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Registration No. 33-59474

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

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POST-EFFECTIVE AMENDMENT NO. 86 TO

FORM N-1A

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

and

REGISTRATION STATEMENT

under

THE INVESTMENT COMPANY ACT OF 1940

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PRINCIPAL FUNDS, INC.

(Exact name of Registrant as specified in Charter)

The Principal Financial Group

Des Moines, Iowa 50392

(Address of principal executive offices)

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Telephone Number (515) 248-3842

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	Copy to:
MICHAEL D. ROUGHTON		JOHN W. BLOUCH, Esq.
The Principal Financial Group		Dykema Gossett PLLC
Des Moines, Iowa 50392		Franklin Square, Suite 300 West
		1300 I Street, N.W.
		Washington, DC 20005-3306

(Name and address of agent for service)

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


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

If appropriate, check the following box:)

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

EXPLANATORY NOTE

The Amendment is being filed to add Class P shares to the Global Real Estate Securities Fund. The Amendment contains a facing sheet,

Class P shares prospectus for the Global Real Estate Securities Fund, a Statement of Additional Information for the Class P shares of the

Global Real Estate Securities Fund, Part C and signature page.

The Amendment is not being filed to update or amend the other prospectuses or statements of additional information for any other series of

the Registrant.

RULE 461 REQUEST FOR ACCELERATION: Attached to this filing is a transmittal letter in which the Registrant and the Principal

Underwriter request accelerated effectiveness to December 22, 2010, or as soon thereafter as practicable.

GLOBAL REAL ESTATE SECURITIES FUND

Objective: The Fund seeks to generate a total return.

Fees and Expenses of the Fund

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


Shareholder Fees (fees paid directly from your investment): None

Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)

Estimated for the year ended October 31, 2010	Class P
Management Fees	0.90%
Other Expenses	2.61
Total Annual Fund Operating Expenses	3.51%
Expense Reimbursement ⁽¹⁾	2.41
Total Annual Fund Operating Expenses After Expense Reimbursement	1.10%

⁽¹⁾Principal has contractually agreed to limit the expenses identified as “Other Expenses” and, if necessary, pay expenses normally

payable by the Fund, excluding interest expense, through the period ending February 28, 2012. The expense limit will maintain

“Other Expenses” (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%. This agreement

can be terminated by mutual agreement of the parties (Principal Funds, Inc. and Principal Management Corporation).

Example

This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other

mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of

your shares at the end of those periods. The Example also assumes that your investment has a 5% return each

year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,

based on these assumptions your costs would be:


	1 year	3 years
Class P	$112	$814

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).

A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares

are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the

example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was

35.3% of the average value of its portfolio.


Investor Profile:	The Fund may be an appropriate investment for investors who seek a total return, want to invest in
	U.S. and non-U.S. companies engaged in the real estate industry and can accept the potential for
	volatile fluctuations in the value of investments.

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets (plus any borrowings for investment

purposes) in equity securities of U.S. and non-U.S. companies principally engaged in the real estate industry (“real

estate companies”). For purposes of the Fund’s investment policies, a real estate company has at least 50% of its

assets, income or profits derived from products or services related to the real estate industry. Real estate companies

(“real estate companies”) include real estate investment trusts and companies with substantial real estate holdings

such as paper, lumber, hotel and entertainment companies as well as those whose products and services relate to the

real estate industry such as building supply manufacturers, mortgage lenders, and mortgage servicing companies.


The Fund may invest up to 10% of its assets in fixed income securities issued by real estate companies. The Fund will
invest in equity securities of small, medium, and large capitalization companies. The Fund may purchase securities
issued as part of, or a short period after, companies' initial public offerings and may at times dispose of those shares
shortly after their acquisition. The Fund may actively trade portfolio securities in an attempt to achieve its investment
objective.

Real estate investment trusts (“REITs”) are pooled investment vehicles that invest in income producing real estate,
real estate related loans, or other types of real estate interests. REITs in the U.S. are corporations or business trusts
that are permitted to eliminate corporate level federal income taxes by meeting certain requirements of the Internal
Revenue Code. REITs, are characterized as:
•	Equity REITs, which primarily own property and generate revenue from rental income;
•	Mortgage REITs, which invest in real estate mortgages; and
•	Hybrid REITs, which combine the characteristics of both equity and mortgage REITs.

Some foreign countries have adopted REIT structures that are very similar to those in the United States. Similarities
include pass through tax treatment and portfolio diversification. Other countries may have REIT structures that are
significantly different than the U.S. or may not have adopted a REIT like structure at all. The Fund may invest a
significant percentage of its portfolio in REITs and foreign REIT-like entities.

The Fund is “non-diversified” which means that it may invest more of its assets in the securities of fewer issuers than
diversified mutual funds. Thus, the Fund is subject to non-diversification risk.

The Fund has no limitation on the percentage of assets that are invested in any one country or denominated in any
one currency. The Fund will typically have investments located in a number of different countries, which may include
the U.S. The Fund may invest in companies located in countries with emerging securities markets.

The Fund may engage in certain options transactions, enter into financial futures contracts, currency forwards, and
related options for the purpose of portfolio hedging and other purposes.

Principal Risks
The value of your investment in the Fund changes with the value of the Fund’s investments. Many factors affect that
value, and it is possible to lose money by investing in the Fund. The principal risks of investing in the Fund, in
alphabetical order, are:

Active Trading Risk. Actively trading portfolio securities may result in high portfolio turnover rates and increase
brokerage costs, accelerate realization of taxable gains and adversely impact fund performance.

Derivatives Risk. Transactions in derivatives (such as options, futures, and swaps) may increase volatility, cause the
liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses. Certain Fund
transactions, such as reverse repurchase agreements, loans of portfolio securities, and the use of when-issued,
delayed delivery or forward commitment transactions, or derivative instruments, may give rise to leverage, causing the
Fund to be more volatile than if it had not been leveraged.

Equity Securities Risk. Equity securities (common, preferred, and convertible preferred stocks and securities whose
values are tied to the price of stocks, such as rights, warrants and convertible debt securities) could decline in value if
the issuer's financial condition declines or in response to overall market and economic conditions. A fund's principal
market segment(s), such as large cap, mid cap or small cap stocks, or growth or value stocks, may underperform
other market segments or the equity markets as a whole. Investments in smaller companies and mid-size companies
may involve greater risk and price volatility than investments in larger, more mature companies.

Fixed-Income Securities Risk. Fixed-income securities are subject to interest rate risk and credit quality risk. The
market value of fixed-income securities generally declines when interest rates rise, and an issuer of fixed-income
securities could default on its payment obligations.

Foreign Securities Risk. The risks of foreign securities include loss of value as a result of: political or economic

instability; nationalization, expropriation or confiscatory taxation; changes in foreign exchange rates and foreign

exchange restrictions; settlement delays; and limited government regulation (including less stringent reporting,

accounting, and disclosure standards than are required of U.S. companies). These risks are greater for investments in

emerging markets.

Industry Concentration (Sector) Risk. A fund that concentrates investments in a particular industry or group of

industries (e.g., real estate, technology, financial services) has greater exposure than other funds to market, economic

and other factors affecting that industry or sector.

Initial Public Offerings ("IPOs") Risk. The market for IPO shares may be volatile, continued access to IPO offerings

cannot be assured, and a fund may dispose of IPO shares shortly after their acquisition.

Non-Diversification Risk. A non-diversified fund may invest a high percentage of its assets in the securities of a

small number of issuers and is more likely than diversified funds to be significantly affected by a specific security’s

poor performance.

Real Estate Securities Risk. Real estate securities (including real estate investment trusts ("REITs")) are subject to

the risks associated with direct ownership of real estate, including declines in value, adverse economic conditions,

increases in expenses, regulatory changes and environmental problems. A REIT could fail to qualify for tax-free

passthrough of income under the Internal Revenue Code, and Fund shareholders will indirectly bear their

proportionate share of the expenses of REITs in which the Fund invests.

Performance

The following information provides an indication of the risks of investing in the Fund. The bar chart shows the

investment returns of the Fund’s Class P shares for each full calendar year of operations for 10 years (or, if shorter,

the life of the Fund). The table shows, for Class P shares of the Fund and for the last one, five, and ten calendar year

periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare to the returns of one

or more broad-based market indices. Past performance (before and after taxes) is not necessarily an indication of how

the Fund will perform in the future. You may get updated performance information online at www.principal.com or by

calling 1-800-222-5852.

Class P shares were first sold on ______________. The returns for the periods prior to that date are based on the

performance of the Institutional Class shares adjusted to reflect the fees and expenses of Class P shares. The

adjustments result in performance for such periods that is no higher than the historical performance of the Institutional

Class shares. The Institutional Class shares were first sold on October 1, 2007.


Highest return for a quarter during the period of the bar chart above:	Q2 ‘09	31.05%
Lowest return for a quarter during the period of the bar chart above:	Q4 ‘08	-29.72%


Average Annual Total Returns

For the periods ended December 31, 2009	1 Year	Life of Fund
Class P Return Before Taxes	36.15%	-17.26%
Class P Return After Taxes on Distributions	34.12%	-18.27%
Class P Return After Taxes on Distribution and Sale of Fund Shares	23.50%	-14.91%
FTSE EPRA/NAREIT Developed Index (reflects no deduction for fees, expenses, or taxes)	38.26%	-17.47%

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not

reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ

from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-

deferred arrangements, such as 401(k) plans or individual retirement accounts.

Management

Investment Advisor: Principal Management Corporation

Sub-Advisor(s) and Portfolio Manager(s):

Principal Real Estate Investors, LLC


•	Alistair Gillespie (since 2010), Managing Director, Portfolio Management
•	Simon Hedger (since 2007), Portfolio Manager
•	Anthony Kenkel (since 2010), Portfolio Manager
•	Chris Lepherd (since 2007), Portfolio Manager
•	Kelly D. Rush (since 2007), Portfolio Manager

Purchase and Sale of Fund Shares

There are no restrictions on amounts to be invested in Class P shares of the Fund for an eligible purchaser. You may

purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for

regular trading) through your Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024,

Boston, MA 02266-8024; or calling us at 800-222-5852.

Tax Information

The Fund’s distributions are generally taxable to you as ordinary income, capital gains, or a combination of the two,

unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement

account.


Payments to Broker-Dealers and Other Financial Intermediaries.
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank, insurance company,
investment adviser, etc.), the Fund and its related companies may pay the intermediary for the sale of Fund shares
and related services. These payments may create a conflict of interest by influencing the broker-dealer or other
intermediary and your salesperson to recommend the Fund over another investment, or to recommend one share
class of the Fund over another share class. Ask your salesperson or visit your financial intermediary’s website for
more information.

PURCHASE OF FUND SHARES

Principal Funds, Inc. offers funds in multiple share classes: A, B, C, J, Institutional, R-1, R-2, R-3, R-4, R-5, and P.
Funds available in multiple share classes have the same investments, but differing expenses. Class P shares are
available in this prospectus.

Only eligible purchasers may buy Class P shares of the Funds. At the present time, eligible purchasers include but are
not limited to:
•	sponsors, recordkeepers, or administrators of fee-based programs that have special agreements with the Fund’s
	distributor and through certain registered investment advisers;
•	retirement and pension plans to which Principal Life Insurance Company (“Principal Life”) provides recordkeeping
	services;
•	clients of Principal Global Investors, LLC;
•	sponsors, recordkeepers, or administrators of wrap account or mutual fund asset allocation programs or
	participants in those programs (that trade in an omnibus relationship);
•	certain pension plans;
•	certain retirement account investment vehicles administered by foreign or domestic pension plans;
•	an investor who buys shares through an omnibus account with certain intermediaries, such as a broker-dealer,
	bank, or other financial institution, pursuant to a written agreement; and
•	certain institutional clients that have been approved by Principal Life for purposes of providing plan recordkeeping.

Principal Management Corporation (“Principal”) reserves the right to broaden or limit the designation of eligible
purchasers.

Shares may be purchased from Principal Funds Distributor, Inc. (“the Distributor”). The Distributor is an affiliate of
Principal Life Insurance Company and with it are subsidiaries of Principal Financial Group, Inc. and members of the
Principal Financial Group. There are no sales charges on Class P shares of the Fund. There are no restrictions on
amounts to be invested in Class P shares of the Fund.

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

The Fund may reject or cancel any purchase orders for any reason. For example, the Fund does not intend to permit

market timing because short-term or other excessive trading into and out of the Funds may harm performance by

disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject any

purchase orders from market timers or investors that, in Principal’s opinion, may be disruptive to the Fund. For these

purposes, Principal may consider an investor’s trading history in the Fund or other Funds sponsored by Principal Life

and accounts under common ownership or control.

Payments are to be made via personal or financial institution check (for example, a bank or cashier's check). We

reserve the right to refuse any payment that we feel presents a fraud or money laundering risk. Examples of the types

of payments we will not accept are cash, money orders, travelers' checks, credit card checks, and foreign checks.

Principal may recommend to the Board, and the Board may elect, to close certain funds to new and existing investors.

NOTE: No salesperson, dealer or other person is authorized to give information or make representations about a

Fund other than those contained in this Prospectus. Information or representations not contained in this

prospectus may not be relied upon as having been provided or made by Principal Funds, a Fund, Principal,

any Sub-Advisor, or the Distributor.

REDEMPTION OF FUND SHARES

You may redeem shares of the Fund upon request. There is no charge for the redemption. Shares are redeemed at

the net asset value (NAV) per share next computed after the request is received by the Fund in proper and complete

form.

The Fund generally sends payment for shares sold the business day after the sell order is received. Under unusual

circumstances, the Fund may suspend redemptions, or postpone payment for more than seven days, as permitted by

federal securities law.

Distributions in Kind. Payment for shares of the Funds tendered for redemption is ordinarily made by check.

However, the Funds may determine that it would be detrimental to the remaining shareholders of a Fund to make

payment of a redemption order wholly or partly in cash. Under certain circumstances, therefore, each of the Funds

may pay the redemption proceeds in whole or in part by a distribution “in kind” of securities from the Fund’s portfolio in

lieu of cash. If a Fund pays the redemption proceeds in kind, the redeeming shareholder might incur brokerage or

other costs in selling the securities for cash. Each Fund will value securities used to pay redemptions in kind using the

same method the Fund uses to value its portfolio securities as described in this prospectus.

Redemption fees. The Fund board of directors has determined that it is not necessary to impose a fee upon the

redemption of fund shares, because the Fund has adopted transfer restrictions as described in “Exchange of

Fund Shares.”

EXCHANGE OF FUND SHARES

An exchange between Funds is a redemption of shares of one Fund and a concurrent purchase of shares in another

Fund with the redemption proceeds. A shareholder, including a beneficial owner of shares held in nominee name may

exchange Fund shares under certain circumstances. You may exchange your Fund shares, without charge, for

shares of any other Fund of the Principal Funds available in Class P; however, an intermediary or employee benefit

plan may impose restrictions on exchanges.

In order to prevent excessive exchanges, and under other circumstances where the Fund Board of Directors or

Principal believes it is in the best interests of the Fund, the Fund reserves the right to revise or terminate this exchange

privilege, limit the amount or further limit the number of exchanges, reject any exchange or close an account.

TAX CONSIDERATIONS

Shareholders are responsible for federal income tax (and any other taxes, including state and local income taxes, if

applicable) on dividends and capital gains distributions whether such dividends or distributions are paid in cash or

reinvested in additional shares. Special tax rules apply to distributions from IRAs and other retirement accounts. You

should consult a tax advisor to determine the suitability of the Fund as an investment by such a plan and the tax

treatment of Fund distributions.

Generally, dividends paid by the Funds from interest, dividends, or net short-term capital gains will be taxed as

ordinary income. Distributions properly designated by the Fund as deriving from net gains on securities held for more

than one year are taxable as such (generally at a 15% tax rate), regardless of how long you have held your shares.

For taxable years beginning before January 1, 2011, distributions of investment income properly designated by the

Fund as derived from “qualified dividend income” will be taxed at the rates applicable to long-term capital gains.

Investments by a Fund in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield

on those securities would be decreased. Shareholders of the Funds that invest in foreign securities may be entitled to

claim a credit or deduction with respect to foreign taxes. In addition, the Fund’s investments in foreign securities or

foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or

amount of the Fund’s distributions.

Early in each calendar year, each Fund will notify you of the amount and tax status of distributions paid to you for the

preceding year.

A dividend or distribution made shortly after the purchase of shares of a Fund by a shareholder, although in effect a

return of capital to that shareholder, would be taxable to that shareholder as described above, subject to a holding

period requirement for dividends designated as qualified dividend income.

Because of tax law requirements, you must provide the Funds with an accurate and certified taxpayer identification

number (for individuals, generally a Social Security number) to avoid “back-up” withholding, which is currently imposed

at a rate of 28%.

Any gain resulting from the sale, redemption, or exchange of your shares will generally also be subject to tax. You

should consult your tax advisor for more information on your own tax situation, including possible foreign, state, and

local taxes.

Investments by a Fund in certain debt instruments or derivatives may cause the Fund to recognize taxable income in

excess of the cash generated by such instruments. As a result, the Fund could be required at times to liquidate other

investments in order to satisfy its distribution requirements under the Internal Revenue Code. The Fund’s use of

derivatives will also affect the amount, timing, and character of the Fund’s distributions.

The information contained in this prospectus is not a complete description of the federal, state, local, or foreign tax

consequences of investing in the Fund. You should consult your tax advisor before investing in the Fund.

INTERMEDIARY COMPENSATION

Shares of the Fund are sold primarily through intermediaries, such as brokers, dealers, investment advisors, banks,

trust companies, pension plan consultants, retirement plan administrators and insurance companies.

Principal or its affiliates enter into agreements with some intermediaries pursuant to which the intermediaries receive

payments for providing services relating to Fund shares. Examples of such services are administrative, networking,

recordkeeping, sub-transfer agency and shareholder services. In some situations, the Fund will reimburse Principal or

its affiliates for making such payments; in others the Fund may make such payments directly to intermediaries.


In addition, Principal or its affiliates may pay, without reimbursement from the Fund, compensation from their own
resources to certain intermediaries that support the distribution of shares of the Fund or provide services to Fund
shareholders.

Such payments may vary, but generally do not exceed: (a) 0.10% of the current year's sales of Fund shares by that
intermediary or (b) 0.10% of the average net asset value of Fund shares held by clients of such intermediary. The
amounts paid to intermediaries vary by share class and by fund.

Additionally, in some cases the Distributor and its affiliates will provide payments or reimbursements in connection
with the costs of conferences, educational seminars, training and marketing efforts related to the Funds. Such
activities may be sponsored by intermediaries or the Distributor. The costs associated with such activities may include
travel, lodging, entertainment, and meals. In some cases the Distributor will also provide payment or reimbursement
for expenses associated with transactions ("ticket") charges and general marketing expenses.

For more information, see the Statement of Additional Information (SAI).

The payments described in this prospectus may create a conflict of interest by influencing your Financial Professional
or your intermediary to recommend the Fund over another investment, or to recommend one share class of the Fund
over another share class. Ask your Financial Professional or visit your intermediary's website for more information
about the total amounts paid to them by Principal and its affiliates, and by sponsors of other mutual funds your
Financial Professional may recommend to you.

Your intermediary may charge you additional fees other than those disclosed in this prospectus. Ask your Financial
Professional about any fees and commissions they charge.

THE COSTS OF INVESTING

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

In addition to the ongoing fees listed below, the Class P shares of the Funds may pay a portion of investment related
expenses (e.g., interest on reverse repurchase agreements) that are allocated to all classes of the Funds.

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

Each Fund pays ongoing fees to the Manager and others who provide services to the Fund. These fees include:
•	Management Fee – Through the Management Agreement with the Fund, Principal has agreed to provide
	investment advisory services and corporate administrative services to the Fund.
•	Other Expenses – A portion of expenses that are allocated to all classes of the Fund. An example includes a
	Transfer Agent Fee (Principal Shareholder Services, Inc. (“PSS”) has entered into a Transfer Agency Agreement
	with the Fund under which PSS provides transfer agent services to the Class P shares of the Fund. These services
	are currently provided at cost.). Class P shares of the Funds also pay expenses of registering and qualifying shares
	for sale, the cost of producing and distributing reports and prospectuses to Class P shareholders, the cost of
	shareholder meetings held solely for Class P shares, and other operating expenses of the Fund.

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

The Fund’s investment objective is described in the Fund’s summary description. The Board of Directors may change

a Fund’s objective or the investment strategies without a shareholder vote if it determines such a change is in the best

interests of the Fund. If there is a material change to the Fund’s investment objective or investment strategies, you

should consider whether the Fund remains an appropriate investment for you. There is no guarantee that a Fund will

meet its objective.

The Fund is designed to be a portion of an investor's portfolio and is not intended to be a complete investment

program. Investors should consider the risks of each Fund before making an investment and be prepared to maintain

the investment during periods of adverse market conditions. The Fund is subject to Underlying Fund Risk to the extent

that a fund of funds invests in the Fund. It is possible to lose money by investing in the Fund.

The SAI contains additional information about investment strategies and their related risks.

Securities and Investment Practices

Market Volatility. The value of a fund’s portfolio securities may go down in response to overall stock or bond market

movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to

go up and down in value more than bonds. If the fund’s investments are concentrated in certain sectors, its

performance could be worse than the overall market. The value of an individual security or particular type of security

can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. It

is possible to lose money when investing in the fund.

Equity Securities. Equity securities include common stocks, preferred stocks, convertible securities, depositary

receipts, rights (a right is an offering of common stock to investors who currently own shares which entitle them to buy

subsequent issues at a discount from the offering price), and warrants (a warrant is a certificate granting its owner the

right to purchase securities from the issuer at a specified price, normally higher than the current market price) .

Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation. The value of a

company’s stock may fall as a result of factors directly relating to that company, such as decisions made by its

management or lower demand for the company’s products or services. A stock’s value may also fall because of

factors affecting not just the company, but also companies in the same industry or in a number of different industries,

such as increases in production costs. The value of a company’s stock may also be affected by changes in financial

markets that are relatively unrelated to the company or its industry, such as changes in interest rates or currency

exchange rates. In addition, a company’s stock generally pays dividends only after the company invests in its own

business and makes required payments to holders of its bonds and other debt. For this reason, the value of a

company’s stock will usually react more strongly than its bonds and other debt to actual or perceived changes in the

company’s financial condition or prospects. Stocks of smaller companies may be more vulnerable to adverse

developments than those of larger companies.

Fixed-Income Securities. Fixed-income securities include bonds and other debt instruments that are used by issuers

to borrow money from investors (some examples include investment grade corporate bonds, mortgage-backed

securities, U.S. government securities and asset-backed securities). The issuer generally pays the investor a fixed,

variable, or floating rate of interest. The amount borrowed must be repaid at maturity. Some debt securities, such as

zero coupon bonds, do not pay current interest, but are sold at a discount from their face values.

Interest Rate Changes. Fixed-income securities are sensitive to changes in interest rates. In general, fixed-income

security prices rise when interest rates fall and fall when interest rates rise. Longer term bonds and zero coupon bonds

are generally more sensitive to interest rate changes. If interest rates fall, issuers of callable bonds may call (repay)

securities with high interest rates before their maturity dates; this is known as call risk. In this case, a fund would likely

reinvest the proceeds from these securities at lower interest rates, resulting in a decline in the fund's income.

Credit Risk. Fixed-income security prices are also affected by the credit quality of the issuer. Investment grade debt

securities are medium and high quality securities. Some bonds, such as lower grade or “junk” bonds, may have

speculative characteristics and may be particularly sensitive to economic conditions and the financial condition of the

issuers.

Counterparty Risk. The Fund is subject to the risk that the issuer or guarantor of a fixed-income security or other

obligation, the counterparty to a derivatives contract or repurchase agreement, or the borrower of a portfolio’s

securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise to honor

its obligations.

Management Risk

The Fund is actively managed and prepared to invest in securities, sectors, or industries differently from the

benchmark. If a sub-advisor's investment strategies do not perform as expected, the Fund could underperform other

funds with similar investment objectives or lose money.

Liquidity Risk

A fund is exposed to liquidity risk when trading volume, lack of a market maker, or legal restrictions impair the fund’s

ability to sell particular securities or close derivative positions at an advantageous price. Funds with principal

investment strategies that involve securities of companies with smaller market capitalizations, foreign securities,

derivatives, or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk.

Repurchase Agreements

Although not a principal investment strategy, the Fund may invest a portion of its assets in repurchase agreements.

Repurchase agreements typically involve the purchase of debt securities from a financial institution such as a bank,

savings and loan association, or broker-dealer. A repurchase agreement provides that the Fund sells back to the seller

and that the seller repurchases the underlying securities at a specified price on a specific date. Repurchase

agreements may be viewed as loans by a Fund collateralized by the underlying securities. This arrangement results in

a fixed rate of return that is not subject to market fluctuation while the Fund holds the security. In the event of a default

or bankruptcy by a selling financial institution, the affected Fund bears a risk of loss. To minimize such risks, the Fund

enters into repurchase agreements only with parties a Sub-Advisor deems creditworthy (those that are large, well-

capitalized and well-established financial institutions). In addition, the value of the securities collateralizing the

repurchase agreement is, and during the entire term of the repurchase agreement remains, at least equal to the

repurchase price, including accrued interest.

Real Estate Investment Trusts

The Global Real Estate Securities Fund typically invests a significant portion of its net assets in real estate investment

trusts (“REITs”). REITs involve certain unique risks in addition to those risks associated with investing in the real

estate industry in general (such as possible declines in the value of real estate, lack of availability of mortgage funds,

or extended vacancies of property). Equity REITs may be affected by changes in the value of the underlying property

owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are

dependent upon management skills, are not diversified, and are subject to heavy cash flow dependency, risks of

default by borrowers, and self-liquidation. As an investor in a REIT, the Fund will be subject to the REIT’s expenses,

including management fees, and will remain subject to the Fund’s advisory fees with respect to the assets so invested.

REIT’s are also subject to the possibilities of failing to qualify for the special tax treatment accorded REITs under the

Code, and failing to maintain their exemptions from registration under the 1940 Act.

Investment in REITs involves risks similar to those associated with investing in small capitalization companies. REITs

may have limited financial resources, may trade less frequently and in a limited volume, and may be subject to more

abrupt or erratic price movements than larger company securities.

Initial Public Offerings (“IPOs”)

An IPO is a company’s first offering of stock to the public. IPO risk is that the market value of IPO shares will fluctuate

considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of

shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high

transaction costs. IPO shares are subject to market risk and liquidity risk. In addition, the market for IPO shares can be

speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some

IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact

on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares by sales

of additional shares and by concentration of control in existing management and principal shareholders.

When a Fund’s asset base is small, a significant portion of the Fund’s performance could be attributable to

investments in IPOs because such investments would have a magnified impact on the Fund. As the Fund’s assets

grow, the effect of the Fund’s investments in IPOs on the Fund’s performance probably will decline, which could

reduce the Fund’s performance. Because of the price volatility of IPO shares, a Fund may choose to hold IPO shares

for a very short period of time. This may increase the turnover of the Fund’s portfolio and lead to increased expenses

to the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it

will subsequently distribute to shareholders.

Derivatives

Generally, a derivative is a financial arrangement, the value of which is derived from, or based on, a traditional

security, asset, or market index. Certain derivative securities are described more accurately as index/structured

securities. Index/structured securities are derivative securities whose value or performance is linked to other equity

securities (such as depositary receipts), currencies, interest rates, indices, or other financial indicators (reference

indices).

Some derivatives, such as mortgage-related and other asset-backed securities, are in many respects like any other

investment, although they may be more volatile or less liquid than more traditional debt securities.

There are many different types of derivatives and many different ways to use them. Futures, forward contracts, and

options are commonly used for traditional hedging purposes to attempt to protect a Fund from exposure to changing

interest rates, securities prices, or currency exchange rates and for cash management purposes as a low-cost method

of gaining exposure to a particular securities market without investing directly in those securities. The Funds may enter

into put or call options, futures contracts, options on futures contracts, over-the-counter swap contracts (e.g., interest

rate swaps, total return swaps and credit default swaps), currency futures contracts and options, options on

currencies, and forward currency contracts for both hedging and non-hedging purposes. A forward currency contract

involves a privately negotiated obligation to purchase or sell a specific currency at a future date at a price set in the

contract. A Fund will not hedge currency exposure to an extent greater than the approximate aggregate market value

of the securities held or to be purchased by the Fund (denominated or generally quoted or currently convertible into

the currency). The Funds may enter into forward commitment agreements (not as a principal investment strategy),

which call for the Fund to purchase or sell a security on a future date at a fixed price. Each of the Funds may also enter

into contracts to sell its investments either on demand or at a specific interval.

Generally, no Fund may invest in a derivative security unless the reference index or the instrument to which it relates

is an eligible investment for the Fund or the reference currency relates to an eligible investment for the Fund.

The return on a derivative security may increase or decrease, depending upon changes in the reference index or

instrument to which it relates. If a Fund’s Sub-Advisor hedges market conditions incorrectly or employs a strategy that

does not correlate well with the Fund’s investment, these techniques could result in a loss. These techniques may

increase the volatility of a Fund and may involve a small investment of cash relative to the magnitude of the risk

assumed. The risks associated with derivative investments include:

• the risk that the underlying security, interest rate, market index, or other financial asset will not move in the

direction the Manager or Sub-Advisor anticipated;

• the possibility that there may be no liquid secondary market which may make it difficult or impossible to close out a

position when desired;

• the risk that adverse price movements in an instrument can result in a loss substantially greater than a Fund’s initial

investment; and

• the possibility that the counterparty may fail to perform its obligations.

For currency contracts, there is also a risk of government action through exchange controls that would restrict the

ability of the Fund to deliver or receive currency.

Exchange Traded Funds (ETFs)

These are a type of index or actively managed fund bought and sold on a securities exchange. An ETF trades like

common stock. Shares in an index ETF represent an interest in a fixed portfolio of securities designed to track a

particular market index. The Funds could purchase shares issued by an ETF to gain exposure to a portion of the

U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect

the risks of owning the underlying securities they are designed to track, although ETFs have management fees that


increase their costs. Fund shareholders indirectly bear their proportionate share of the expenses of the ETFs in which
the fund invests.

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

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

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

Preferred Securities
Preferred securities generally pay fixed rate dividends (though some are adjustable rate) and typically have
“preference” over common stock in the payment of dividends and the liquidation of a company’s assets - preference
means that a company must pay dividends on its preferred securities before paying any dividends on its common
stock, and the claims of preferred securities holders are ahead of common stockholders’ claims on assets in a
corporate liquidation. Holders of preferred securities usually have no right to vote for corporate directors or on other
matters. The market value of preferred securities is sensitive to changes in interest rates as they are typically fixed
income securities - the fixed-income payments are expected to be the primary source of long-term investment return.
Preferred securities share many investment characteristics with bonds; therefore, the risks and potential rewards of
investing in the Fund are more similar to those associated with a bond fund than a stock fund.

Foreign Investing
As a principal investment strategy, the Global Real Estate Securities Fund may invest Fund assets in securities of
foreign companies. For the purpose of this restriction, foreign companies are:
•	companies with their principal place of business or principal office outside the U.S. or
•	companies for which the principal securities trading market is outside the U.S.

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

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

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


Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial
relative to the actual market values and may be unfavorable to Fund investors. To protect against future uncertainties
in foreign currency exchange rates, the funds are authorized to enter into certain foreign currency exchange
transactions.

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

A Fund may choose to invest in a foreign company by purchasing depositary receipts. Depositary receipts are
certificates of ownership of shares in a foreign-based issuer held by a bank or other financial institution. They are
alternatives to purchasing the underlying security but are subject to the foreign securities to which they relate.

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

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

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

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

Small and Medium Capitalization Companies
The Fund may invest in securities of companies with small- or mid-sized market capitalizations. Market
capitalization is defined as total current market value of a company’s outstanding common stock. Investments in
companies with smaller market capitalizations may involve greater risks and price volatility (wide, rapid fluctuations)
than investments in larger, more mature companies. Small companies may be less significant within their industries
and may be at a competitive disadvantage relative to their larger competitors. While smaller companies may be

subject to these additional risks, they may also realize more substantial growth than larger or more established

companies.

Smaller companies may be less mature than larger companies. At this earlier stage of development, the companies

may have limited product lines, reduced market liquidity for their shares, limited financial resources, or less depth in

management than larger or more established companies. Unseasoned issuers are companies with a record of less

than three years continuous operation, including the operation of predecessors and parents. Unseasoned issuers by

their nature have only a limited operating history that can be used for evaluating the company’s growth prospects. As

a result, these securities may place a greater emphasis on current or planned product lines and the reputation and

experience of the company’s management and less emphasis on fundamental valuation factors than would be the

case for more mature growth companies.

Securities Lending Risk

To earn additional income, the Fund may lend portfolio securities to approved financial institutions. Risks of such a

practice include the possibility that a financial institution becomes insolvent, increasing the likelihood that the Fund will

be unable to recover the loaned security or its value. Further, the cash collateral received by the Fund in connection

with such a loan may be invested in a security that subsequently loses value.

Temporary Defensive Measures

From time to time, as part of its investment strategy, the Fund may invest without limit in cash and cash equivalents

for temporary defensive purposes in response to adverse market, economic, or political conditions. To the extent that

the Fund is in a defensive position, it may lose the benefit of upswings and limit its ability to meet its investment

objective. For this purpose, cash equivalents include: bank notes, bank certificates of deposit, bankers’ acceptances,

repurchase agreements, commercial paper, and commercial paper master notes which are floating rate debt

instruments without a fixed maturity. In addition, the Fund may purchase U.S. government securities, preferred stocks,

and debt securities, whether or not convertible into or carrying rights for common stock.

There is no limit on the extent to which the Fund may take temporary defensive measures. In taking such measures,

the Fund may fail to achieve its investment objective.

Portfolio Turnover

“Portfolio Turnover” is the term used in the industry for measuring the amount of trading that occurs in a fund’s portfolio

during the year. For example, a 100% turnover rate means that on average every security in the portfolio has been

replaced once during the year. Funds that engage in active trading may have higher portfolio turnover rates.

Funds with high turnover rates (more than 100%) often have higher transaction costs (that are paid by the Fund) which

may lower the Fund’s performance and may generate short-term capital gains (on which taxes may be imposed even

if no shares of the Fund are sold during the year).

MANAGEMENT OF THE FUNDS

The Manager

Principal Management Corporation (“Principal”) serves as the manager for the Fund. Through the Management

Agreement with the Fund, Principal provides investment advisory services and certain corporate administrative

services for the Fund.

Principal is an indirect subsidiary of Principal Financial Group, Inc. and has managed mutual funds since 1969.

Principal’s address is Principal Financial Group, Des Moines, Iowa 50392.

The Sub-Advisors

Principal has signed a contract with a Sub-Advisor. Under the sub-advisory agreement, the Sub-Advisor

agrees to assume the obligations of Principal to provide investment advisory services to the portion of the assets for a

specific Fund allocated to it by Principal. For these services, Principal pays the Sub-Advisor a fee.

Principal or the Sub-Advisor provides the Directors of the Fund with a recommended investment program. The

program must be consistent with the Fund's investment objective and policies. Within the scope of the approved

investment program, the Sub-Advisor advises the Fund on its investment policy and determines which securities are

bought or sold, and in what amounts.

The Sub-Advisor may enter into co-employee agreements, investment service agreements, dual employee

agreements, or other similar agreements with advisers with which they are affiliated. Through the agreements, the

Sub-Advisor’s portfolio manager usually is accorded access to the portfolio management processes, systems, staff,

proprietary quantitative model, portfolio construction disciplines, experienced portfolio management, and quantitative

research staff of the affiliated investment advisory firm. Likewise, through the agreements, the portfolio manager

usually has access to the trading staff and trade execution capabilities along with the order management system, pre-

and post-trade compliance system, portfolio accounting system and portfolio accounting system and performance

attribution and risk management system of the affiliated investment advisory firm.

The Fund summary identified the portfolio managers and the fund they manage. Additional information about the

portfolio managers follows. The SAI provides additional information about each portfolio manager’s compensation,

other accounts managed by the portfolio manager, and the portfolio manager’s ownership of securities in the Fund.

Sub-Advisor: Principal Real Estate Investors, LLC (“Principal - REI”), 801 Grand Avenue, Des Moines, IA 50392,

an indirect wholly owned subsidiary of Principal Life, an affiliate of Principal, and a member of the

Principal Financial Group, was founded in 2000.

The day-to-day portfolio management for the fund is shared by multiple portfolio managers. The portfolio

managers operate as a team, sharing authority and responsibility for research and the day-to-day management

of the portfolio with no limitation on the authority of one portfolio manager in relation to another.

Alistair Gillespie has been with Principal - REI since 2009. As a co-employee of Principal - REI and Principal Global

Investors (Singapore) Limited, Mr. Gillespie manages Principal Fund assets as an employee of Principal - REI. From

2006-2009, he was also a management board member of the Asian Public Real Estate Association (APREA). Prior to

working in Asia, he covered the Australian market for eight years with UBS, ABN Amro and BT Alex Brown. He

earned a Bachelor of Commerce (Finance) from University of Wollongong and a Graduate Diploma in Applied Finance

and Investment from the Securities Institute of Australia. Mr. Gillespie has earned the right to use the Chartered

Financial Analyst designation.

Simon Hedger has been with Principal - REI since 2003. As a co-employee of Principal-REI and PGI Europe, Mr.

Hedger manages Principal Fund assets as an employee of Principal-REI. He earned an MBA from the University of

New England and is an associate member of both the Royal Institute of Chartered Surveyors and of the Australian

Property Institute. He is a U.K. qualified chartered surveyor (ARICS).

Anthony Kenkel has been with Principal - REI since 2005. He earned a Bachelor's degree in Finance from Drake

University and an MBA from the University of Chicago Graduate School of Business. Mr. Kenkel has earned the right

to use the Chartered Financial Analyst and Financial Risk Manager designations.

Chris Lepherd has been with Principal - REI since 2003. As a co-employee of Principal-REI and Principal Global

Investors (Australia) Limited, Mr. Lepherd manages Principal Fund assets as an employee of Principal-REI. He

earned a Bachelor of Business (Land Economy) from the University of Western Sydney and a Graduate Diploma in

Applied Finance and Investment from the Securities Institute of Australia.

Kelly Rush has been with the real estate investment area for the firm since 1987. He earned a Bachelor’s degree in

Finance and an MBA in Business Administration from the University of Iowa. Mr. Rush has earned the right to use the

Chartered Financial Analyst designation.


Fees Paid to Principal
The Fund pays Principal a fee for its services, which includes the fee Principal pays to the Sub-Advisor. The fee the Global Real
Estate Securities Fund paid (as a percentage of the average daily net assets) for the fiscal year ended October 31, 2009 was 0.90%.

A discussion regarding the basis for the Board of Directors approval of the management agreement with Principal and
the sub-advisory agreements with each Sub-Advisor is available in the semi-annual report to shareholders for the
period ended April 30, 2010 and in the annual report to shareholders for the fiscal year ended October 31, 2009.

Manager of Managers
The Fund operates as a Manager of Managers. Under an order received from the SEC, the Fund and Principal, may
enter into and materially amend agreements with Sub-Advisors, other than those affiliated with Principal, without
obtaining shareholder approval. For any Fund that is relying on that order, Principal may, without obtaining
shareholder approval:
•	hire one or more Sub-Advisors;
•	change Sub-Advisors; and
•	reallocate management fees between itself and Sub-Advisors.

Principal has ultimate responsibility for the investment performance of each Fund that utilizes a Sub-Advisor due to its
responsibility to oversee Sub-Advisors and recommend their hiring, termination, and replacement. No Fund will rely on
the order until it receives approval from its shareholders or, in the case of a new Fund, the Fund’s sole initial
shareholder before the Fund is available to the other purchasers, and the Fund states in its prospectus that it intends
to rely on the order.

The shareholders of the Fund have approved the Fund’s reliance on the order; however, the Global Real Estate
Securities Fund does not rely on the order.

PRICING OF FUND SHARES

Each Fund’s shares are bought and sold at the current share price. The share price of each class of each Fund is
calculated each day the New York Stock Exchange (“NYSE”) is open (share prices are not calculated on the days on
which the NYSE is closed for trading, generally New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday/
Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas). The
share price is determined as of the close of business of the NYSE (normally 3:00 p.m. Central Time). When an order
to buy or sell shares is received, the share price used to fill the order is the next price we calculate after we receive the
order at our transaction processing center in Canton, Massachusetts. To process your purchase order on the day we
receive it, we must receive the order (with complete information):
	•	on a day that the NYSE is open and
	•	prior to the close of trading on the NYSE (normally 3 p.m. Central Time).
Orders received after the close of the NYSE or on days that the NYSE is not open will be processed on the next day
that the NYSE is open for normal trading.

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

For this Fund, the share price is calculated by:
•	taking the current market value of the total assets of the Fund
•	subtracting liabilities of the Fund
•	dividing the remainder proportionately into the classes of the Fund
•	subtracting the liability of each class
•	dividing the remainder by the total number of shares outstanding for that class.


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

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

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

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

•	Certain securities issued by companies in emerging market countries may have more than one quoted valuation at
	any point in time. These may be referred to as local price and premium price. The premium price is often a
	negotiated price that may not consistently represent a price at which a specific transaction can be effected. The
	Fund has a policy to value such securities at a price at which the Sub-Advisor expects the securities may be sold.

DIVIDENDS AND DISTRIBUTIONS

Dividends are based on estimates of income, expenses, and shareholder activity for the Fund. Actual income,
expenses, and shareholder activity may differ from estimates; consequently, differences, if any, will be included in the
calculation of subsequent dividends. The Funds pay their net investment income to shareholders of record on the
business day prior to the payment date. The Global Real Estate Securities Fund pays its net investment income
quarterly in March, June, September, and December. For more details on the payment schedule go to
www.principal.com

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

Dividend and capital gains distributions will be reinvested, without a sales charge, in shares of the Fund from which
the distribution is paid.

Generally, for federal income tax purposes, Fund distributions are taxable as ordinary income, except that any
distributions of long-term capital gains will be taxed as such regardless of how long Fund shares have been held.
Special tax rules apply to Fund distributions to retirement plans. A tax advisor should be consulted to determine the
suitability of the Fund as an investment by such a plan and the tax treatment of distributions by the Fund. A tax advisor
can also provide information on the potential impact of possible foreign, state, and local taxes. A Fund’s investments in
foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield on those securities would
be decreased.

To the extent that distributions the Funds pay are derived from a source other than net income (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 you should not rely upon them for purposes of reporting income taxes. 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.

FREQUENT PURCHASES AND REDEMPTIONS

The Fund is not designed for, and does not knowingly accommodate, frequent purchases and redemptions of fund
shares by investors. If you intend to trade frequently and/or use market timing investment strategies, you should not
purchase this Fund.

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

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

Certain Funds may be at greater risk of harm due to frequent purchases and redemptions. For example, those Funds
that invest in foreign securities may appeal to investors attempting to take advantage of time-zone arbitrage.

The Fund has adopted procedures to “fair value” foreign securities under certain circumstances, which are intended, in
part, to discourage excessive trading of shares of the Fund. The Board of Directors of the Fund has also adopted
policies and procedures with respect to frequent purchases and redemptions of shares of the Fund. The Fund
monitors shareholder trading activity to identify and take action against abuses. While our policies and procedures are
designed to identify and protect against abusive trading practices, there can be no certainty that we will identify and
prevent abusive trading in all instances. If we are not able to identify such excessive trading practices, the Fund and its
shareholders may be harmed. When we do identify abusive trading, we will apply our policies and procedures in a fair
and uniform manner.

If we, or a Fund, deem abusive trading practices to be occurring, we will take action that may include, but is not limited
to:
•	Rejecting exchange instructions from the shareholder or other person authorized by the shareholder to direct
	exchanges;
•	Restricting submission of exchange requests by, for example, allowing exchange requests to be submitted by 1st
	class U.S. mail only and disallowing requests made by facsimile, overnight courier, telephone or via the internet;
•	Limiting the number of exchanges a year; and
•	Taking other such action as directed by the Fund.

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


FUND ACCOUNT INFORMATION

Orders Placed by Intermediaries
Principal Funds may have an agreement with your intermediary, such as a broker-dealer, third party administrator, or
trust company, that permits the intermediary to accept orders on behalf of the Fund until 3 p.m. Central Time. The
agreement may include authorization for your intermediary to designate other intermediaries (“sub-designees”) to
accept orders on behalf of the Fund on the same terms that apply to the intermediary. In such cases, if your
intermediary or a sub-designee receives your order in correct form by 3 p.m. Central Time, transmits it to the Fund,
and pays for it in accordance with the agreement, the Fund will price the order at the next net asset value per share it
computes after your intermediary or sub-designee received your order.

Note: The time at which the Fund prices orders and the time until which the Fund or your intermediary or sub-
designee will accept orders may change in the case of an emergency or if the NYSE closes at a time other than
3 p.m. Central Time.

Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the signature(s) must be guaranteed by a
commercial bank, trust company, credit union, savings and loan, national securities exchange member, or brokerage
firm. A signature guaranteed by a notary public or savings bank is not acceptable. Signature guarantees are required:
•	if you sell more than $500,000 from any one Fund;
•	if a sales proceeds check is payable to other than the account shareholder(s);
•	to change ownership of an account;
•	to add telephone transaction services and/or wire privileges to an existing account if there is not a common owner
	between the bank account and mutual fund account;
•	to change bank account information designated under an existing telephone withdrawal plan if there is not a
	common owner between the bank account and mutual fund account;
•	to exchange or transfer among accounts with different ownership; and
•	to have a sales proceeds check mailed to an address other than the address on the account or to the address on
	the account if it has been changed within the preceding 15 days.

Reservation of Rights
Principal Funds reserves the right to amend or terminate the special plans described in this prospectus. In addition,
Principal Funds reserves the right to change the share class described herein. Shareholders will be notified of any
such action to the extent required by law.

Financial Statements
Shareholders will receive annual financial statements for the Funds, audited by the Funds’ independent registered
public accounting firm. Shareholders will also receive a semiannual financial statement that is unaudited.

PORTFOLIO HOLDINGS INFORMATION

A description of the Fund's policies and procedures with respect to disclosure of the Fund's portfolio securities is
available in the Fund's Statement of Additional Information.

ADDITIONAL INFORMATION

Additional information about the Fund (including the Fund’s policy regarding the disclosure of portfolio securities) is

available in the Statement of Additional Information dated ___________, 2010, which is incorporated by reference into

this prospectus. Additional information about the Funds’ investments is available in the Fund’s annual and semiannual

reports to shareholders. In the Fund’s annual report, you will find a discussion of the market conditions and investment

strategies that significantly affected the Funds’ performance during the last fiscal year. The Statement of Additional

Information and the Fund’s annual and semiannual reports can be obtained free of charge by writing Principal Funds,

P.O. Box 8024, Boston, MA 02266-8024. In addition, the Fund makes its Statement of Additional Information and

annual and semiannual reports available, free of charge, on our website www.principal.com. To request this and other

information about the Fund and to make shareholder inquiries, telephone 1-800-222-5852.

Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the

Securities and Exchange Commission’s Public Reference Room in Washington, D.C. Information on the operation of

the Public Reference Room may be obtained by calling the Commission at 1-202-551-8090. Reports and other

information about the Fund are available on the EDGAR Database on the Commission’s internet site at http://

www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at

the following e-mail address: publicinfo@sec.gov, or by writing the Commission’s Public Reference Section, 100 F

Street, N.E., Washington, D.C. 20549-1520.

The U.S. government does not insure or guarantee an investment in any of the Funds.

Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution, nor are

shares of the Funds federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or

any other agency.

Principal Funds, Inc. SEC File 811-07572


PRINCIPAL FUNDS, INC.
(the "Fund")

Statement of Additional Information

dated _______________________

Ticker Symbols for Principal Funds, Inc.
Fund Name	Class P
Global Real Estate Securities	POSPX

This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information
in the Fund's prospectuses. The prospectus, which we may amend from time to time, contains the basic information
you should know before investing in the Fund. You should read this SAI together with the Fund’s prospectus dated
_____________.

For a free copy of the current prospectus or annual report, call 1-800-222-5852 or write:

Principal Funds
P.O. Box 8024
Boston, MA 02266-8024

The prospectus may be viewed at www.Principal.com.

Incorporation by Reference: The audited financial statements, schedules of investments and auditor’s report
included in the Fund’s Annual Report to Shareholders, for the fiscal year ended October 31, 2009, are hereby
incorporated by reference into and are legally a part of this SAI. The unaudited financial statements and schedules of
investments included in the Fund’s Semi-Annual Report to Shareholders, for the period ended April 30, 2010, are
hereby incorporated by reference into and are legally a part of this SAI.

FUND HISTORY

Principal Funds, Inc. ("the Registrant" or the "Fund") was organized as Principal Special Markets Fund, Inc. on

January 28, 1993 as a Maryland corporation. The Fund changed its name to Principal Investors Fund, Inc. effective

September 14, 2000. The Fund changed its name to Principal Funds, Inc. effective June 13, 2008.

The Global Real Estate Securities Fund offers Class A, Class C, and Institutional Class shares along with Class P.

This SAI is only relevant to Class P Shares of the Global Real Estate Securities Fund. For more information, including

your eligibility to purchase certain classes of shares, call Principal Funds at 1-800-222-5852.

DESCRIPTION OF THE FUNDS’ INVESTMENTS AND RISKS

The Fund is a registered, open-end management investment company, commonly called a mutual fund. The Fund

consists of multiple investment portfolios including the Global Real Estate Securities Fund. The Fund operates for

many purposes as if it were an independent mutual fund. The Fund has its own investment objective, strategy, and

management team.

Fund Policies

The investment objective, investment strategies and the principal risks of the Fund are described in the Prospectus.

This Statement of Additional Information contains supplemental information about those strategies and risks and the

types of securities the Sub-Advisor can select for the Fund. Additional information is also provided about the strategies

that the Fund may use to try to achieve its objective.

The composition of the Fund and the techniques and strategies that the Sub-Advisor may use in selecting securities

will vary over time. The Fund is not required to use all of the investment techniques and strategies available to it in

seeking its goals.

Unless otherwise indicated, with the exception of the percentage limitations on borrowing, the restrictions apply at the

time transactions are entered into. Accordingly, any later increase or decrease beyond the specified limitation,

resulting from market fluctuations or in a rating by a rating service, does not require elimination of any security from the

portfolio.

The investment objective of the Fund and, except as described below as "Fundamental Restrictions," the investment

strategies described in this Statement of Additional Information and the prospectuses are not fundamental and may be

changed by the Board of Directors without shareholder approval. The Fundamental Restrictions may not be changed

without a vote of a majority of the outstanding voting securities of the Fund. The Investment Company Act of 1940, as

amended, ("1940 Act") provides that "a vote of a majority of the outstanding voting securities" of the Fund means the

affirmative vote of the lesser of 1) more than 50% of the outstanding shares or 2) 67% or more of the shares present at

a meeting if more than 50% of the outstanding Fund shares are represented at the meeting in person or by proxy.

Each share has one vote, with fractional shares voting proportionately. Shares of all classes of the Fund will vote

together as a single class except when otherwise required by law or as determined by the Board of Directors.

With the exception of the diversification test required by the Internal Revenue Code, the Fund will not consider

collateral held in connection with securities lending activities when applying any of the following fundamental

restrictions or any other investment restriction set forth in the Fund's prospectus or Statement of Additional

Information.

Fundamental Restrictions

Each of the following numbered restrictions for the Global Real Estate Securities Fund is a matter of fundamental

policy and may not be changed without shareholder approval. The Fund may not:

1) Issue any senior securities as defined in the 1940 Act. Purchasing and selling securities and futures contracts and

options thereon and borrowing money in accordance with restrictions described below do not involve the issuance

of a senior security.


2)	Invest in physical commodities or commodity contracts (other than foreign currencies), but it may purchase and sell
	financial futures contracts, options on such contracts, swaps, and securities backed by physical commodities.

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

4)	Borrow money, except as permitted under the Investment Company Act of 1940, as amended, and as interpreted,
	modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.

5)	Make loans, except that the Fund may a) purchase and hold debt obligations in accordance with its investment
	objectives and policies, b) enter into repurchase agreements, and c) lend its portfolio securities without limitation
	against collateral (consisting of cash or liquid assets) equal at all times to not less than 100% of the value of the
	securities lent. This limit does not apply to purchases of debt securities or commercial paper.

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

7)	Sell securities short (except where the Fund holds or has the right to obtain at no added cost a long position in the
	securities sold that equals or exceeds the securities sold short).

Non-Fundamental Restrictions
The Fund has also adopted the following restrictions that are not fundamental policies and may be changed without
shareholder approval. It is contrary to the Fund's present policy to:

1)	Invest more than 15% (5% in the case of the Money Market Fund) of its net assets in illiquid securities and in
	repurchase agreements maturing in more than seven days except to the extent permitted by applicable law.

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

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

4)	Invest more than 25% of its assets in foreign securities.

5)	Acquire securities of other investment companies in reliance on Section 12(d)(1)(F) or (G) of the 1940 Act, invest
	more than 10% of its total assets in securities of other investment companies, invest more than 5% of its total
	assets in the securities of any one investment company, or acquire more than 3% of the outstanding voting
	securities of any one investment company except in connection with a merger, consolidation, or plan of
	reorganization and except as permitted by the 1940 Act, SEC rules adopted under the 1940 Act or exemptions
	granted by the Securities and Exchange Commission. The Fund may purchase securities of closed-end investment
	companies in the open market where no underwriter or dealer's commission or profit, other than a customary
	broker's commission, is involved.

The Fund has also adopted the non-fundamental policy, pursuant to SEC Rule 35d-1, which requires it, under normal
circumstances, to invest at least 80% of its net assets in the type of securities, industry or geographic region (as
described in the prospectus) as suggested by the name of the Fund. The Fund will provide 60-days notice to
shareholders prior to implementing a change in this policy for the Fund.

Investment Strategies and Risks
Restricted Securities
Generally, restricted securities are not readily marketable because they are subject to legal or contractual restrictions
upon resale. They are sold only in a public offering with an effective registration statement or in a transaction that is
exempt from the registration requirements of the Securities Act of 1933. When registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of


the decision to sell and the time the Fund may be permitted to sell a security. If adverse market conditions were to
develop during such a period, the Fund might obtain a less favorable price than existed when it decided to sell.
Restricted securities and other securities not readily marketable are priced at fair value as determined in good faith by
or under the direction of the Directors.

The Fund has adopted investment restrictions that limit its investments in restricted securities or other illiquid
securities up to 15% of its net assets (or, in the case of the Money Market Fund, 5%). The Directors have adopted
procedures to determine the liquidity of Rule 4(2) short-term paper and of restricted securities under Rule 144A.
Securities determined to be liquid under these procedures are excluded from the preceding investment restriction.

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

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

With respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political, or
social instability, or diplomatic developments that could affect the Fund's investments in those countries. In addition,
the Fund may also suffer losses due to nationalization, expropriation, or differing accounting practices and treatments.
Investments in foreign securities are subject to laws of the foreign country that may limit the amount and types of
foreign investments. Changes of governments or of economic or monetary policies, in the U.S. or abroad, changes in
dealings between nations, currency convertibility, or exchange rates could result in investment losses for the Fund.
Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial
relative to the actual market values and may be unfavorable to the Fund's investors.

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

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


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

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

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

Depositary Receipts
Depositary Receipts are generally subject to the same sort of risks as direct investments in a foreign country, such as,
currency risk, political and economic risk, and market risk, because their values depend on the performance of a
foreign security denominated in its home currency.

The Fund may invest in:
•	American Depositary Receipts ("ADRs") - receipts issued by an American bank or trust company evidencing
	ownership of underlying securities issued by a foreign issuer. They are designed for use in U.S. securities markets.
•	European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") - receipts typically issued by a
	foreign financial institution to evidence an arrangement similar to that of ADRs.

Depositary Receipts may be issued by sponsored or unsponsored programs. In sponsored programs, an issuer has
made arrangements to have its securities traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a sponsored program. Accordingly, there may be
less information available regarding issuers of securities of underlying unsponsored programs, and there may not be a
correlation between the availability of such information and the market value of the Depositary Receipts.

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

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

Spread Transactions, Options on Securities and Securities Indices, and Futures Contracts and Options on Futures

Contracts

The Fund may engage in:

• Spread Transactions. The Fund may purchase covered spread options. Such covered spread options are not

presently exchange listed or traded. The purchase of a spread option gives the Fund the right to put, or sell, a

security that it owns at a fixed dollar spread or fixed yield spread in relationship to another security that the Fund

does not own, but which is used as a benchmark. The risk to the Fund in purchasing covered spread options is the

cost of the premium paid for the spread option and any transaction costs. In addition, there is no assurance that

closing transactions will be available. The purchase of spread options can be used to protect the Fund against

adverse changes in prevailing credit quality spreads, i.e., the yield spread between high quality and lower quality

securities. The security covering the spread option is maintained in segregated accounts either with the Fund's

custodian or on the Fund's records. The Fund does not consider a security covered by a spread option to be

"pledged" as that term is used in the Fund's policy limiting the pledging or mortgaging of assets.

• Options on Securities and Securities Indices. The Fund may write (sell) and purchase call and put options on

securities in which it invests and on securities indices based on securities in which the Fund invests. The Fund may

engage in these transactions to hedge against a decline in the value of securities owned or an increase in the price

of securities which the Fund plans to purchase, or to generate additional revenue.

• Writing Covered Call and Put Options. When the Fund writes a call option, it gives the purchaser of the option

the right to buy a specific security at a specified price at any time before the option expires. When the Fund

writes a put option, it gives the purchaser of the option the right to sell to the Fund a specific security at a

specified price at any time before the option expires. In both situations, the Fund receives a premium from the

purchaser of the option.

The premium received by the Fund reflects, among other factors, the current market price of the underlying

security, the relationship of the exercise price to the market price, the time period until the expiration of the

option and interest rates. The premium generates additional income for the Fund if the option expires

unexercised or is closed out at a profit. By writing a call, the Fund limits its opportunity to profit from any

increase in the market value of the underlying security above the exercise price of the option, but it retains the

risk of loss if the price of the security should decline. By writing a put, the Fund assumes the risk that it may

have to purchase the underlying security at a price that may be higher than its market value at time of exercise.

The Fund writes only covered options and complies with applicable regulatory and exchange cover

requirements. The Fund usually owns the underlying security covered by any outstanding call option. With

respect to an outstanding put option, the Fund deposits and maintains with its custodian or segregates on the

Fund's records, cash, or other liquid assets with a value at least equal to the exercise price of the option.

Once the Fund has written an option, it may terminate its obligation before the option is exercised. The Fund

executes a closing transaction by purchasing an option of the same series as the option previously written. The

Fund has a gain or loss depending on whether the premium received when the option was written exceeds the

closing purchase price plus related transaction costs.

• Purchasing Call and Put Options. When the Fund purchases a call option, it receives, in return for the premium it

pays, the right to buy from the writer of the option the underlying security at a specified price at any time before the

option expires. The Fund purchases call options in anticipation of an increase in the market value of securities that

it intends ultimately to buy. During the life of the call option, the Fund is able to buy the underlying security at the

exercise price regardless of any increase in the market price of the underlying security. In order for a call option to

result in a gain, the market price of the underlying security must exceed the sum of the exercise price, the premium

paid, and transaction costs.

When the Fund purchases a put option, it receives, in return for the premium it pays, the right to sell to the writer of

the option the underlying security at a specified price at any time before the option expires. The Fund purchases

put options in anticipation of a decline in the market value of the underlying security. During the life of the put

option, the Fund is able to sell the underlying security at the exercise price regardless of any decline in the market

price of the underlying security. In order for a put option to result in a gain, the market price of the underlying

security must decline, during the option period, below the exercise price enough to cover the premium and

transaction costs.

Once the Fund purchases an option, it may close out its position by selling an option of the same series as the

option previously purchased. The Fund has a gain or loss depending on whether the closing sale price exceeds the

initial purchase price plus related transaction costs.

• Options on Securities Indices. The Fund may purchase and sell put and call options on any securities index based

on securities in which the Fund may invest. Securities index options are designed to reflect price fluctuations in a

group of securities or segment of the securities market rather than price fluctuations in a single security. Options on

securities indices are similar to options on securities, except that the exercise of securities index options requires

cash payments and does not involve the actual purchase or sale of securities. The Fund engages in transactions in

put and call options on securities indices for the same purposes as they engage in transactions in options on

securities. When the Fund writes call options on securities indices, it holds in its portfolio underlying securities

which, in the judgment of the Sub-Advisor, correlate closely with the securities index and which have a value at

least equal to the aggregate amount of the securities index options.

• Risks Associated with Option Transactions. An option position may be closed out only on an exchange that

provides a secondary market for an option of the same series. The Fund generally purchases or writes only those

options for which there appears to be an active secondary market. However, there is no assurance that a liquid

secondary market on an exchange exists for any particular option, or at any particular time. If the Fund is unable to

effect closing sale transactions in options it has purchased, it has to exercise its options in order to realize any profit

and may incur transaction costs upon the purchase or sale of underlying securities. If the Fund is unable to effect a

closing purchase transaction for a covered option that it has written, it is not able to sell the underlying securities, or

dispose of the assets held in a segregated account, until the option expires or is exercised. The Fund's ability to

terminate option positions established in the over-the-counter market may be more limited than for exchange-

traded options and may also involve the risk that broker-dealers participating in such transactions might fail to meet

their obligations.

• Futures Contracts and Options on Futures Contracts. The Fund may purchase and sell financial futures contracts

and options on those contracts. Financial futures contracts are commodities contracts based on financial

instruments such as U.S. Treasury bonds or bills or on securities indices such as the S&P 500 Index. Futures

contracts, options on futures contracts, and the commodity exchanges on which they are traded are regulated by

the Commodity Futures Trading Commission. Through the purchase and sale of futures contracts and related

options, a Fund may seek to hedge against a decline in the value of securities owned by the Fund or an increase in

the price of securities that the Fund plans to purchase. The Fund may enter into futures contracts and related

options transactions both for hedging and non-hedging purposes.

• Futures Contracts. When the Fund sells a futures contract based on a financial instrument, the Fund is obligated to

deliver that kind of instrument at a specified future time for a specified price. When the Fund purchases that kind of

contract, it is obligated to take delivery of the instrument at a specified time and to pay the specified price. In most

instances, these contracts are closed out by entering into an offsetting transaction before the settlement date. The

Fund realizes a gain or loss depending on whether the price of an offsetting purchase plus transaction costs are

less or more than the price of the initial sale or on whether the price of an offsetting sale is more or less than the

price of the initial purchase plus transaction costs. Although the Funds usually liquidate futures contracts on

financial instruments, by entering into an offsetting transaction before the settlement date, they may make or take

delivery of the underlying securities when it appears economically advantageous to do so.

A futures contract based on a securities index provides for the purchase or sale of a group of securities at a

specified future time for a specified price. These contracts do not require actual delivery of securities but result in a

cash settlement. The amount of the settlement is based on the difference in value of the index between the time the

contract was entered into and the time it is liquidated (at its expiration or earlier if it is closed out by entering into an

offsetting transaction).

When the Fund purchases or sells a futures contract, it pays a commission to the futures commission merchant

through which the Fund executes the transaction. When entering into a futures transaction, the Fund does not pay

the execution price, as it does when it purchases a security, or a premium, as it does when it purchases an option.

Instead, the Fund deposits an amount of cash or other liquid assets (generally about 5% of the futures contract

amount) with its futures commission merchant. This amount is known as "initial margin." In contrast to the use of

margin account to purchase securities, the Fund's deposit of initial margin does not constitute the borrowing of

money to finance the transaction in the futures contract. The initial margin represents a good faith deposit that

helps assure the Fund's performance of the transaction. The futures commission merchant returns the initial

margin to the Fund upon termination of the futures contract if the Fund has satisfied all its contractual obligations.

Subsequent payments to and from the futures commission merchant, known as "variation margin," are required to

be made on a daily basis as the price of the futures contract fluctuates, a process known as "marking to market."

The fluctuations make the long or short positions in the futures contract more or less valuable. If the position is

closed out by taking an opposite position prior to the settlement date of the futures contract, a final determination of

variation margin is made. Any additional cash is required to be paid to or released by the broker and the Fund

realizes a loss or gain.

In using futures contracts, the Fund may seek to establish more certainly, than would otherwise be possible, the

effective price of or rate of return on portfolio securities or securities that the Fund proposes to acquire. The Fund,

for example, sells futures contracts in anticipation of a rise in interest rates that would cause a decline in the value

of its debt investments. When this kind of hedging is successful, the futures contract increases in value when the

Fund's debt securities decline in value and thereby keeps the Fund's net asset value from declining as much as it

otherwise would. The Fund may also sell futures contracts on securities indices in anticipation of or during a stock

market decline in an endeavor to offset a decrease in the market value of its equity investments. When the Fund is

not fully invested and anticipates an increase in the cost of securities it intends to purchase, it may purchase

financial futures contracts. When increases in the prices of equities are expected, the Fund may purchase futures

contracts on securities indices in order to gain rapid market exposure that may partially or entirely offset increases

in the cost of the equity securities it intends to purchase.

• Options on Futures Contracts. The Fund may also purchase and write call and put options on futures contracts. A

call option on a futures contract gives the purchaser the right, in return for the premium paid, to purchase a futures

contract (assume a long position) at a specified exercise price at any time before the option expires. A put option

gives the purchaser the right, in return for the premium paid, to sell a futures contract (assume a short position), for

a specified exercise price, at any time before the option expires.

Upon the exercise of a call, the writer of the option is obligated to sell the futures contract (to deliver a long position

to the option holder) at the option exercise price, which will presumably be lower than the current market price of

the contract in the futures market. Upon exercise of a put, the writer of the option is obligated to purchase the

futures contract (deliver a short position to the option holder) at the option exercise price, which will presumably be

higher than the current market price of the contract in the futures market. However, as with the trading of futures,

most options are closed out prior to their expiration by the purchase or sale of an offsetting option at a market price

that reflects an increase or a decrease from the premium originally paid. Options on futures can be used to hedge

substantially the same risks addressed by the direct purchase or sale of the underlying futures contracts. For

example, if the Fund anticipates a rise in interest rates and a decline in the market value of the debt securities in its

portfolio, it might purchase put options or write call options on futures contracts instead of selling futures contracts.

If the Fund purchases an option on a futures contract, it may obtain benefits similar to those that would result if it

held the futures position itself. But in contrast to a futures transaction, the purchase of an option involves the

payment of a premium in addition to transaction costs. In the event of an adverse market movement, however, the

Fund is not subject to a risk of loss on the option transaction beyond the price of the premium it paid plus its

transaction costs.

When the Fund writes an option on a futures contract, the premium paid by the purchaser is deposited with the

Fund's custodian. The Fund must maintain with its futures commission merchant all or a portion of the initial margin

requirement on the underlying futures contract. It assumes a risk of adverse movement in the price of the

underlying futures contract comparable to that involved in holding a futures position. Subsequent payments to and

from the futures commission merchant, similar to variation margin payments, are made as the premium and the

initial margin requirements are marked to market daily. The premium may partially offset an unfavorable change in

the value of portfolio securities, if the option is not exercised, or it may reduce the amount of any loss incurred by

the Fund if the option is exercised.

• Risks Associated with Futures Transactions. There are a number of risks associated with transactions in futures

contracts and related options. The Fund's successful use of futures contracts is subject to the ability of the Sub-

Advisor to predict correctly the factors affecting the market values of the Fund's portfolio securities. For example, if

the Fund is hedged against the possibility of an increase in interest rates which would adversely affect debt

securities held by the Fund and the prices of those debt securities instead increases, the Fund loses part or all of

the benefit of the increased value of its securities it hedged because it has offsetting losses in its futures positions.

Other risks include imperfect correlation between price movements in the financial instrument or securities index

underlying the futures contract, on the one hand, and the price movements of either the futures contract itself or the

securities held by the Fund, on the other hand. If the prices do not move in the same direction or to the same

extent, the transaction may result in trading losses.

Prior to exercise or expiration, a position in futures may be terminated only by entering into a closing purchase or

sale transaction. This requires a secondary market on the relevant contract market. The Fund enters into a futures

contract or related option only if there appears to be a liquid secondary market. There can be no assurance,

however, that such a liquid secondary market exists for any particular futures contract or related option at any

specific time. Thus, it may not be possible to close out a futures position once it has been established. Under such

circumstances, the Fund continues to be required to make daily cash payments of variation margin in the event of

adverse price movements. In such situations, if the Fund has insufficient cash, it may be required to sell portfolio

securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In

addition, the Fund may be required to perform under the terms of the futures contracts it holds. The inability to

close out futures positions also could have an adverse impact on the Fund's ability effectively to hedge its portfolio.

Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a

single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary

either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has

been reached in a particular type of contract, no more trades may be made on that day at a price beyond that limit.

The daily limit governs only price movements during a particular trading day and therefore does not limit potential

losses because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have

occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby

preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.

• Limitations on the Use of Futures and Options on Futures Contracts. The Fund has claimed an exclusion from the

definition of a “commodity pool operator” under the Commodity Exchange Act and is not subject to registration or

regulation as a commodity pool operator under the Commodity Exchange Act,.

The Fund may enter into futures contracts and related options transactions, for hedging purposes and for other

appropriate risk management purposes, and to modify the Fund's exposure to various currency, equity, or fixed-

income markets. The Fund may engage in speculative futures trading. When using futures contracts and options

on futures contracts for hedging or risk management purposes, the Fund determines that the price fluctuations in

the contracts and options are substantially related to price fluctuations in securities held by the Fund or which it

expects to purchase. In pursuing traditional hedging activities, the Fund may sell futures contracts or acquire puts

to protect against a decline in the price of securities that the Fund owns. The Fund may purchase futures contracts

or calls on futures contracts to protect the Fund against an increase in the price of securities the Fund intends to

purchase before it is in a position to do so.

When the Fund purchases a futures contract, or purchases a call option on a futures contract, it segregates

portfolio assets, which must be liquid and marked to the market daily, in a segregated account. The amount so

segregated plus the amount of initial margin held for the account of its futures commission merchant equals the

market value of the futures contract.

With respect to futures contracts that are not legally required to “cash settle,” the Fund may cover the open position

by setting aside or “earmarking” liquid assets in an amount equal to the market value of the futures contract. With

respect to futures that are required to “cash settle,” however, the Fund is permitted to set aside or “earmark” liquid

assets in an amount equal to the Fund’s daily marked to market (net) obligation, if any (in other words, the Fund’s

daily net liability, if any) rather than the market value of the futures contract. By setting aside or “earmarking” assets

equal to only its net obligation under cash-settled futures, the Fund will have the ability to utilize these contracts to

a greater extent than if the Fund were required to segregate or “earmark” assets equal to the full market value of

the futures contract.

Mortgage- and Asset-Backed Securities

The yield characteristics of the mortgage- and asset-backed securities in which the Funds may invest differ from those

of traditional debt securities. Among the major differences are that the interest and principal payments are made more

frequently on mortgage- and asset-backed securities (usually monthly) and that principal may be prepaid at any time

because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if the Fund

purchases those securities at a premium, a prepayment rate that is faster than expected will reduce their yield, while a

prepayment rate that is slower than expected will have the opposite effect of increasing yield. If the Fund purchases

these securities at a discount, faster than expected prepayments will increase their yield, while slower than expected

prepayments will reduce their yield. Amounts available for reinvestment by the Fund are likely to be greater during a

period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates than during a period

of rising interest rates.

In general, the prepayment rate for mortgage-backed securities decreases as interest rates rise and increases as

interest rates fall. However, rising interest rates will tend to decrease the value of these securities. In addition, an

increase in interest rates may affect the volatility of these securities by effectively changing a security that was

considered a short-term security at the time of purchase into a long-term security. Long-term securities generally

fluctuate more widely in response to changes in interest rates than short- or medium-term securities.

The market for privately issued mortgage- and asset-backed securities is smaller and less liquid than the market for

U.S. government mortgage-backed securities. A collateralized mortgage obligation may be structured in a manner that

provides a wide variety of investment characteristics (yield, effective maturity, and interest rate sensitivity). As market

conditions change, and especially during periods of rapid market interest rate changes, the ability of a collateralized

mortgage obligation to provide the anticipated investment characteristics may be greatly diminished. Increased market

volatility and/or reduced liquidity may result.

Inflation-Indexed Bonds

The Funds may invest in inflation-indexed bonds or inflation protected debt securities, which are fixed income

securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S.

Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond. Most

other issuers pay out the Consumer Price Index accruals as part of a semi-annual coupon. Inflation-indexed securities

issued by the U.S. Treasury (Treasury Inflation Protected Securities or TIPS) have maturities of approximately five, ten

or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury

securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation-adjusted principal amount. If

the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted

downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal

amount) will be reduced. The value of inflation-indexed bonds is expected to change in response to changes in real

interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of

inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates might

decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a

faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. While

these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may

lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in

currency exchange rates), investors in these securities may not be protected to the extent that the increase is not

reflected in the bond's inflation measure.

The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers

(CPI-U), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes

in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds

issued by a foreign government are generally adjusted to reflect a comparable inflation index calculated by that

government. Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary

income, even though investors do not receive their principal until maturity.

Real Estate Investment Trusts (“REITs”)

REITs are pooled investment vehicles that invest in income producing real estate, real estate related loans, or other

types of real estate interests. U.S. REITs are allowed to eliminate corporate level federal tax so long as they meet

certain requirements of the Internal Revenue Code. Foreign REITs ("REIT-like") entities may have similar tax

treatment in their respective countries. Equity real estate investment trusts own real estate properties, while mortgage

real estate investment trusts make construction, development, and long-term mortgage loans. Their value may be

affected by changes in the underlying property of the trusts, the creditworthiness of the issuer, property taxes, interest

rates, and tax and regulatory requirements, such as those relating to the environment. Both types of trusts are not

diversified, are dependent upon management skill, are subject to heavy cash flow dependency, defaults by borrowers,

self-liquidation, and the possibility of failing to qualify for tax-free status of income under the Internal Revenue Code

and failing to maintain exemption from the 1940 Act. In addition, foreign REIT-like entities will be subject to foreign

securities risks. (See "Foreign Securities")

Zero-Coupon Securities

The Fund may invest in zero-coupon securities. Zero-coupon securities have no stated interest rate and pay only the

principal portion at a stated date in the future. They usually trade at a substantial discount from their face (par) value.

Zero-coupon securities are subject to greater market value fluctuations in response to changing interest rates than

debt obligations of comparable maturities that make distributions of interest in cash.

Securities Lending

The Fund may lend their portfolio securities. The Fund will lend its portfolio securities if as a result the aggregate of

such loans made by the Fund would exceed the limits established by the 1940 Act. Portfolio securities may be lent to

unaffiliated broker-dealers and other unaffiliated qualified financial institutions provided that such loans are callable at

any time on not more than five business days' notice and that cash or other liquid assets equal to at least 100% of the

market value of the securities loaned, determined daily, is deposited by the borrower with the Fund and is maintained

each business day. While such securities are on loan, the borrower pays the Fund any income accruing thereon. The

Fund may invest any cash collateral, thereby earning additional income, and may receive an agreed-upon fee from the

borrower. Borrowed securities must be returned when the loan terminates. Any gain or loss in the market value of the

borrowed securities that occurs during the term of the loan belongs to the Fund and its shareholders. The Fund pays

reasonable administrative, custodial, and other fees in connection with such loans and may pay a negotiated portion of

the interest earned on the cash or government securities pledged as collateral to the borrower or placing broker. The

Fund does not normally retain voting rights attendant to securities it has lent, but it may call a loan of securities in

anticipation of an important vote.

Short Sales

The Fund may engage in “short sales against the box.” This technique involves selling either a security owned by the

Fund, or a security equivalent in kind and amount to the security sold short that the Fund has the right to obtain, for

delivery at a specified date in the future. The Fund may enter into a short sale against the box to hedge against

anticipated declines in the market price of portfolio securities. If the value of the securities sold short increases prior to

the scheduled delivery date, the Fund loses the opportunity to participate in the gain.

Forward Foreign Currency Exchange Contracts

The Fund may, but is not obligated to, enter into forward foreign currency exchange contracts. Currency transactions

include forward currency contracts and exchange listed or over-the-counter options on currencies. A forward currency

contract involves a privately negotiated obligation to purchase or sell a specific currency at a specified future date at a

price set at the time of the contract.

The typical use of a forward contract is to "lock in" the price of a security in U.S. dollars or some other foreign currency

which the Fund is holding in its portfolio. By entering into a forward contract for the purchase or sale, for a fixed

amount of dollars or other currency, of the amount of foreign currency involved in the underlying security transactions,

the Fund may be able to protect itself against a possible loss resulting from an adverse change in the relationship

between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in

which the security is denominated in or exposed to during the period between the date on which the security is

purchased or sold and the date on which payment is made or received.

The Sub-Advisor also may from time to time utilize forward contracts for other purposes. For example, they may be

used to hedge a foreign security held in the portfolio or a security which pays out principal tied to an exchange rate

between the U.S. dollar and a foreign currency, against a decline in value of the applicable foreign currency. They also

may be used to lock in the current exchange rate of the currency in which those securities anticipated to be purchased

are denominated in or exposed to. At times, the Fund may enter into "cross-currency" hedging transactions involving

currencies other than those in which securities are held or proposed to be purchased are denominated.

The Fund segregates liquid assets in an amount equal to its daily marked-to-market (net) obligation (i.e., its daily net

liability, if any) with respect to forward currency contracts. It should be noted that the use of forward foreign currency

exchange contracts does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a

rate of exchange between the currencies that can be achieved at some future point in time. Additionally, although such

contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit

any potential gain that might result if the value of the currency increases.

Currency hedging involves some of the same risks and considerations as other transactions with similar instruments.

Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or

in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may

not be present or may not be present during the particular time that the Fund is engaging in proxy hedging. Currency

transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of

great importance to the issuing governments and influences economic planning and policy, purchases and sales of

currency and related instruments can be adversely affected by government exchange controls, limitations or

restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These

forms of governmental actions can result in losses to the Fund if it is unable to deliver or receive currency or monies in

settlement of obligations. They could also cause hedges the Fund has entered into to be rendered useless, resulting in

full currency exposure as well as incurring transaction costs. Currency exchange rates may also fluctuate based on

factors extrinsic to a country's economy. Buyers and sellers of currency forward contracts are subject to the same

risks that apply to the use of forward contracts generally. Further, settlement of a currency forward contract for the

purchase of most currencies must occur at a bank based in the issuing nation. The ability to establish and close out

positions on trading options on currency futures contracts is subject to the maintenance of a liquid market that may not

always be available.

Moreover, the Fund bears the risk of loss of the amount expected to be received under a forward contract in the event

of the default as bankruptcy of a forward counterparty.

Repurchase and Reverse Repurchase Agreements, Mortgage Dollar Rolls and Sale-Buybacks

The Fund may invest in repurchase and reverse repurchase agreements. In a repurchase agreement, the Fund

purchases a security and simultaneously commits to resell that security to the seller at an agreed upon price on an

agreed upon date within a number of days (usually not more than seven) from the date of purchase. The resale price

consists of the purchase price plus an amount that is unrelated to the coupon rate or maturity of the purchased

security. A repurchase agreement involves the obligation of the seller to pay the agreed upon price, which obligation is

in effect secured by the value (at least equal to the amount of the agreed upon resale price and marked-to-market

daily) of the underlying security or "collateral." A risk associated with repurchase agreements is the failure of the seller

to repurchase the securities as agreed, which may cause the Fund to suffer a loss if the market value of such

securities declines before they can be liquidated on the open market. In the event of bankruptcy or insolvency of the

seller, the Fund may encounter delays and incur costs in liquidating the underlying security. Repurchase agreements

that mature in more than seven days are subject to the Fund's limit on illiquid investments. While it is not possible to

eliminate all risks from these transactions, it is the policy of the Fund to limit repurchase agreements to those parties

whose creditworthiness has been reviewed and found satisfactory by the Sub-Advisor.

The Fund may use reverse repurchase agreements, mortgage dollar rolls, and economically similar transactions to

obtain cash to satisfy unusually heavy redemption requests or for other temporary or emergency purposes without the


necessity of selling portfolio securities, or to earn additional income on portfolio securities, such as Treasury bills or
notes. In a reverse repurchase agreement, the Fund sells a portfolio security to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, the Fund will maintain cash or appropriate liquid assets to cover its
obligation under the agreement. The Fund will enter into reverse repurchase agreements only with parties that the
Sub-Advisor deems creditworthy. Using reverse repurchase agreements to earn additional income involves the risk
that the interest earned on the invested proceeds is less than the expense of the reverse repurchase agreement
transaction. This technique may also have a leveraging effect on the Fund, although the Fund's intent to segregate
assets in the amount of the reverse repurchase obligation minimizes this effect.

A "mortgage dollar roll" is similar to a reverse repurchase agreement in certain respects. In a "dollar roll" transaction
the Fund sells a mortgage-related security, such as a security issued by the Government National Mortgage
Association, to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the
future at a pre-determined price. A dollar roll can be viewed, like a reverse repurchase agreement, as a collateralized
borrowing in which the Fund pledges a mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which the Fund enters into a dollar roll transaction is not obligated to
return the same securities as those originally sold by the Fund, but only securities which are "substantially identical."
To be considered "substantially identical," the securities returned to the Fund generally must: 1) be collateralized by
the same types of underlying mortgages; 2) be issued by the same agency and be part of the same program; 3) have
a similar original stated maturity; 4) have identical net coupon rates; 5) have similar market yields (and therefore
price); and 6) satisfy "good delivery" requirements, meaning that the aggregate principal amounts of the securities
delivered and received back must be within 0.01% of the initial amount delivered.

The Fund's obligations under a dollar roll agreement must be covered by segregated liquid assets equal in value to the
securities subject to repurchase by the Fund.

The Fund also may effect simultaneous purchase and sale transactions that are known as "sale-buybacks." A sale-
buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases
the security is entitled to receive any principal or interest payments made on the underlying security pending
settlement of the Fund's repurchase of the underlying security. The Fund's obligations under a sale-buyback typically
would be offset by liquid assets equal in value to the amount of the Fund's forward commitment to repurchase the
subject security.

Swap Agreements and Options on Swap Agreements
The Fund may engage in swap transactions, including, but not limited to, swap agreements on interest rates, security
or commodity indexes, specific securities and commodities, and credit and event-linked swaps, to the extent permitted
by its investment restrictions. To the extent the Fund may invest in foreign currency-denominated securities, it
may also invest in currency exchange rate swap agreements. The Fund may also enter into options on swap
agreements ("swap options").

The Fund may enter into swap transactions for any legal purpose consistent with its investment objectives and
policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than
obtaining a return or spread through purchases and/or sales of instruments in other markets, to protect against
currency fluctuations, as a duration management technique, to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date, or to gain exposure to certain markets in the most economical way
possible.

Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a
few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may
be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities or commodities
representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or
"cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the

extent that interest rates fall below a specified rate, or "floor"; and interest rate collars, under which a party sells a cap

and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given

minimum or maximum levels. Consistent with the Fund's investment objectives and general investment policies,

certain of the Funds may invest in commodity swap agreements. For example, an investment in a commodity swap

agreement may involve the exchange of floating-rate interest payments for the total return on a commodity index. In a

total return commodity swap, the Fund will receive the price appreciation of a commodity index, a portion of the index,

or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period, the Fund

may pay a fixed fee, established at the outset of the swap. However, if the term of the commodity swap is for more

than one period, with interim swap payments, the Fund may pay an adjustable or floating fee. With a "floating" rate, the

fee may be pegged to a base rate, such as the London Interbank Offered Rate, and is adjusted each period.

Therefore, if interest rates increase over the term of the swap contract, the Fund may be required to pay a higher fee

at each swap reset date.

The Fund may enter into credit default swap agreements. The "buyer" in a credit default contract is obligated to pay

the "seller" a periodic stream of payments over the term of the contract provided that no event of default on an

underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full

notional value, or "par value," of the reference obligation in exchange for the reference obligation. The Fund may be

either the buyer or seller in a credit default swap transaction. If the Fund is a buyer and no event of default occurs, the

Fund will lose its investment and recover nothing. However, if an event of default occurs, the Fund (if the buyer) will

receive the full notional value of the reference obligation that may have little or no value. As a seller, the Fund receives

a fixed rate of income throughout the term of the contract, which typically is between six months and three years,

provided that there is no default event. If an event of default occurs, the seller must pay the buyer the full notional

value of the reference obligation.

A swap option is a contract that gives a counterparty the right (but not the obligation) in return for payment of a

premium, to enter into a new swap agreement or to shorten, extend, cancel, or otherwise modify an existing swap

agreement, at some designated future time on specified terms. The Fund may write (sell) and purchase put and call

swap options. Most swap agreements entered into by the Funds would calculate the obligations of the parties to the

agreement on a "net basis." Consequently, the Fund's current obligations (or rights) under a swap agreement will

generally be equal only to the net amount to be paid or received under the agreement based on the relative values of

the positions held by each party to the agreement (the "net amount"). The Fund's current obligations under a swap

agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net

amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by the

Manager or Sub-Advisor in accordance with procedures established by the Board of Directors, to avoid any potential

leveraging of the Fund's portfolio. Obligations under swap agreements so covered will not be construed to be "senior

securities" for purposes of the Fund's investment restriction concerning senior securities. The Fund will not enter into a

swap agreement with any single party if the net amount owed or to be received under existing contracts with that party

would exceed 5% of the Fund's total assets.

Whether the Fund's use of swap agreements or swap options will be successful in furthering its investment objective

of total return will depend on the ability of the Fund's Manager or Sub-Advisor to predict correctly whether certain types

of investments are likely to produce greater returns than other investments. Because they are two party contracts and

because they may have terms of greater than seven days, swap agreements may be considered to be illiquid.

Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event

of the default or bankruptcy of a swap agreement counterparty. The Fund will enter into swap agreements only with

counterparties that present minimal credit risks, as determined by the Fund's Manager or Sub-Advisor. Certain

restrictions imposed on the Fund by the Internal Revenue Code may limit the Fund's ability to use swap agreements.

The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps

market, including potential government regulation, could adversely affect the Fund's ability to terminate existing swap

agreements or to realize amounts to be received under such agreements.

Depending on the terms of the particular option agreement, the Fund will generally incur a greater degree of risk when

it writes a swap option than it will incur when it purchases a swap option. When the Fund purchases a swap option, it

risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However,

when the Fund writes a swap option, upon exercise of the option the Fund will become obligated according to the

terms of the underlying agreement.


Liquidity. Some swap markets have grown substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, these
swap markets have become relatively liquid.

The liquidity of swap agreements will be determined by the Manager or Sub-Advisor based on various factors,
including:
•	the frequency of trades and quotations,
•	the number of dealers and prospective purchasers in the marketplace,
•	dealer undertakings to make a market,
•	the nature of the security (including any demand or tender features), and
•	the nature of the marketplace for trades (including the ability to assign or offset a portfolio's rights and obligations
	relating to the investment).

Such determination will govern whether a swap will be deemed to be within each Fund's restriction on investments in
illiquid securities.

For purposes of applying the Fund's investment policies and restrictions (as stated in the Prospectuses and this
Statement of Additional Information) swap agreements are generally valued by the Funds at market value. In the case
of a credit default swap sold by the Fund (i.e., where the Fund is selling credit default protection), however, the Fund
will value the swap at its notional amount. The manner in which the Funds value certain securities or other instruments
for purposes of applying investment policies and restrictions may differ from the manner in which those investments
are valued by other types of investors.

When-Issued, Delayed Delivery, and Forward Commitment Transactions
The Fund may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. When
such purchases are outstanding, the Fund will segregate until the settlement date assets determined to be liquid by
the Sub-Advisor in accordance with procedures established by the Board of Directors, in an amount sufficient to meet
the purchase price. Typically, no income accrues on securities the Fund has committed to purchase prior to the time
delivery of the securities is made, although the Fund may earn income on securities it has segregated.

When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, the Fund assumes the
rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the Fund is not required to pay for the security
until the delivery date, these risks are in addition to the risks associated with the Fund's other investments. If the Fund
remains substantially fully invested at a time when when-issued, delayed delivery, or forward commitment purchases
are outstanding, the purchases may result in a form of leverage.

When the Fund has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Fund does
not participate in future gains or losses with respect to the security. If the other party to a transaction fails to deliver or
pay for the securities, the Fund could miss a favorable price or yield opportunity or could suffer a loss. The Fund may
dispose of or renegotiate a transaction after it is entered into, and may sell when-issued, delayed delivery, or forward
commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage
limitation on the extent to which the Funds may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis.

Money Market Instruments/Temporary Defensive Position
The Fund may make money market investments (cash equivalents), without limit, pending other investment or
settlement, for liquidity, or in adverse market conditions. Following are descriptions of the types of money market
instruments that the Fund may purchase:

•	U.S. Government Securities - Securities issued or guaranteed by the U.S. government, including treasury bills,
	notes, and bonds.

•	U.S. Government Agency Securities - Obligations issued or guaranteed by agencies or instrumentalities of the U.S.
	government.


•	U.S. agency obligations include, but are not limited to, the Bank for Cooperatives, Federal Home Loan Banks,
	and Federal Intermediate Credit Banks.
•	U.S. instrumentality obligations include, but are not limited to, the Export-Import Bank, Federal Home Loan
	Mortgage Corporation, and Federal National Mortgage Association.

Some obligations issued or guaranteed by U.S. government agencies and instrumentalities are supported by the
full faith and credit of the U.S. Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S. government to purchase certain obligations of the
agency or instrumentality. Still others, such as those issued by the Student Loan Marketing Association, are
supported only by the credit of the agency or instrumentality.

• Bank Obligations - Certificates of deposit, time deposits and bankers' acceptances of U.S. commercial banks
having total assets of at least one billion dollars and overseas branches of U.S. commercial banks and foreign
banks, which in the opinion of the Sub-Advisor, are of comparable quality. However, each such bank with its
branches has total assets of at least five billion dollars, and certificates, including time deposits of domestic savings
and loan associations having at least one billion dollars in assets that are insured by the Federal Savings and Loan
Insurance Corporation. The Fund may acquire obligations of U.S. banks that are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.

Obligations of foreign banks and obligations of overseas branches of U.S. banks are subject to somewhat different
regulations and risks than those of U.S. domestic banks. For example, an issuing bank may be able to maintain
that the liability for an investment is solely that of the overseas branch which could expose the
Fund to a greater risk of loss. In addition, obligations of foreign banks or of overseas branches of U.S. banks may
be affected by governmental action in the country of domicile of the branch or parent bank. Examples of adverse
foreign governmental actions include the imposition of currency controls, the imposition of withholding taxes on
interest income payable on such obligations, interest limitations, seizure or nationalization of assets, or the
declaration of a moratorium. Deposits in foreign banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Fund only buys short-term instruments where the risks of adverse
governmental action are believed by the Sub-Advisor to be minimal. The Fund considers these factors, along with
other appropriate factors, in making an investment decision to acquire such obligations. It only acquires those
which, in the opinion of management, are of an investment quality comparable to other debt securities bought by
the Fund. The Fund may invest in certificates of deposit of selected banks having less than one billion dollars of
assets providing the certificates do not exceed the level of insurance (currently $100,000) provided by the
applicable government agency.

A certificate of deposit is issued against funds deposited in a bank or savings and loan association for a definite
period of time, at a specified rate of return. Normally they are negotiable. However, the Fund occasionally may
invest in certificates of deposit which are not negotiable. Such certificates may provide for interest penalties in the
event of withdrawal prior to their maturity. A bankers' acceptance is a short-term credit instrument issued by
corporations to finance the import, export, transfer, or storage of goods. They are termed "accepted" when a bank
guarantees their payment at maturity and reflect the obligation of both the bank and drawer to pay the face amount
of the instrument at maturity.

Other Investment Companies
The Fund reserves the right to invest up to 10% of its total assets in the securities of all investment companies, but
may not acquire more than 3% of the voting securities of, nor invest more than 5% of its total assets in securities of,
any other investment company except in connection with a merger, consolidation, or plan of reorganization and except
as permitted by the 1940 Act, SEC rules adopted under the 1940 Act or exemptions granted by the Securities and
Exchange Commission. Securities of other investment companies, including shares of closed-end investment
companies, unit investment trusts, various exchange-traded funds ("ETFs"), and other open-end investment
companies, represent interests in professionally managed portfolios that may invest in any type of instrument. Certain
types of investment companies, such as closed-end investment companies, issue a fixed number of shares that trade
on a stock exchange or over-the-counter at a premium or a discount to their net asset value. Others are continuously
offered at net asset value, but may also be traded in the secondary market. ETFs are often structured to perform in a
similar fashion to a broad-based securities index. Investing in ETFs involves substantially the same risks as investing
directly in the underlying instruments. In addition, ETFs involve the risk that they will not perform in exactly the same
fashion, or in response to the same factors, as the index or underlying instruments.

As a shareholder in an investment company, the Fund would bear its ratable share of that entity's expenses, including

its advisory and administrative fees. The Fund would also continue to pay its own advisory fees and other expenses.

Consequently, the Fund and its shareholders, in effect, will be absorbing two levels of fees with respect to investments

in other investment companies.

Portfolio Turnover

Portfolio turnover is a measure of how frequently a portfolio's securities are bought and sold. The portfolio turnover

rate is generally calculated as the dollar value of the lesser of a portfolio's purchases or sales of shares of securities

during a given year, divided by the monthly average value of the portfolio securities during that year (excluding

securities whose maturity or expiration at the time of acquisition were less than one year). For example, a portfolio

reporting a 100% portfolio turnover rate would have purchased and sold securities worth as much as the monthly

average value of its portfolio securities during the year.

It is not possible to predict future turnover rates with accuracy. Many variable factors are outside the control of a

portfolio manager. The investment outlook for the securities in which a portfolio may invest may change as a result of

unexpected developments in securities markets, economic or monetary policies, or political relationships. High market

volatility may result in a portfolio manager using a more active trading strategy than might otherwise be employed.

Each portfolio manager considers the economic effects of portfolio turnover but generally does not treat the portfolio

turnover rate as a limiting factor in making investment decisions.

Sale of shares by investors may require the liquidation of portfolio securities to meet cash flow needs. In addition,

changes in a particular portfolio's holdings may be made whenever the portfolio manager considers that a security is

no longer appropriate for the portfolio or that another security represents a relatively greater opportunity. Such

changes may be made without regard to the length of time that a security has been held.

Higher portfolio turnover rates generally increase transaction costs that are expenses of the Fund. Active trading may

generate short-term gains (losses) for taxable shareholders.

LEADERSHIP STRUCTURE AND BOARD OF DIRECTORS

Overall responsibility for directing the business and affairs of the Fund rests with the Board of Directors, who are

elected by the Fund's shareholders. In addition to serving on the Board of Directors of the Fund, each director serves

on the Board of Principal Variable Contracts Funds, Inc. (PVC). The Board is responsible for overseeing the

operations of the Fund in accordance with the provisions of the Investment Company Act, other applicable laws and

the Fund's charter. The Board of Directors elects the officers of the Fund to supervise its day-to-day operations. The

Board meets in regularly scheduled meetings eight times throughout the year. Board meetings may occur in-person or

by telephone. In addition, the Board holds special in-person or telephonic meetings or informal conference calls to

discuss specific matters that may arise or require action between regular meetings. Board members who are not

"interested persons" ("Independent Directors") of the Fund meet annually to consider renewal of the Fund's advisory

contracts. The Board is currently composed of twelve members, nine of whom are Independent Directors of the Fund.

Each director has significant prior senior management and/or board experience.

The Chairman of the Board is an interested person of the Fund. The independent directors of the Fund have appointed

a lead independent director whose role is to review and approve, with the Chairman, the agenda for each Board

meeting and facilitate communication among the Fund's independent directors as well as communication between the

independent directors, management of the Fund and the full Board. The Fund has determined that the Board's

leadership structure is appropriate given the characteristics and circumstances of the Fund, including such items as

the number of series or portfolios that comprise the Fund, the variety of asset classes those series reflect, the net

assets of the Fund, the committee structure of the Board and the distribution arrangements of the Fund.

The directors were selected to serve and continue on the Board based upon their skills, experience, judgment,

analytical ability, diligence, ability to work effectively with other Board members, a commitment to the interests of

shareholders and, for each independent director, a demonstrated willingness to take an independent and questioning

view of management. In addition to those qualifications, the following is a brief discussion of the specific education,

experience, qualifications, or skills that led to the conclusion, as of the date of this Statement of Additional Information,

that each person identified below should serve as a director for the Fund. As required by rules the SEC has adopted

under the Investment Company Act, the Fund's Independent Directors select and nominate all candidates for

Independent Director positions.

Independent Directors

Elizabeth Ballantine. Ms. Ballantine has served as a director of the Fund since 2004. Ms. Ballantine has also served

as a director of PVC since 2004. Through her professional training and experience as an attorney and her experience

as a director of Principal Funds, investment consultant and director of McClatchy Company, Ms. Ballantine is

experienced in financial, investment and regulatory matters.

Kristianne Blake. Ms. Blake has served as a director of the Fund since 2007. Ms. Blake has also served as a director

of PVC since 2007. From 1998-2007, Ms. Blake served as a Trustee of the WM Group of Funds. Ms. Blake has been

a director of the Russell Investment Funds since 2000. Through her education, experience as a director of mutual

funds and employment experience, Ms. Blake is experienced with financial, accounting, regulatory and investment

matters.

Craig Damos. Mr. Damos has served as a director of the Fund since 2008. Mr. Damos has also served as a director of

PVC since 2008. Mr. Damos served as President and Chief Executive Officer of Weitz Company from 2006-2010 and

Vertical Growth Officer from 2004-2006. From 2000-2004, Mr. Damos served as the Chief Financial Officer of Weitz

Company. From 2005-2008, Mr. Damos served as a director of West Bank. Through his education, experience as a

director of Principal Funds and employment experience, Mr. Damos is experienced with financial, accounting,

regulatory and investment matters.

Richard W. Gilbert. Mr. Gilbert has served as a director of the Fund since 2000. Mr. Gilbert has also served as a

director of PVC since 2000. From 1988-1993, Mr. Gilbert served as the Chairman of the Board of the Federal Home

Loan Bank of Chicago. Since 2005, Mr. Gilbert has served as a director of Calamos Asset Management, Inc. Through

his service as a director of Principal Funds and his employment experience, Mr. Gilbert is experienced with financial,

regulatory and investment matters.

Mark A. Grimmett. Mr. Grimmett has served as a director of the Fund since 2004. Mr. Grimmett has also served as a

director of PVC since 2004. Mr. Grimmett is a certified public accountant. Since 1996, Mr. Grimmett has served as the

Chief Financial Officer for Merle Norman Cosmetics, Inc. Through his service as a director of Principal Funds, his

education and his employment experience, Mr. Grimmett is experienced with financial, accounting, regulatory and

investment matters.

Fritz Hirsch. Mr. Hirsch has served as director of the Fund since 2005. Mr. Hirsch has also served as a director of the

PVC since 2005. From 1983-1985, Mr. Hirsch served as Chief Financial Officer of Sassy, Inc. From 1986-2009, Mr.

Hirsch served as President and Chief Executive Officer of Sassy, Inc. Through his experience as a director of the

Principal Funds and employment experience, Mr. Hirsch is experienced with financial, accounting, regulatory and

investment matters.

William Kimball. Mr. Kimball has served as director of the Fund since 2000. Mr. Kimball has also served as a director

of the PVC since 2000. From 1998-2004, Mr. Kimball served as Chairman and CEO of Medicap Pharmacies, Inc. Prior

to 1998, Mr. Kimball served as President and CEO of Medicap. Since 2004, Mr. Kimball has served as director of

Casey's General Store, Inc. Through his experience as a director of the Principal Funds and his employment

experience, Mr. Kimball is experienced with financial, regulatory and investment matters.

Barbara Lukavsky. Ms. Lukavsky has served as a director of the Fund since 1993. Ms. Lukavsky has also served as a

director of PVC since 1993. Ms. Lukavsky founded Barbican Enterprises, Inc. and since 1994 has served as its

President and CEO. Through her experience as a director of the Principal Funds and employment experience, Ms.

Lukavsky is experienced with financial, regulatory, marketing and investment matters.

Daniel Pavelich. Mr. Pavelich has served as a director of the Fund since 2007. Mr. Pavelich has also served as a

director of PVC since 2007. From 1998-2007, Mr. Pavelich served as a Trustee of the WM Group of Funds. From

1996-1999, Mr. Pavelich served as Chairman and CEO of BDO Seidman and as its Chairman from 1994-1996.

Through his education, experience as a director of mutual funds and his employment experience, Mr. Pavelich is

experienced with financial, accounting, regulatory and investment matters.

Interested Directors

Ralph C. Eucher. Mr. Eucher has served as a director of the Fund since 1999. Mr. Eucher has also served as a

director of PVC since 1999. Mr. Eucher has served as a director of Principal Management Corporation and Princor

Financial Services Corporation since 1999. Mr. Eucher has been a Senior Vice President at Principal Financial Group,

Inc. since 2002. Through his professional training and experience as an attorney and his service as a director of

Principal Funds and his employment experience, Mr. Eucher is experienced with financial, regulatory and investment

matters.

Nora M. Everett. Ms. Everett has served as a director of the Fund since 2008. Ms. Everett has also served as a

director of PVC since 2008. From 2004-2008, Ms. Everett was Senior Vice President and Deputy General Counsel at

Principal Financial Group, Inc. From 2001-2004, Ms. Everett was Vice President and Counsel at Principal Financial

Group. Through her professional training and experience as an attorney and her service as a director of Principal

Funds and her employment experience, Ms. Everett is experienced with financial, regulatory and investment matters.

William G. Papesh. Mr. Papesh has served as a director of the Fund since 2007. Mr. Papesh has also served as a

director of PVC since 2007. From 1987-2007, Mr. Papesh served as a Trustee, President and Chief Executive Officer

of the WM Group of Funds. Through his experience as a director of mutual funds and his employment experience, Mr.

Papesh is experienced with financial, regulatory and investment matters.

Risk oversight forms part of the Board's general oversight of the Fund and is addressed as part of various Board and

Committee activities. As part of its regular oversight of the Funds, the Board, directly or through a Committee, interacts

with and reviews reports from, among others, Fund management, sub-advisers, the Fund's Chief Compliance Officer,

the independent registered public accounting firm for the Fund, internal auditors for Principal or its affiliates, as

appropriate, regarding risks faced by the Fund. The Board, with the assistance of Fund management and Principal,

reviews investment policies and risks in connection with its review of the Funds' performance. The Board has

appointed a Chief Compliance Officer who oversees the implementation and testing of the Fund's compliance program

and reports to the Board regarding compliance matters for the Fund and its principal service providers. In addition, as

part of the Board's periodic review of the Fund's advisory, sub-advisory and other service provider agreements, the

Board may consider risk management aspects of their operations and the functions for which they are responsible.

With respect to valuation, the Board oversees a Principal valuation committee comprised of Fund officers and officers

of Principal and has approved and periodically reviews valuation policies applicable to valuing the Fund's shares.

The Board has established the following committees and the membership of each committee to assist in its oversight

functions, including its oversight of the risks the Fund faces.

Committee membership is identified on the following pages. Each committee must report its activities to the Board on

a regular basis. As used in this SAI, the “Fund Complex” refers to all series of Principal Funds, Inc. (including those not

contained in this SAI) and Principal Variable Contracts Funds, Inc.

Audit Committee

The primary purpose of the Committee is to assist the Board in fulfilling certain of its responsibilities. The Audit

Committee serves as an independent and objective party to monitor the Fund Complex's accounting policies, financial

reporting and internal control system, as well as the work of the independent registered public accountants. The Audit

Committee assists Board oversight of 1) the integrity of the Fund Complex's financial statements; 2) the Fund

Complex's compliance with certain legal and regulatory requirements; 3) the independent registered public

accountants' qualifications and independence; and 4) the performance of the Fund Complex's independent registered

public accountants. The Audit Committee also serves to provide an open avenue of communication among the

independent registered public accountants, the Manager's internal auditors, Fund Complex management, and the

Board. The Audit Committee held five meetings during the last fiscal year.

Executive Committee

The Committee's primary purpose is to exercise certain powers of the Board of Directors when the Board is not in

session. When the Board is not in session, the Committee may exercise all powers of the Board in the management of

the business of the Fund Complex except the power to 1) authorize dividends or distributions on stock; 2) issue stock,

except as permitted by law 3) recommend to the stockholders any action which requires stockholder approval; 4)

amend the bylaws; or 5) approve any merger or share exchange which does not require stockholder approval. The

Executive Committee held no meetings during the last fiscal year.

Nominating and Governance Committee

The Committee's primary purpose is to oversee 1) the structure and efficiency of the Boards of Directors and the

committees the Boards establish, and 2) the activities of the Fund Complex's Chief Compliance Officer. The

Committee responsibilities include evaluating board membership and functions, committee membership and

functions, insurance coverage, and legal and compliance matters.

The nominating functions of the Nominating and Governance Committee include selecting and nominating all

candidates who are not "interested persons" of the Fund Complex (as defined in the 1940 Act) for election to the

Board. Generally, the committee requests director nominee suggestions from the committee members and

management. In addition, the committee will consider director candidates recommended by shareholders of the Fund

Complex. Recommendations should be submitted in writing to Principal Funds, Inc. at 680 8th Street, Des Moines,

Iowa 50392. When evaluating a person as a potential nominee to serve as an independent director, the committee will

generally consider, among other factors: age; education; relevant business experience; geographical factors; whether

the person is "independent" and otherwise qualified under applicable laws and regulations to serve as a director; and

whether the person is willing to serve, and willing and able to commit the time necessary for attendance at meetings

and the performance of the duties of an independent director. The committee also meets personally with the nominees

and conducts a reference check. The final decision is based on a combination of factors, including the strengths and

the experience an individual may bring to the Board. The Committee believes the Board generally benefits from

diversity of background, experience and views among its members, and considers this a factor in evaluating the

composition of the Board, but has not adopted any specific policy in this regard. The Board does not use regularly the

services of any professional search firms to identify or evaluate or assist in identifying or evaluating potential

candidates or nominees. The Nominating and Governance Committee held four meetings during the last fiscal year.

Operations Committee

The Committee's primary purpose is to oversee the provision of administrative and distribution services to the Fund

Complex, communications with the Fund Complex's shareholders, and review and oversight of the Fund Complex's

operations. The Operations Committee held four meetings during the last fiscal year.

Management Information

The following table presents certain information regarding the Directors of the Fund, including their principal

occupations which, unless specific dates are shown, are of more than five years duration. In addition, the table

includes information concerning other directorships held by each Director in reporting companies under the Securities

Exchange Act of 1934 or registered investment companies under the 1940 Act. Information is listed separately for

those Directors who are "interested persons" (as defined in the 1940 Act) of the Fund (the "Interested Directors") and

those Directors who are Independent Directors. All Directors serve as directors for each of the two investment

companies (with a total of 98 portfolios) sponsored by Principal Life Insurance Company (“Principal Life”): the Fund

and Principal Variable Contracts Funds, Inc. (collectively, the "Fund Complex").

Each officer of the Fund has the same position with Principal Variable Contracts Funds, Inc.


The following directors are considered to be Independent Directors.


				Number
				of Portfolios
				in Fund	Other
		Length of		Complex	Directorships
Name, Address, and		Time Served	Principal Occupation(s)	Overseen	Held by
Year of Birth	Position(s) Held with Fund	as Director	During Past 5 Years	by Director	Director
Elizabeth Ballantine	Director	Since 2004	Principal, EBA Associates	98	Durango Herald, Inc.;
711 High Street	Member Nominating and		(consulting and investments		McClatchy
Des Moines, Iowa 50392	Governance Committee				Newspapers, Inc.
1948

Kristianne Blake	Director	Since 2007	President, Kristianne Gates	98	Avista Corporation; Russell
711 High Street	Member Operations Committee		Blake, P.S. (personal financial		Investment Company*
Des Moines, Iowa 50392			and tax planning)		Russell Investment Funds*
1954					(48 portfolios overseen)

Craig Damos	Director	Since 2008	Chairman/CEO/President and	98	None
711 High Street	Member Operations Committee		Vertical Growth Officer, and The
Des Moines, Iowa 50392			Weitz Company (general
1954			construction)

Richard W. Gilbert	Director	Since 2000	President, Gilbert	98	Calamos Asset
711 High Street	Member Executive Committee		Communications, Inc.		Management, Inc.
Des Moines,	Member Nominating and		(business consulting)		(2005)
Iowa 50392	Governance Committee
1940

Mark A. Grimmett	Director	Since 2004	Executive Vice President and	98	None
711 High Street	Member Audit Committee		CFO, Merle Norman Cosmetics,
Des Moines,			Inc. (cosmetics manufacturing)
Iowa 50392
1960

Fritz S. Hirsch	Director	Since 2005	Formerly President, Sassy, Inc.	98	Focus Products Grup
711 High Street	Member Audit Committee		(manufacturer of infant and		(housewares)
Des Moines,			juvenile products)
Iowa 50392
1951

William C. Kimball	Director	Since 2000	Partner, Kimball - Porter	98	Casey General Stores, Inc.
711 High Street	Member Nominating and		Investments L.L.C.
Des Moines,	Governance Committee
Iowa 50392
1947

Barbara A. Lukavsky	Director	Since 1993	President and CEO, Barbican	98	None
711 High Street	Member Nominating and		Enterprises, Inc.
Des Moines,	Governance Committee		(cosmetics manufacturing)
Iowa 50392
1940


				Number
				of Portfolios
				in Fund	Other
		Length of		Complex	Directorships
Name, Address, and		Time Served	Principal Occupation(s)	Overseen	Held by
Year of Birth	Position(s) Held with Fund	as Director	During Past 5 Years	by Director	Director
Daniel Pavelich	Director	Since 2007	Retired	98	Catalytic Inc.
711 High Street	Member Audit Committee				(offshore software;
Des Moines,					development); Vaagan Bros.
Iowa 50392					Lumber, Inc.
1944


* The Funds and the Funds of Russell Investment Funds and Russell Investment Company have one or more common sub-advisors.

The following directors are considered to be Interested Directors because they are affiliated persons of Principal Management Corporation (the
“Manager”); Edge Asset Management, Inc.; or Principal Funds Distributor, Inc. (“PFD”), the principal underwriter (the “Distributor”).

			Positions with the Manager and its	Number of Portfolios	Other
Name, Address and			Affiliates; Principal Occupation(s)	in Fund Complex	Directorships
Year of Birth	Position(s) Held with Fund	Length of Time Served	During Past 5 Years	Overseen by Director	Held by Director
Ralph C. Eucher	Chairman	Since 2000	Director, Principal, since 2008; Chairman,	98	None
711 High Street	Director	Since 1999	PFD and Princor, since 2008;
Des Moines,			Senior Vice President, Principal Life,
Iowa 50392			and Principal Financial Group, since
1952			2008; Director, PSS and Currency
			Management Committee - London, since
			2008; Director, CCI since 2009; Director,
			Spectrum since 2005; Director,
			PSS since 2008

Nora M. Everett	Chief Executive Officer	Since 2010	President and Director, Principal, since	98	None
711 High Street	President	Since 2008	2008; Senior Vice President, Retirement &
Des Moines,	Director	Since 2008	Investor Services, Principal Life, since
Iowa 50392			2008; Senior Vice President & Deputy
1959			General Counsel, Principal Life, 2004-
			2008; Director, PFD, since 2008; CEO,
			Princor, since 2009; Director, Princor,
			PSS, Edge, Principal Asset Management
			Co. (Asia) Limited, since 2008; Chairman,
			PFA, since 2010; Director, Principal
			International and Principal International
			Holding Company, LLC, since 2006

William G. Papesh	Director	Since 2007	Retired December 2007. Prior thereto,	98	None
711 High Street	Member Operations Committee		President and CEO of WM Group of
Des Moines,			Funds; President and Director of Edge
Iowa 50392			Asset Management, Inc.
1943


Officers of the Fund
The following table presents certain information regarding the officers of the Fund, including their principal occupations which, unless specific dates
are shown, are of more than five years duration. Officers serve at the pleasure of the Board of Directors.


Name, Address and	Position(s) Held with Fund and	Positions with the Manager and its Affiliates;
Year of Birth	Length of Time Served	Principal Occupations During Past 5 Years
Craig L. Bassett	Treasurer	Vice President and Treasurer, Principal Life;
711 High Street	(since 1996)	Treasurer, Principal, PFD, Princor and Spectrum since 2006;
Des Moines, Iowa 50392		Vice President and Treasure, Edge and Principal - REI since 2006;
1952		Treasurer, PSS since 2007; Vice President and Treasurer, Principal
		Principal Global Columbus Circle, LLC and PGI since 2007

Michael J. Beer	Executive Vice President	Executive Vice President, Chief Operating Officer and Director, Principal,
711 High Street	(since 1999)	since 2008; Executive Vice President, PFD since 2006;
Des Moines, Iowa 50392		President and Director, Princor since 2006; Vice President/Mutual Funds
1961		and Broker Dealer, Principal Life, since 2001; President and Director,
		PSS since 2007

Randy L. Bergstrom	Assistant Tax Counsel	Counsel, Principal Life; Counsel, PGI, since 2006
711 High Street	(since 2005)
Des Moines, Iowa 50392
1955

David J. Brown	Chief Compliance Officer	Vice President/Product and Distribution Compliance, Principal Life;
711 High Street	(since 2004)	Senior Vice President, PFD, Principal and Princor, since 2006;
Des Moines, Iowa 50392		Senior Vice President PSS, since 2007
1960

Jill R. Brown	Senior Vice President	President, PFD since 2010; Senior Vice President/Chief Financial Officer,
1100 Investment Boulevard, Ste 200	(since 2007)	Princor since 2006; Senior Vice President/Chief Financial Officer, PFD and
El Dorado Hills, CA 95762		PSS since 2007; Senior Vice President/Chief Financial Officer, Principal
1967		since 2008

Cary Fuchs	Senior Vice President of Distribution	President, PFD, 2007-2010; Vice President, PSS, since 2008; FVO, WMSS,
1100 Investment Boulevard, Ste 200	(since 2007)	2005-2007; prior thereto, Divisional Vice President, BFDS
El Dorado Hills, CA 95762
1957

Stephen G. Gallaher	Assistant Counsel	Assistant General Counsel, Principal Life and PFD since 2006;
711 High Street	(since 2006)	Assistant General Counsel, PMC, PSS, and Princor since 2007;
Des Moines, Iowa 50392		Prior thereto, self-employed writer
1955

Ernest H. Gillum	Vice President (since 1998)	Chief Compliance Officer, Principal since 2004; Vice President - Product
711 High Street	Assistant Secretary (since 1993)	Development, Principal and Princor, since 2000; Vice President, PSS, since
Des Moines, Iowa 50392		2007
1955


Name, Address and	Position(s) Held with Fund and	Positions with the Manager and its Affiliates;
Year of Birth	Length of Time Served	Principal Occupations During Past 5 Years
Patrick A. Kirchner	Assistant Counsel	Counsel, Principal Life; Assistant General Counsel, Principal, PGI
711 High Street	(since 2002)	and Princor since 2008
Des Moines, Iowa 50392
1960

Carolyn F. Kolks	Assistant Tax Counsel	Counsel, Principal Life since, 2005
711 High Street	(since 2005)
Des Moines, Iowa 50392
1962

Jennifer A. Mills	Assistant Counsel	Attorney, Principal Life since 2008; Counsel, Princor, PSS, Principal, and
711 High Street	(since 2010)	PFD, since 2009; Counsel, Principal, Princor, and PFD since 2009;
Des Moines, IA 50392		Registered Product Analyst, Principal Funds, 2007-2008, Registered Product
1973		Development Consultant, Princor, 2006-2007; and prior thereto, Judicial Law
		Clerk, Iowa Supreme Court

Layne A. Rasmussen	Chief Financial Officer (since 2008)	Financial Controller, Principal Financial Group, since 2005
711 High Street	Vice President (since 2005)
Des Moines, Iowa 50392	Controller (since 2000)
1958

Michael D. Roughton	Counsel	Vice President and Associate General Counsel, Principal Life and
711 High Street	(since 1991)	Principal Financial Group since 2001; Counsel, PGI, since 2001; Senior Vice
Des Moines, Iowa 50392		President and Counsel, Principal and Princor, since 2001; Senior Vice
1951		President and Counsel, PFD since 2007

Adam U. Shaikh	Assistant Counsel	Counsel, Principal Life and PFD, since 2006. Prior thereto, practicing
711 High Street	(since 2006)	attorney; Counsel, Principal, since 2007
Des Moines, Iowa 50392
1972

Dan L. Westholm	Assistant Treasurer	Director - Treasury, Principal Life, Principal, and Princor.
711 High Street	(since 2006)
Des Moines, Iowa 50392
1966

Beth C. Wilson	Vice President and Secretary	Vice President, Principal, since 2007. Prior thereto, Segment Business
711 High Street	(since 2007)	Manager for Pella Corp.
Des Moines, Iowa 50392
1956

Board Committees

The Fund Complex's board has the following four committees: Audit Committee, Executive Committee, Nominating

and Governance Committee, and Operations Committee. Committee membership is identified on the previous pages.

Each committee must report its activities to the Board on a regular basis.