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The Merger of the Principal SmallCap Value Fund III into the Principal SmallCap Value Fund II to be Effective May 1, 2009

The Principal Funds, Inc. Board of Directors has approved the merger of the Principal SmallCap Value Fund III into the Principal SmallCap Value Fund II. This merger will be completed and effective May 1, 2009. With the merger of these two Funds, it is anticipated that there will be no negative impact to existing shareholders of the Funds.

Principal Funds management believes that combining the Funds at this time is in the best long-term interest of the shareholders of both of the Funds. Management also believes that the opportunity exists for further economies of scale and the opportunity for improved performance for the shareholders when the scheduled merger of the Principal SmallCap Value Fund III into the Principal SmallCap Value Fund II is complete.

Dimensional Fund Advisors and Vaughan Nelson Investment Management, LP are the sub-advisors of the Principal SmallCap Value Fund II.

Shareholders are being notified by mail beginning March 23, 2009.

Questions

If you have any questions regarding this merger, please contact our Principal Funds Customer Service at 800.222.5852.

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To obtain a prospectus, download online or call Customer Service at 1.800.222.5852

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal^® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Customer Service at 1.800.222.5852.

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

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

Not FDIC or NCUA/NCUSIF insured - May lose value - No bank guarantee - Not a deposit - Not insured by any federal government agency