Principal Funds, Inc. R-1 Class R-2 Class R-3 Class R-4 Class R-5 Class Prospectus

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PRINCIPAL FUNDS, INC.

R-1 CLASS SHARES

R-3 CLASS SHARES

R-5 CLASS SHARES

R-2 CLASS SHARES

R-4 CLASS SHARES

The date of this Prospectus is March 1, 2011. Ticker Symbols for Principal Funds, Inc.

Fund Name R-1 R-2 R-3 R-4 R-5

Bond & Mortgage Securities PBOMX PBMNX PBMMX PBMSX PBMPX Core Plus Bond I PCBRX PCBBX PCIRX PCBDX PCBEX Disciplined LargeCap Blend PDSLX PDCAX PDAPX PDCSX PDPBX Diversified International PDVIX PINNX PINRX PINLX PINPX Equity Income PIEMX PEINX PEIOX PEIPX PEIQX Government & High Quality Bond PMGRX PFMRX PRCMX PMRDX PMREX

Income PIOMX PIONX PIOOX PIOPX PIOQX Inflation Protection PISPX PBSAX PIFPX PIFSX PBPPX

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Objective: The Fund seeks long-term growth of capital.

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)

For the year ended October 31, 2010 Class R-1 Class R-2 Class R-3 Class R-4 Class R-5

Management Fees 0.58% 0.58% 0.58% 0.58% 0.58% Distribution and/or Service (12b-1) Fees 0.35% 0.30% 0.25% 0.10% N/A Other Expenses 0.54% 0.46% 0.33% 0.29% 0.27%

Total Annual Fund Operating Expenses 1.47% 1.34% 1.16% 0.97% 0.85%

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 5 years 10 years

Class R-1 $150 $465 $803 $1,757 Class R-2 $136 $425 $734 $1,613 Class R-3 $118 $368 $638 $1,409 Class R-4 $ 99 $309 $536 $1,190 Class R-5 $ 87 $271 $471 $1,049 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 145.0% of the average value of its portfolio.

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Standard & Poor’s (“S&P”) 500 Index (as of the most recent calendar year end, this range was between approximately $1.6 billion and $364.1 billion)) at the time of purchase. The Fund may actively trade portfolio securities in an attempt to achieve its investment objective.

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Principal Risks

The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in equity securities, but who prefer investing in larger, established companies.

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. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund, in alphabetical order, are:

Active Trading Risk. Actively trading portfolio securities may accelerate realization of taxable gains and losses,

lower fund performance and may result in high portfolio turnover rates and increased brokerage costs.

Equity Securities Risk. Equity securities (common, convertible preferred stocks and other 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.

Growth Stock Risk. Market prices of growth stocks are often more sensitive than other securities to earnings

expectations.

Underlying Fund Risk. As of the date of this prospectus, this fund was being used as an underlying fund of a fund

of funds, and an underlying fund of a fund of funds may experience relatively large redemptions or investments as the fund of funds periodically reallocates or rebalances its assets. These transactions may cause the underlying fund to sell portfolio securities to meet such redemptions, or to invest cash from such investments, at times it would not otherwise do so, and may as a result increase transaction costs and adversely affect underlying fund performance.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be

appropriately priced at the time of purchase.

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 R-2 shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for each share class 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 1-800-547-7754.

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Total Returns as of December 31 each year (Class R-2 shares)

Highest return for a quarter during the period of the bar chart above: Q2 ‘03 14.82% Lowest return for a quarter during the period of the bar chart above: Q4 ‘08 -21.90%

Average Annual Total Returns

For the periods ended December 31, 2010 1 Year 5 Years Life of Fund Class R-1 Return Before Taxes 11.96% 0.02% 5.30% Class R-1 Return After Taxes on Distributions 11.18% -0.59% 4.73% Class R-1 Return After Taxes on Distribution and Sale of Fund Shares 8.81% 0.08% 4.58% Class R-2 Return Before Taxes 12.03% 0.14% 5.45% Class R-3 Return Before Taxes 12.28% 0.33% 5.65% Class R-4 Return Before Taxes 12.65% 0.55% 5.87% Class R-5 Return Before Taxes 12.63% 0.63% 5.97%

S&P 500 Index (reflects no deduction for fees, expenses, or taxes) 15.06% 2.29% 6.68%

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. After-tax returns are shown for Class R-1 shares only and would be different for Class R-2, R-3, R-4 and R-5 shares.

Management

Investment Advisor: Principal Management Corporation Sub-Advisor(s) and Portfolio Manager(s):

Principal Global Investors, LLC

x Jeffrey A. Schwarte (since 2002), Portfolio Manager

Purchase and Sale of Fund Shares

There are no restrictions on amounts to be invested in R-1, R-2, R-3, R-4, and R-5 Class 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 the retirement plan offering the Fund.

For Important Information About:

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Objective: The Fund seeks to provide a relatively high level of current income and long-term growth of income

and capital.

Example

Class R-1 $143 $443 $766 $1,680 Class R-2 $129 $403 $697 $1,534 Class R-3 $111 $347 $601 $1,329 Class R-4 $ 92 $287 $498 $1,108 Class R-5 $ 80 $249 $433 $ 966 Portfolio Turnover

Under normal circumstances, the Fund invests at least 80% of its net assets in dividend-paying equity securities. The Fund usually invests in equity securities of companies with large market capitalizations (which as of the most recent calendar year end ranged between $1.6 billion and $364.1 billion, as defined by the S&P 500 Index), but may also invest in equity securities of companies with medium market capitalizations (which as of the most recent calendar year end ranged between $0.2 billion and $21.8 billion, as defined by the Russell Midcap Index). The Fund invests in value equity securities; the value orientation selection emphasizes buying equity securities that appear to be

undervalued. The Fund will also invest in real estate investment trusts and securities of foreign issuers.

Principal Risks

The Fund may be an appropriate investment for investors who seek dividends to generate income or to be reinvested for growth and who can accept fluctuations in the value of investments and the risks of investing in real estate

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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. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund, in alphabetical order, are:

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). Certain of these risks are greater for investments in emerging markets.

Real Estate Investment Trusts ("REITs") Risk. A REIT could fail to qualify for tax-free pass-through 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 Fund commenced operations after succeeding to the operations of another fund on January 12, 2007. Performance for periods prior to that date is based on the performance of the predecessor fund’s Class A shares adjusted to reflect the fees and expenses of these classes. The adjustments result in performance (for periods prior to the date these classes began operations) that is no higher than the historical performance of Class A shares. The predecessor fund commenced operations on July 25, 1996. The R-1, R-2, R-3, R-4 and R-5 Class shares were first sold on March 1, 2010.

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For the periods ended December 31, 2010 1 Year 5 Years 10 Years Class R-1 Return Before Taxes 15.34% 1.93% 5.40% Class R-1 Return After Taxes on Distributions 14.94% 1.06% 4.54% Class R-1 Return After Taxes on Distribution and Sale of Fund Shares 10.45% 1.55% 4.46% Class R-2 Return Before Taxes 15.44% 2.05% 5.54% Class R-3 Return Before Taxes 15.65% 2.23% 5.73% Class R-4 Return Before Taxes 15.93% 2.41% 5.88% Class R-5 Return Before Taxes 16.03% 2.44% 5.90%

Russell 1000 Value Index (reflects no deduction for fees, expenses, or taxes) 15.51% 1.28% 3.26% S&P 500/Citigroup Value Index (reflects no deduction for fees, expenses, or taxes) 15.10% 0.87% 1.65%

Management

Edge Asset Management, Inc.

x Daniel R. Coleman (since 2010), Head of Equities, Portfolio Manager x David W. Simpson (since 2008), Portfolio Manager

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x taxes, please turn to “Certain Information Common to all Funds - Tax Information” at page 216 of the Prospectus

and

x financial intermediary compensation, please turn to “Certain Information Common to all Funds - Payments to

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Total Annual Fund Operating Expenses 1.63% 1.50% 1.32% 1.13% 1.01% Fee Waiver 0.02% 0.02% 0.02% 0.02% 0.02%

Total Annual Fund Operating Expenses After Fee Waiver 1.61% 1.48% 1.30% 1.11% 0.99%

Principal Management Corporation has contractually agreed to limit the Fund's Management Fees through the period ending February 29, 2012. The fee waiver will reduce the Fund's Management Fees by 0.018% (expressed as a percent of average net assets on an annualized basis). This agreement can be terminated by mutual agreement of the parties (Principal Funds, Inc. and Principal Management Corporation).

Example

Class R-1 $164 $512 $884 $1,931 Class R-2 $151 $472 $816 $1,789 Class R-3 $132 $416 $721 $1,588 Class R-4 $113 $357 $620 $1,373 Class R-5 $101 $319 $556 $1,234 Portfolio Turnover

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 36.2% of the average value of its portfolio

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Employing a “blend” strategy, the Fund’s assets are invested in equity securities with both growth and/or value characteristics. The value orientation selection emphasizes buying equity securities that appear to be undervalued. The growth orientation selection emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average.

Principal Management Corporation invests between 10% and 40% of the Fund's assets in equity securities in an attempt to match or exceed the performance of the Fund's benchmark index by applying a risk-controlled investment process that slightly over/underweights individual equity securities relative to their weight in the Fund's benchmark index.

Principal Risks

The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in an actively managed portfolio of equity securities, but who prefer investing in larger, established companies.

expectations.

Performance

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Management

Investment Advisor and Portfolio Manager:

Principal Management Corporation

x Mariateresa Monaco (since 2009), Vice President-Portfolio Manager

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

ClearBridge Advisors, LLC

x Scott Glasser (since 2009), Senior Portfolio Manager and Managing Director x Michael Kagan (since 2009), Senior Portfolio Manager and Managing Director

T. Rowe Price Associates, Inc.

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Example

Class R-1 $155 $480 $829 $1,813 Class R-2 $142 $440 $761 $1,669 Class R-3 $123 $384 $665 $1,466 Class R-4 $104 $325 $563 $1,248 Class R-5 $ 92 $287 $498 $1,108 Portfolio Turnover

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000®_Growth Index (as of the most recent calendar year end, this range was between approximately $0.2 billion and $364.1 billion)) at the time of purchase. The Fund invests in growth equity securities; growth orientation emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average.

Principal Risks

The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in equity securities that may have greater risks than equity securities of companies with lower potential for earnings growth.

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expectations.

Performance

The R-1 Class shares were first sold on November 1, 2004. The other classes were first sold on December 6, 2000. For periods prior to the date on which the R-1 Class began operations, its returns are based on the performance of the Fund’s R-3 Class shares adjusted to reflect the fees and expenses of the R-1 Class. The adjustments result in performance (for the periods prior to the date the R-1 began operations) that is no higher than the historical performance of the R-3 Class shares.

During 2003, the Fund processed a significant (relative to the R-1 Class) “As Of” transaction that resulted in a gain to the remaining shareholders of the R-1 Class. In accordance with the Fund’s shareholder processing policies, this benefit inures all shareholders of the R-1 Class. Had such a gain not been recognized, the total return amounts expressed herein would have been smaller.

During 2010, the R-3 Class experienced a significant one time gain of approximately $0.06/shares as the result of a settlement in an SEC administrative proceeding. If such gain had not been recognized, the total amounts expressed herein would have been lower.

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For the periods ended December 31, 2010 1 Year 5 Years 10 Years Class R-1 Return Before Taxes 17.41% 2.21% -0.87%(1) Class R-1 Return After Taxes on Distributions 17.41% 2.12% -0.92%(1) Class R-1 Return After Taxes on Distribution and Sale of Fund Shares 11.32% 1.90% -0.73%(1) Class R-2 Return Before Taxes 17.46% 2.34% -1.09% Class R-3 Return Before Taxes 18.42%(2)_2.65%(2)_-0.51%(1) (2) Class R-4 Return Before Taxes 17.96% 2.70% -0.58%(3) Class R-5 Return Before Taxes 18.03% 2.81% -0.65%

Russell 1000 Growth Index (reflects no deduction for fees, expenses, or taxes) 16.71% 3.75% 0.02%

(1) _{During 2003, the Fund processed a significant (relative to the Class) “As Of” transaction that resulted in a gain to the remaining shareholders of}

the Class. In accordance with the Fund’s shareholder processing policies, this benefit inures all shareholders of the Class. Had such a gain not been recognized, the total return amounts expressed herein would have been smaller.

(2) _{During 2003, the R-3 Class experienced a significant one time gain of approximately $0.06/share as the result of a settlement in an SEC}

administrative proceeding. If such gain had not been recognized, the total return amounts expressed herein would have been lower.

(3)_{During 2003, the R-4 Class experienced a significant withdrawal of monies by an affiliate. As the remaining shareholders held relatively small}

positions, the total return amounts expressed herein are greater than those that would have been experienced without the withdrawal.

Management

Columbus Circle Investors

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Objective: The Fund seeks long-term growth of capital. Fees and Expenses of the Fund

Total Annual Fund Operating Expenses 1.51% 1.38% 1.20% 1.01% 0.89% Fee Waiver 0.02% 0.02% 0.02% 0.02% 0.02%

Total Annual Fund Operating Expenses After Waiver 1.49% 1.36% 1.18% 0.99% 0.87%

Management Fees have been restated to reflect current fees. Effective July 1, 2010, management fees were reduced.

Example

Class R-1 $152 $475 $821 $1,800 Class R-2 $138 $435 $753 $1,655 Class R-3 $120 $379 $657 $1,452 Class R-4 $101 $319 $556 $1,234 Class R-5 $ 89 $282 $491 $1,094 Portfolio Turnover

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Principal Risks

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).

expectations.

Performance

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Management

Brown Investment Advisory Incorporated

x Kenneth M. Stuzin (since 2009), Partner and U.S. Large-Cap Growth Equity Portfolio Manager

T. Rowe Price Associates, Inc.

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Total Annual Fund Operating Expenses 1.82% 1.69% 1.51% 1.32% 1.20% Fee Waiver 0.01% 0.01% 0.01% 0.01% 0.01%

Total Annual Fund Operating Expenses After Fee Waiver 1.81% 1.68% 1.50% 1.31% 1.19%

Example

Class R-1 $184 $571 $984 $2,136 Class R-2 $171 $531 $917 $1,997 Class R-3 $153 $476 $823 $1,801 Class R-4 $133 $417 $722 $1,589 Class R-5 $121 $380 $659 $1,454 Portfolio Turnover

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Principal Risks

expectations.

Performance

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For the periods ended December 31, 2010 1 Year 5 Years 10 Years Class R-1 Return Before Taxes 12.31% 2.93% -0.29% Class R-1 Return After Taxes on Distributions 12.23% 2.06% -0.76% Class R-1 Return After Taxes on Distribution and Sale of Fund Shares 8.12% 2.21% -0.40% Class R-2 Return Before Taxes 12.57% 3.05% -0.17% Class R-3 Return Before Taxes 12.74% 3.24% 0.01% Class R-4 Return Before Taxes 12.83% 3.44% 0.19% Class R-5 Return Before Taxes 13.13% 3.59% 0.31%

Management

American Century Investment Management, Inc.

x Gregory J. Woodhams (since 2000), Chief Investment Officer, U.S. Growth Equity - Large Cap, Senior Vice

President and Senior Portfolio Manager

x Prescott LeGard (since 2000), Vice President and Portfolio Manager

Montag & Caldwell, LLC

x Ronald E. Canakaris (since 2009), Chairman and CIO x Charles E. Markwalter (since 2009), Vice President

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Example

Class R-1 $106 $331 $574 $1,271 Class R-2 $ 93 $290 $504 $1,120 Class R-3 $ 75 $233 $406 $ 906 Class R-4 $ 55 $173 $302 $ 677 Class R-5 $ 43 $135 $235 $ 530 Portfolio Turnover

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of companies that compose the S&P 500 Index at the time of purchase. The Index is designed to represent U.S equities with risk/return characteristics of the large cap universe. As of the most recent calendar year end, the market capitalization range of the Index was between approximately $1.6 billion and $364.1 billion. The Fund employs a passive investment approach designed to attempt to track the performance of the Index. The Fund invests in index futures and options on a daily basis to gain exposure to the Index in an effort to minimize tracking error relative to the benchmark. NOTE: “Standard & Poor’s 500” and “S&P 500®” are trademarks of The McGraw-Hill Companies, Inc. and have

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Principal Risks

The Fund may be an appropriate investment for investors seeking long-term growth of capital, willing to accept the potential for volatile fluctuations in the value of investments and preferring a passive, rather than active, management style.

Counterparty Risk. Counterparty risk is the risk that the counterparty to a derivatives contract or repurchase

agreement, the borrower of a portfolio’s securities, or other obligation, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise to honor its obligations.

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.

Index Fund Investment Risk. More likely than not, the fund will not provide investment performance that matches

the index performance due to the fees and expenses of the fund.

Performance

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Management

Principal Global Investors, LLC

x Thomas L. Kruchten (since 2011), Research Analyst and Portfolio Manager

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Estimated For the year ended October 31, 2010 Class R-1 Class R-2 Class R-3 Class R-4 Class R-5

Example

Class R-1 $134 $418 $723 $1,590 Class R-2 $121 $378 $654 $1,443 Class R-3 $103 $322 $558 $1,236 Class R-4 $ 84 $262 $455 $1,014 Class R-5 $ 72 $224 $390 $ 871 Portfolio Turnover

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000® Value Index, which as of the most recent calendar year end ranged between approximately $0.2 billion and $364.1 billion) at the time of purchase. The Fund invests in value equity securities; the value orientation selection emphasizes buying equity securities that appear to be undervalued. The Fund may actively trade portfolio securities in an attempt to achieve its investment objective.

Principal Risks

Principal Funds, Inc. R-1 Class R-2 Class R-3 Class R-4 Class R-5 Class Prospectus