Issued and Outstanding				3,828
Net Asset Value per share				$ 8.47
Maximum Offering Price				$ 8.96 (e)
Class B: Net Assets		N/A	N/A	$ 10,135
Shares Issued and Outstanding				1,203
Net Asset Value per share				$ 8.42 (f)
Class C: Net Assets		N/A	N/A	$ 884
Shares Issued and Outstanding				105
Net Asset Value per share				$ 8.43 (f)
Class J: Net Assets		N/A	N/A	$ 66,714
Shares Issued and Outstanding				7,983
Net Asset Value per share				$ 8.36 (f)
Institutional: Net Assets	$ 874,193		$ 115,577	$ 1,592,265
Shares Issued and Outstanding		99,634	16,202	187,516
Net Asset Value per share	$ 8.77		$ 7.13	$ 8.49
R-1: Net Assets	$ 3,370		$ 287	$ 4,834
Shares Issued and Outstanding		388	41	576
Net Asset Value per share	$ 8.70		$ 7.07	$ 8.40
R-2: Net Assets	$ 4,848		$ 250	$ 25,923
Shares Issued and Outstanding		559	35	3,105
Net Asset Value per share	$ 8.68		$ 7.08	$ 8.35
R-3: Net Assets	$ 4,422		$ 982	$ 60,137
Shares Issued and Outstanding		508	138	6,961
Net Asset Value per share	$ 8.71		$ 7.10	$ 8.64
R-4: Net Assets	$ 2,386		$ 132	$ 23,519
Shares Issued and Outstanding		273	19	2,790
Net Asset Value per share	$ 8.73		$ 7.11	$ 8.43
R-5: Net Assets	$ 5,745		$ 1,500	$ 47,854
Shares Issued and Outstanding		657	211	5,648
Net Asset Value per share	$ 8.74		$ 7.12	$ 8.47

(a)	Effective June 13, 2008, Partners LargeCap Value Fund I changed its name to LargeCap Value Fund I.
(b)	Effective June 13, 2008, Partners LargeCap Value Fund II changed its name to LargeCap Value Fund II.
(c)	Effective June 13, 2008, Partners LargeCap Value Fund changed its name to LargeCap Value Fund III.
(d)	Includes fair market value of securities loaned, see "Securities Lending" in Notes to Financial Statements.
(e)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(f)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

98

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	MidCap Blend		MidCap Growth	MidCap Growth
Amounts in thousands, except per share amounts	Fund		Fund	Fund I(a)
Investment in securities--at cost	$ 738,261		$ 60,466	$ 258,464
Assets
Investment in securities--at value	$ 586,543		$ 49,320	$ 176,431
Cash		18	10	1,293
Receivables:
Capital Shares sold		351	55	61
Dividends and interest		230	23	104
Expense reimbursement from Underwriter		6	1	–
Investment securities sold		–	1,004	–
Other assets		6	–	–
Total Assets		587,154	50,413	177,889
Liabilities
Accrued management and investment advisory fees		328	26	154
Accrued administrative service fees		3	1	1
Accrued distribution fees		166	9	2
Accrued service fees		4	1	2
Accrued transfer agent fees		400	13	4
Accrued directors' expenses		–	1	1
Accrued other expenses		149	21	37
Payables:
Capital Shares reacquired		343	419	–
Investment securities purchased		483	634	–
Total Liabilities		1,876	1,125	201
Net Assets Applicable to Outstanding Shares	$ 585,278		$ 49,288	$ 177,688
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 704,760		$ 63,679	$ 274,035
Accumulated undistributed (overdistributed) net investment income (operating loss)		13	–	–
Accumulated undistributed (overdistributed) net realized gain (loss)		32,223	(3,245 )	(14,314 )
Net unrealized appreciation (depreciation) of investments		(151,718 )	(11,146)	(82,033 )
Total Net Assets	$ 585,278		$ 49,288	$ 177,688
Capital Stock (par value: $.01 a share):
Shares authorized		490,000	305,000	430,000
Net Asset Value Per Share:
Class A: Net Assets	$ 362,130		N/A	$ 1,885
Shares Issued and Outstanding		37,949		276
Net Asset Value per share	$ 9.54			$ 6.82
Maximum Offering Price	$ 10.10 (b)			$ 7.22 (b)
Class B: Net Assets	$ 35,769		N/A	N/A
Shares Issued and Outstanding		3,780
Net Asset Value per share	$ 9.46 (c)
Class C: Net Assets	$ 3,639		N/A	$ 202
Shares Issued and Outstanding		388		30
Net Asset Value per share	$ 9.38 (c)			$ 6.72 (c)
Class J: Net Assets	$ 128,240		$ 20,448	N/A
Shares Issued and Outstanding		13,818	4,056
Net Asset Value per share	$ 9.28 (c)		$ 5.04(c)
Institutional: Net Assets	$ 28,740		$ 19,287	$ 164,793
Shares Issued and Outstanding		2,996	3,548	23,500
Net Asset Value per share	$ 9.59		$ 5.43	$ 7.01
R-1: Net Assets	$ 954		$ 658	$ 1,077
Shares Issued and Outstanding		102	125	160
Net Asset Value per share	$ 9.34		$ 5.24	$ 6.73
R-2: Net Assets	$ 2,552		$ 625	$ 2,035
Shares Issued and Outstanding		273	116	302
Net Asset Value per share	$ 9.36		$ 5.38	$ 6.73
R-3: Net Assets	$ 7,650		$ 1,699	$ 2,786
Shares Issued and Outstanding		807	310	410
Net Asset Value per share	$ 9.48		$ 5.47	$ 6.80
R-4: Net Assets	$ 4,998		$ 4,010	$ 3,430
Shares Issued and Outstanding		518	724	498
Net Asset Value per share	$ 9.65		$ 5.54	$ 6.88
R-5: Net Assets	$ 10,606		$ 2,561	$ 1,480
Shares Issued and Outstanding		1,109	457	214
Net Asset Value per share	$ 9.56		$ 5.60	$ 6.92

(a)	Effective June 13, 2008, Partners MidCap Growth Fund I changed its name to MidCap Growth Fund I.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(c)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

99

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	MidCap Growth		MidCap Growth	MidCap S&P 400
Amounts in thousands, except per share amounts	Fund II(a)		Fund III(b)	Index Fund
Investment in securities--at cost	$ 315,694		$ 669,023	$ 233,435
Assets
Investment in securities--at value	$ 201,100		$ 523,907	$ 165,341
Cash		4,813	2,179	140
Receivables:
Capital Shares sold		17	605	612
Dividends and interest		116	252	122
Expense reimbursement from Manager		–	1	–
Expense reimbursement from Underwriter		–	3	1
Investment securities sold		1,446	7,765	1,263
Variation margin on futures contracts		–	207	99
Total Assets		207,492	534,919	167,578
Liabilities
Accrued management and investment advisory fees		181	452	21
Accrued administrative service fees		2	7	14
Accrued distribution fees		2	28	23
Accrued service fees		2	9	16
Accrued transfer agent fees		–	59	12
Accrued directors' expenses		1	–	1
Accrued other expenses		19	43	27
Payables:
Capital Shares reacquired		239	340	193
Investment securities purchased		1,380	4,163	1,486
Total Liabilities		1,826	5,101	1,793
Net Assets Applicable to Outstanding Shares	$ 205,666		$ 529,818	$ 165,785
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 389,913		$ 777,950	$ 226,917
Accumulated undistributed (overdistributed) net investment income (operating loss)		–	–	1,803
Accumulated undistributed (overdistributed) net realized gain (loss)		(69,653 )	(104,310 )	4,933
Net unrealized appreciation (depreciation) of investments		(114,594 )	(143,822)	(67,868 )
Total Net Assets	$ 205,666		$ 529,818	$ 165,785
Capital Stock (par value: $.01 a share):
Shares authorized		705,000	455,000	305,000
Net Asset Value Per Share:
Class A: Net Assets		N/A	$ 21,252	N/A
Shares Issued and Outstanding			3,425
Net Asset Value per share			$ 6.20
Maximum Offering Price			$ 6.56(c)
Class B: Net Assets		N/A	$ 5,477	N/A
Shares Issued and Outstanding			907
Net Asset Value per share			$ 6.04(d)
Class C: Net Assets		N/A	$ 778	N/A
Shares Issued and Outstanding			126
Net Asset Value per share			$ 6.15(d)
Class J: Net Assets		N/A	$ 20,178	$ 24,690
Shares Issued and Outstanding			3,399	2,625
Net Asset Value per share			$ 5.94(d)	$ 9.41 (d)
Institutional: Net Assets	$ 191,051		$ 423,812	$ 32,043
Shares Issued and Outstanding		33,454	66,503	3,342
Net Asset Value per share	$ 5.71		$ 6.37	$ 9.59
R-1: Net Assets	$ 1,454		$ 775	$ 3,900
Shares Issued and Outstanding		266	126	410
Net Asset Value per share	$ 5.47		$ 6.13	$ 9.50
R-2: Net Assets	$ 1,150		$ 7,120	$ 15,114
Shares Issued and Outstanding		209	1,146	1,568
Net Asset Value per share	$ 5.50		$ 6.21	$ 9.64
R-3: Net Assets	$ 4,701		$ 23,848	$ 29,043
Shares Issued and Outstanding		849	3,719	3,002
Net Asset Value per share	$ 5.54		$ 6.41	$ 9.68
R-4: Net Assets	$ 5,183		$ 17,117	$ 16,573
Shares Issued and Outstanding		929	2,667	1,708
Net Asset Value per share	$ 5.58		$ 6.42	$ 9.70
R-5: Net Assets	$ 2,127		$ 9,461	$ 44,422
Shares Issued and Outstanding		379	1,453	4,561
Net Asset Value per share	$ 5.62		$ 6.51	$ 9.74

(a)	Effective June 13, 2008, Partners MidCap Growth Fund II changed its name to MidCap Growth Fund II.
(b)	Effective June 13, 2008, Partners MidCap Growth Fund changed its name to MidCap Growth Fund III.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

100

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	MidCap Stock		MidCap Value	MidCap Value
Amounts in thousands, except per share amounts	Fund		Fund I(a)	Fund II(b)
Investment in securities--at cost	$ 425,116		$ 890,398	$ 462,949
Assets
Investment in securities--at value	$ 395,877		$ 663,040	$ 308,781
Cash		10	–	111
Receivables:
Capital Shares sold		28	1,232	1,043
Dividends and interest		140	823	689
Expense reimbursement from Manager		–	–	4
Expense reimbursement from Underwriter		–	–	2
Investment securities sold		2,412	2,080	–
Total Assets		398,467	667,175	310,630
Liabilities
Accrued management and investment advisory fees		253	572	273
Accrued administrative service fees		–	5	6
Accrued distribution fees		23	6	28
Accrued service fees		–	6	7
Accrued transfer agent fees		66	–	40
Accrued directors' expenses		–	1	1
Accrued other expenses		84	29	53
Cash overdraft		–	171	–
Payables:
Capital Shares reacquired		67	–	590
Investment securities purchased		1,910	1,327	–
Total Liabilities		2,403	2,117	998
Net Assets Applicable to Outstanding Shares	$ 396,064		$ 665,058	$ 309,632
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 431,035		$ 960,362	$ 539,642
Accumulated undistributed (overdistributed) net investment income (operating loss)		2,516	7,385	3,905
Accumulated undistributed (overdistributed) net realized gain (loss)		(8,248 )	(75,331 )	(79,747 )
Net unrealized appreciation (depreciation) of investments		(29,239 )	(227,358 )	(154,168 )
Total Net Assets	$ 396,064		$ 665,058	$ 309,632
Capital Stock (par value: $.01 a share):
Shares authorized		600,000	280,000	440,000
Net Asset Value Per Share:
Class A: Net Assets	$ 36,639		N/A	$ 6,097
Shares Issued and Outstanding		3,198		757
Net Asset Value per share	$ 11.46			$ 8.06
Maximum Offering Price	$ 12.13 (c)			$ 8.53 (c)
Class B: Net Assets	$ 12,453		N/A	$ 1,006
Shares Issued and Outstanding		1,174		127
Net Asset Value per share	$ 10.60 (d)			$ 7.92 (d)
Class C: Net Assets	$ 4,296		N/A	$ 744
Shares Issued and Outstanding		405		93
Net Asset Value per share	$ 10.60 (d)			$ 7.96 (d)
Class J: Net Assets		N/A	N/A	$ 46,916
Shares Issued and Outstanding				6,150
Net Asset Value per share				$ 7.63 (d)
Institutional: Net Assets	$ 342,676		$ 624,473	$ 210,043
Shares Issued and Outstanding		29,280	72,956	25,833
Net Asset Value per share	$ 11.70		$ 8.56	$ 8.13
R-1: Net Assets		N/A	$ 3,050	$ 906
Shares Issued and Outstanding			363	114
Net Asset Value per share			$ 8.40	$ 7.97
R-2: Net Assets		N/A	$ 5,188	$ 9,892
Shares Issued and Outstanding			617	1,282
Net Asset Value per share			$ 8.41	$ 7.72
R-3: Net Assets		N/A	$ 11,990	$ 15,018
Shares Issued and Outstanding			1,416	1,884
Net Asset Value per share			$ 8.46	$ 7.97
R-4: Net Assets		N/A	$ 9,391	$ 6,771
Shares Issued and Outstanding			1,105	851
Net Asset Value per share			$ 8.50	$ 7.95
R-5: Net Assets		N/A	$ 10,966	$ 12,239
Shares Issued and Outstanding			1,286	1,525
Net Asset Value per share			$ 8.53	$ 8.03

(a)	Effective June 13, 2008, Partners MidCap Value Fund I changed its name to MidCap Value Fund I.
(b)	Effective June 13, 2008, Partners MidCap Value Fund changed its name to MidCap Value Fund II.
(c)	Maximum offering price equals net asset value plus a front-end sales charge of 5.50% of the offering price or 5.82% of the net asset value.
(d)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

101

STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL FUNDS, INC.
October 31, 2008
	MidCap Value		Money Market	Mortgage
Amounts in thousands, except per share amounts	Fund III(a)		Fund	Securities Fund
Investment in securities--at cost	$ 105,148		$ 2,805,384	$ 1,204,827
Assets
Investment in securities--at value	$ 80,492		$ 2,805,384	$ 1,162,026
Cash		697	390	10
Receivables:
Capital Shares sold		165	4,138	4,822
Dividends and interest		75	1,686	5,821
Expense reimbursement from Manager		–	–	4
Expense reimbursement from Underwriter		3	–	–
Investment securities sold		717	7,307	388
Variation margin on futures contracts		22	–	–
Other assets		–	27	–
Total Assets		82,171	2,818,932	1,173,071
Liabilities
Accrued management and investment advisory fees		45	897	558
Accrued administrative service fees		1	38	–
Accrued distribution fees		29	484	57
Accrued service fees		1	91	–
Accrued transfer agent fees		32	510	53
Accrued directors' expenses		1	4	–
Accrued other expenses		35	103	62
Payables:
Capital Shares reacquired		34	8,215	1,003
Dividends payable		–	–	4,663
Investment securities purchased		782	–	–
Total Liabilities		960	10,342	6,396
Net Assets Applicable to Outstanding Shares	$ 81,211		$ 2,808,590	$ 1,166,675
Net Assets Consist of:
Capital Shares and additional paid-in-capital	$ 119,650		$ 2,812,331	$ 1,244,735
Accumulated undistributed (overdistributed) net investment income (operating loss)		966	–	(1,745 )
Accumulated undistributed (overdistributed) net realized gain (loss)		(14,785 )	(3,741 )	(33,514 )
Net unrealized appreciation (depreciation) of investments		(24,620 )	–	(42,801 )
Total Net Assets	$ 81,211		$ 2,808,590	$ 1,166,675
Capital Stock (par value: $.01 a share):
Shares authorized		305,000	17,575,000	855,000
Net Asset Value Per Share:
Class A: Net Assets		N/A	$ 775,670	$ 83,376
Shares Issued and Outstanding			776,617	8,062
Net Asset Value per share			$ 1.00	$ 10.34
Maximum Offering Price			$ 1.00	$ 10.83 (b)
Class B: Net Assets		N/A	$ 87,353	$ 39,613
Shares Issued and Outstanding			87,423	3,832
Net Asset Value per share			$ 1.00(c)	$ 10.34 (c)
Class C: Net Assets		N/A	$ 42,966	$ 6,118
Shares Issued and Outstanding			42,997	593
Net Asset Value per share			$ 1.00(c)	$ 10.32 (c)
Class J: Net Assets	$ 71,496		$ 355,746	N/A
Shares Issued and Outstanding		8,634	356,136
Net Asset Value per share	$ 8.28 (c)		$ 1.00(c)
Class S: Net Assets		N/A	$ 951,684	N/A
Shares Issued and Outstanding			953,071
Net Asset Value per share			$ 1.00
Institutional: Net Assets	$ 6		$ 276,963	$ 1,037,568
Shares Issued and Outstanding		1	277,416	100,278
Net Asset Value per share	$ 8.68		$ 1.00	$ 10.35
R-1: Net Assets	$ 273		$ 11,194	N/A
Shares Issued and Outstanding		33	11,204
Net Asset Value per share	$ 8.33		$ 1.00
R-2: Net Assets	$ 970		$ 32,085	N/A
Shares Issued and Outstanding		116	32,129
Net Asset Value per share	$ 8.38		$ 1.00
R-3: Net Assets	$ 1,317		$ 85,636	N/A
Shares Issued and Outstanding		158	85,741
Net Asset Value per share	$ 8.36		$ 1.00
R-4: Net Assets	$ 1,719		$ 30,868	N/A
Shares Issued and Outstanding		208	30,906
Net Asset Value per share	$ 8.28		$ 1.00
R-5: Net Assets	$ 5,430		$ 158,425	N/A
Shares Issued and Outstanding		650	158,691
Net Asset Value per share	$ 8.36		$ 1.00

(a)	Effective June 13, 2008, MidCap Value Fund changed its name to MidCap Value Fund III.
(b)	Maximum offering price equals net asset value plus a front-end sales charge of 4.50% of the offering price or 4.71% of the net asset value.
(c)	Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See accompanying notes.

102