Diversification at The Global Level

China, Japan, India, Latin America, Eastern Europe. theyve all grown faster than anyone could have predicted ten years ago.

The current global stock market capitalization is over $50 trillion. With nearly two-thirds of the worlds market capitalization outside the United States 1 including 70% of all listed companies the opportunities for investing overseas are vast.

Consider these facts:

• 9 of the worlds 10 largest auto companies are outside the U.S. 2
• 8 of the worlds 10 largest telecommunications companies are outside the U.S. 2
• 9 of the worlds 10 largest electronic equipment and instrument companies are outside the U.S. 2

Past performance is no guarantee of future results. 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.

International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards.

Seeking investment opportunities overseas can do a world of good for your portfolio. Learn more with our international investing publication Are you missing more than two-thirds of the investment universe? (PDF: 690 KB) It outlines the growing opportunities abroad and spotlights the international asset management expertise of Principal Global Investors.

The Average Investor

Most investors have a smaller percentage of their portfolios invested abroad than corporate pension plans. Many business retirement plans have an average of 19% invested internationally. 3 The average investor has less.

Global investing helps you diversify your portfolio with options unavailable in the United States. This includes emerging markets once considered too risky and volatile.

Why Go International With Principal Funds

We have extensive experience in the global marketplace. And its been growing for more than 20 years.

Principal Global Investors an asset management organization of the Principal Financial Group (one of the sub-advisors of the Principal Funds) and its international affiliates has a large global footprint and world-class investment expertise in equities, fixed income and real estate. 4

The Principal Global Investors advantage:

• Substantial investment experience in 29 countries.
• More than 1,300 employees, including 527 investment professionals.
• Trading during daylight hours in the local currencies of 29 countries.
• Selection by 10 of the largest U.S. pension plans. 5

Our Four International Funds

Principal Funds has the expertise to help you enhance your diversification options by going global. Often you need more than one international fund to more fully diversify your portfolio. Our suite of four international funds offers you a variety of investment opportunities.

NEW! Principal International Growth Fund . Many domestic investors already know the importance of a portfolio that includes well-established companies with prospects for above-average growth. This Fund, previously offered only to institutional investors, offers similar opportunities outside the United States. Advantages of the Fund include:

• Balancing the risks of a portfolio overweighted domestically.
• Benefiting from the many opportunities only found abroad.
• Investments in well-known companies in fast growing economies.

Fund Flyer . Summarizes Fund performance, investments and assets.

Fund Profile . Outlines investment strategy, assets, long-term returns, risk vs. return, top ten holdings, regional investments and Morningstar category.

NEW! Principal Global Real Estate Securities Fund . Deep foundations in the worldwide real estate market and a strong international presence help position this Fund to exploit the immense potential of global real estate.

We offer:

• Offices around the world, in more than 60 metropolitan real estate markets.
• Investment professionals around the world focused on real estate.
• Management of more than $40 billion in commercial real estate assets for clients in over 25 countries. 6

Find out more with our global real estate overview Welcome to a whole new world of diversification (PDF: 590 KB) This publication outlines the growing opportunities in real estate investment trusts (REITs) worldwide for those seeking investments that offer tax advantages, liquidity and further portfolio diversification.

International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards.

Real estate investment options are subject to some risks inherent in real estate and real estate investment trusts (REITs), such as risks associated with general and local economic conditions. Investing in REITs involves special risks, including interest rate fluctuation, credit risks, and liquidity risks, including interest conditions on real estate values and occupancy rates.

Fund Flyer . Summarizes Fund performance, investments and assets.

Fund Profile . Outlines investment strategy, assets, long-term returns, risk vs. return, top ten holdings, regional investments and Morningstar category.

Principal Diversified International Fund . This Fund may be an ideal first step abroad. Its an excellent core investment for a solid international portfolio. It has several features that mitigate the risks of international investing:

• More than 800 individual investments.
• A proven investment philosophy resulting in greater diversification: 90% core developed, 6% international small cap, and 5% emerging markets. 7
• 25 years of international investment management experience.

Fund Flyer . Summarizes Fund performance, investments and assets.

Fund Profile . Outlines investment strategy, assets, long-term returns, risk vs. return, top ten holdings, regional investments and Morningstar category.

Principal International Emerging Markets Fund . Emerging market economies have shown surprising growth in recent years and have become an increasingly popular investment choice.

Our combined international expertise offers:

• 2,800 stocks screened every week to produce a portfolio of approximately 150 of the best ranked stocks.
• Multi-cap portfolios that provide greater diversification opportunity and asset class coverage.
• Around the clock coverage provided by portfolio managers, traders and analysts during local trading hours.

Fund Flyer . Summarizes Fund performance, investments and assets.

Fund Profile . Outlines investment strategy, assets, long-term returns, risk vs. return, top ten holdings, regional investments and Morningstar category.

Learn More

To learn more about Principal Funds or our international funds, contact your financial representative.

1 Source: S&P Citigroup Global Equity Indices

2 Source: Principal Global Investors, as of August 31, 2007

3 InvestmentNews, January 23, 2006.

4 Principal Global Investors is the asset management arm of the of the Principal Financial Group (The Principal) and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Spectrum Asset Management, Inc.; Post Advisory Group LLC, Morley Capital Management, Inc., Columbus Circle Investors; Edge Asset Management, Inc.; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; and the majority owned affiliates of Principal International, Inc. The Principal Financial Group and The Principal are registered trademarks of Principal Financial Services, Inc. a member of the Principal Financial Group.

5 Pensions & Investments, January 25, 2007

6 As of September 30, 2007

7 Totals do not add up to 100% due to international small cap containing both developed and emerging markets.

To obtain a prospectus, download online or call Sales Support at 1.800.787.1621

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 Sales Support at 1.800.787.1621.

Investing involves risk, including possible loss of principal.

Principal Funds are distributed by Principal Funds Distributor, Inc.

Not FDIC Insured — May Lose Value — No Bank Guarantee