PRINCIPAL FUNDS, INC. SUB-ADVISORY AGREEMENT SMALLCAP GROWTH FUND II

PRINCIPAL FUNDS, INC.
SUB-ADVISORY AGREEMENT
SMALLCAP GROWTH FUND II
AGREEMENT executed as of the 1st day of July, 2009, by and between PRINCIPAL MANAGEMENT
CORPORATION, an Iowa Corporation (hereinafter called "the Manager") and EMERALD ADVISORS, INC.
(”Emerald”) (hereinafter called "the Sub-Advisor").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to Principal Funds, Inc., (the "Fund"), an
open-end management investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it with portfolio selection and related
research and statistical services in connection with the investment advisory services for the SmallCap
Growth Fund II of the Fund (hereinafter called the “Series”), which the Manager has agreed to provide to the
Fund, and the Sub-Advisor desires to furnish such services; and
WHEREAS, the Manager has furnished the Sub-Advisor with copies properly certified or authenticated of each
of the following and will promptly provide the Sub-Advisor with copies properly certified or authenticated of any
amendment or supplement thereto:
(a)	Management Agreement (the "Management Agreement") between the Manager and the Fund;
(b)	The Fund's registration statement as filed with the Securities and Exchange Commission (the
	“Registration Statement”);
(c)	The Fund's Articles of Incorporation and By-laws;
(d)	Policies, procedures or instructions adopted or approved by the Board of Directors of the Fund relating
	to obligations and services provided by the Sub-Advisor.
NOW, THEREFORE, in consideration of the promises and the terms and conditions hereinafter set forth, the
parties agree as follows:
1.	Appointment of Sub-Advisor
	In accordance with and subject to the Management Agreement, the Manager hereby appoints the
	Sub-Advisor to perform the services described in Section 2 below for investment and reinvestment of
	the securities and other assets of the Series, subject to the control and direction of the Fund's Board
	of Directors, for the period and on the terms hereinafter set forth. The Sub-Advisor accepts such
	appointment and agrees to furnish the services hereinafter set forth for the compensation herein
	provided. The Sub-Advisor shall for all purposes herein be deemed to be an independent contractor
	and shall, except as expressly provided or authorized, have no authority to act for or represent the
	Fund or the Manager in any way or otherwise be deemed an agent of the Fund or the Manager.
2.	Obligations of and Services to be Provided by the Sub-Advisor
	(a)	Provide investment advisory services, including but not limited to research, advice and
		supervision, for the Series.
	(b)	Furnish to the Board of Directors of the Fund (or any appropriate committee of such Board), and
		revise from time to time as conditions require, a recommended investment program for the
		portfolio of the Series consistent with the Series’ investment objective and policies as set forth in
		the Registration Statement, as may be amended from time to time.

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c)	Implement such of its recommended investment program as the Board of Directors (or any
	appropriate committee of the Board) shall approve, by placing orders for the purchase and sale of
	securities, subject always to the provisions of the Fund's Articles of Incorporation and Bylaws and
	the requirements of the 1940 Act, as each of the same shall be from time to time in effect.
(d)	Advise and assist the officers of the Fund, as reasonably requested by the officers, in taking such
	steps as are necessary or appropriate to carry out the decisions of its Board of Directors, and any
	appropriate committees of such Board, regarding the general conduct of the investment business
	of the Series.
(e)	Report to the Board of Directors of the Fund at such times and in such detail as the Board of
	Directors may deem appropriate in order to enable it to determine that the investment policies,
	procedures and approved investment program of the Series are being observed.
(f)	Upon reasonable request, provide assistance and recommendations for the determination of the
	fair value of certain securities when market quotations are not readily available for purposes of
	calculating net asset value in accordance with procedures and methods established by the Fund's
	Board of Directors.
(g)	Furnish, at its own expense, (i) all necessary investment and management facilities, including
	salaries of clerical and other personnel required for it to execute its duties faithfully, and (ii)
	administrative facilities, including bookkeeping, clerical personnel and equipment necessary for
	the efficient conduct of the investment advisory affairs of the Series. Except for expenses
	specifically assumed or agreed to be paid by the Sub-Advisor under this Agreement, the Sub-
	Advisor shall not be liable for any expenses of the Manager, the Fund or the Series including,
	without limitation, (i) interest and taxes, (ii) brokerage commissions and other costs in connection
	with the purchase or sale of securities or other investment instruments with respect to the Series,
	and (iii) custodian fees and expenses.
(h)	Open accounts with broker-dealers and future commission merchants (“broker-dealers”), select
	brokers and dealers to effect all transactions for the Series (which may include brokers or dealers
	affiliated with the Sub-Advisor, provided such transactions comply with applicable requirements
	under the 1940 Act), place all necessary orders with brokers, dealers, or issuers, and negotiate
	brokerage commissions, if applicable. To the extent consistent with applicable law, purchase or
	sell orders for the Series may be aggregated with contemporaneous purchase or sell orders of
	other clients of the Sub-Advisor. In such event, allocation of securities so sold or purchased, as
	well as the expenses incurred in the transaction, will be made by the Sub-Advisor in a manner the
	Sub-Advisor considers to be equitable and consistent with its fiduciary obligations to the Series
	and to other clients. The Sub-Advisor shall use its best efforts to obtain execution of transactions
	for the Fund at prices that are advantageous to the Fund and at commission rates that are
	reasonable in relation to the benefits received. In doing so, the Sub-Advisor may select brokers or
	dealers on the basis that they also provide brokerage, research or other services or products to
	the Sub-Advisor. To the extent consistent with applicable law, the Sub-Advisor may pay a broker
	or dealer an amount of commission for effecting a securities transaction in excess of the amount
	of commission or dealer spread another broker or dealer would have charged for effecting that
	transaction if the Sub-Advisor determines in good faith that such amount of commission is
	reasonable in relation to the value of the brokerage and research products and/or services
	provided by such broker or dealer. This determination, with respect to brokerage and research
	products and/or services, may be viewed in terms of either that particular transaction or the overall
	responsibilities which the Sub-Advisor and its affiliates have with respect to the Series as well as
	to accounts over which they exercise investment discretion. Not all such services or products
	need be used by the Sub-Advisor in managing the Series. In addition, joint repurchase or other
	accounts may not be utilized by the Series except to the extent permitted under any exemptive
	order obtained by the Sub-Advisor and provided that all conditions of such order are complied
	with.

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(i)	Maintain all accounts, books and records with respect to the Series as are required of an
	investment adviser of a registered investment company pursuant to the 1940 Act and Investment
	Advisers Act of 1940, as amended, (the "Investment Advisers Act"), and the rules thereunder,
	and furnish the Fund and the Manager with such periodic and special reports as the Fund or
	Manager may reasonably request. In compliance with the requirements of Rule 31a-3 under the
	1940 Act, the Sub-Advisor hereby agrees that all records that it maintains for the Series are the
	property of the Fund and it will surrender promptly to the Fund any records that it maintains for the
	Series upon request by the Fund or the Manager provided, however, that the Sub-Advisor may
	retain a copy of such records. The Sub-Advisor has no responsibility for the maintenance of Fund
	records except insofar as is directly related to the services provided to the Series.
(j)	Observe and comply with Rule 17j-1 under the 1940 Act and the Sub-Advisor’s Code of Ethics
	adopted pursuant to that Rule as the same may be amended from time to time. The Manager
	acknowledges receipt of a copy of Sub-Advisor’s current Code of Ethics. The Sub-Advisor shall
	promptly forward to the Manager a copy of any material amendments to the Sub-Advisor’s Code
	of Ethics.
(k)	From time to time as the Manager or the Fund may reasonably request, furnish the requesting
	party reports on portfolio transactions and reports on investments held by the Series, all in such
	detail as the Manager or the Fund may reasonably request. The Sub-Advisor will make available
	its officers and employees to meet with the Fund’s Board of Directors at reasonable times at the
	Fund’s principal place of business upon reasonable notice to review the investments of the
	Series.
(l)	Provide such information as may be required for the Fund or the Manager to comply with their
	respective obligations under applicable laws, including, without limitation, the Internal Revenue
	Code of 1986, as amended (the “Code”), the 1940 Act, the Investment Advisers Act, the
	Securities Act of 1933, as amended (the “Securities Act”), and any state securities laws, and any
	rule or regulation thereunder.
(m)	Maintain, in connection with the Sub-Advisor’s investment advisory services obligations provided
	hereunder, compliance with the 1940 Act and the regulations adopted by the Securities and
	Exchange Commission thereunder and each Series’ investment strategies and restrictions as
	stated in the Series’ current prospectus and statement of additional information.
(n)	Provide to the Manager a copy of its Form ADV as filed with the Securities and Exchange
	Commission, as amended from time to time, and a list of the persons whom the Sub-Advisor
	wishes to have authorized to give written and/or oral instructions to custodians of assets of the
	Series.

3.	Prohibited Conduct
	In providing the services described in this agreement, the Sub-Advisor will not consult with any other
	investment advisory firm that provides investment sub-advisory services to the Fund or a fund that is
	under common control with the Fund regarding transactions for the Fund in the securities or other
	assets allocated to the Sub-Advisor pursuant to this Agreement, except as permitted by Rule 12d-3-1
	under the 1940 Act.
4.	Compensation
	As full compensation for all services rendered and obligations assumed by the Sub-Advisor hereunder
	with respect to the Series, the Manager shall pay the compensation specified in Appendix A to this
	Agreement. Although the Manager may from time to time waive the compensation it is entitled to
	receive from the Series, such waiver will have no effect on the Manager’s obligation to pay the Sub-
	Advisor the compensation provided for herein.

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5.	Liability of Sub-Advisor
	Neither the Sub-Advisor nor any of its directors, officers or employees shall be liable to the Manager,
	the Fund, the Series or any shareholder of the Fund for any loss suffered by the Manager, the Fund,
	the Series or any shareholder of the Fund resulting from any error of judgment made in the good faith
	exercise of the Sub-Advisor's investment discretion in connection with selecting investments for the
	Series except for losses resulting from willful misfeasance, bad faith or gross negligence of, or from
	reckless disregard of, the duties of the Sub-Advisor or any of its directors, officers or employees. The
	Manager shall hold harmless and indemnify the Sub-Advisor for any loss, liability, cost, damage or
	expense (including reasonable attorneys fees and costs) arising from any claim or demand by any
	past or present shareholder of the Series or the Fund that is not based upon the obligations of the
	Sub-Advisor with respect to the Series under this Agreement. The Manager acknowledges and agrees
	that the Sub-Advisor makes no representation or warranty, express or implied, that any level of
	performance or investment results will be achieved by the Series or that the Series will perform
	comparably with any standard or index, including other clients of the Sub-Advisor, whether public or
	private.
6.	Supplemental Arrangements
	The Sub-Advisor may enter into arrangements with other persons affiliated with the Sub-Advisor for
	the provision of certain personnel and facilities to the Sub-Advisor to better enable it to fulfill its
	obligations under this Agreement.
7.	Regulation
	The Sub-Advisor shall submit to all regulatory and administrative bodies having jurisdiction over the
	services provided pursuant to this Agreement any information, reports or other material which any
	such body may request or require pursuant to applicable laws and regulations.
8.	Manager’s Representations
	The Manager represents and warrants that (i) it is registered as an investment adviser under the
	Investment Advisers Act and will continue to be so registered for so long as this Agreement remains in
	effect; (ii) it is not prohibited by the 1940 Act or the Investment Advisers Act from performing the
	services contemplated by this Agreement; (iii) it has met, and will continue to meet for so long as this
	Agreement remains in effect, any applicable federal or state requirements, or the applicable
	requirements of any regulatory or industry self-regulatory agency, necessary to be met in order to
	perform the services contemplated by this Agreement; (iv) it has the authority to enter into and
	perform the services contemplated by this Agreement, and (v) it will immediately notify the Sub-
	Advisor of the occurrence of any event that would disqualify the Manager from serving as an
	investment advisor of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
9.	Duration and Termination of This Agreement
	This Agreement shall become effective as of the date of execution and, unless otherwise terminated,
	shall continue in effect thereafter from year to year provided that the continuance is specifically
	approved at least annually either by the Board of Directors of the Fund or by a vote of a majority of the
	outstanding voting securities of the Series and in either event by a vote of a majority of the directors of
	the Fund who are not interested persons of the Manager, Principal Life Insurance Company, the Sub-
	Advisor or the Fund cast in person at a meeting called for the purpose of voting on such approval.
	If the shareholders of the Account fail to approve the Agreement or any continuance of the Agreement
	in accordance with the requirements of the 1940 Act, the Sub-Advisor will continue to act as
	Sub-Advisor with respect to the Account pending the required approval of the Agreement or its
	continuance or of any contract with the Sub-Advisor or a different manager or sub-advisor or other
	definitive action; provided, that the compensation received by the Sub-Advisor in respect to the
	Account during such period is in compliance with Rule 15a-4 under the 1940 Act.

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This Agreement may, on sixty days written notice, be terminated at any time without the payment of
any penalty, by the Board of Directors of the Fund, the Sub-Advisor or the Manager or by vote of a
majority of the outstanding voting securities of the Series. This Agreement shall automatically
terminate in the event of its assignment or upon termination of the Management Agreement. In
interpreting the provisions of this Section 9, the definitions contained in Section 2(a) of the 1940 Act
(particularly the definitions of "interested person," "assignment" and "voting security") shall be applied.
10. Indemnification
(a)	The Sub-Advisor agrees to indemnify and hold harmless the Manager, any affiliated person within
	the meaning of Section 2(a)(3) of the 1940 Act (“affiliated person”) of the Manager and each person,
	if any who, within the meaning of Section 15 of the Securities Act controls (“controlling persons”) the
	Manager, against any and all losses, claims, damages, liabilities or litigation, including reasonable
	legal expenses (collectively “Losses”) to which the Manager or such affiliated person or controlling
	person of the Manager may become subject under the Securities Act, the 1940 Act, the Investment
	Advisers Act, under any other statute, law, rule or regulation at common law or otherwise, arising out
	of the Sub-Advisor’s responsibilities hereunder (1) to the extent of and as a result of the willful
	misconduct, bad faith, or gross negligence by the Sub-Advisor, any of the Sub-Advisor’s employees
	or representatives or any affiliate of or any person acting on behalf of the Sub-Advisor; or (2) as a
	result of any untrue statement of a material fact contained in the Registration Statement, including
	any amendment thereof or any supplement thereto, or the omission to state therein a material fact
	required to be stated therein or necessary to make the statement therein not misleading, if such a
	statement or omission was made in reliance upon and in conformity with written information
	furnished by the Sub-Advisor to the Manager specifically for use therein; provided, however, that in
	no case is the Sub-Advisor’s indemnity in favor of the Manager or any affiliated person or controlling
	person of the Manager deemed to protect such person against any liability to which any such person
	would otherwise be subject by reason of willful misconduct, bad faith or gross negligence in the
	performance of its duties or by reason of its reckless disregard of its obligations and duties under this
	Agreement.
(b)	The Manager agrees to indemnify and hold harmless the Sub-Advisor, any affiliated person and
	any controlling person of the Sub-Advisor, if any, against any and all Losses to which the Sub-
	Advisor or such affiliated person or controlling person of the Sub-Advisor may become subject
	under the Securities Act, the 1940 Act, the Investment Advisers Act, under any other statute, law,
	rule or regulation, at common law or otherwise, arising out of the Manager’s responsibilities as
	investment manager of the Fund (1) to the extent of and as a result of the willful misconduct, bad
	faith, or gross negligence by the Manager, any of the Manager’s employees or representatives or
	any affiliate of or any person acting on behalf of the Manager, or (2) as a result of any untrue
	statement of a material fact contained in the Registration Statement, including any amendment
	thereof or any supplement thereto, or the omission to state therein a material fact required to be
	stated therein or necessary to make the statement therein not misleading; provided, however,
	that in no case is the Manager’s indemnity in favor of the Sub-Advisor or any affiliated person or
	controlling person of the Sub-Advisor deemed to protect such person against any liability to
	which any such person would otherwise be subject by reason of willful misconduct, bad faith or
	gross negligence in the performance of its duties or by reason of its reckless disregard of its
	obligations and duties under this Agreement. It is agreed that the Manager’s indemnification
	obligations under this Section will extend to expenses and costs (including reasonable attorneys
	fees) incurred by the Sub-Advisor as a result of any litigation brought by the Manager alleging the
	Sub-Advisor’s failure to perform its obligations and duties in the manner required under this
	Agreement unless judgment is rendered for the Manager.
11. Amendment of this Agreement
This Agreement may be amended at any time by mutual consent of the parties, provided that, if
required by law, such amendment shall also have been approved by vote of the holders of a majority
of the outstanding voting securities of the Series and by vote of a majority of the Directors of the Fund

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who are not interested persons of the Manager, the Sub-Advisor, Principal Life Insurance Company or
the Fund cast in person at a meeting called for the purpose of voting on such approval.
12. General Provisions
(a)	Each party agrees to perform such further acts and execute such further documents as are
	necessary to effectuate the purposes hereof. This Agreement shall be construed and enforced in
	accordance with and governed by the laws of the State of Iowa. The captions in this Agreement
	are included for convenience only and in no way define or delimit any of the provisions hereof or
	otherwise affect their construction or effect.
(b)	Any notice under this Agreement shall be in writing, addressed and delivered or mailed postage
	pre-paid to the other party at such address as such other party may designate for the receipt of
	such notices. Until further notice to the other party, it is agreed that the address of the Manager for
	this purpose shall be the Principal Financial Group, Xxx Xxxxxx, Xxxx 00000-0000, and the
	address of the Sub-Advisor shall be 0000 Xxxxxx Xxxx, X.X. Xxx 00000, Xxxxxxxxx, XX 17605-
	0666.
(c)	Each party will promptly notify the other in writing of the occurrence of any of the following events:
	(1)	the party fails to be registered as an investment adviser under the Investment Advisers Act or
		under the laws of any jurisdiction in which the party is required to be registered as an
		investment adviser in order to perform its obligations under this Agreement.
	(2)	the party is served or otherwise receives notice of any action, suit, proceeding, inquiry or
		investigation, at law or in equity, before or by any court, public board or body, involving the
		affairs of the Series.
(d)	The Manager shall provide (or cause the Account custodian to provide) timely information to the
	Sub-Advisor regarding such matters as the composition of the assets of the Account, cash
	requirements and cash available for investment in the Account, any applicable investment
	restrictions imposed by state insurance laws and regulations, and all other reasonable information
	as may be necessary for the Sub-Advisor to perform its duties and responsibilities hereunder.
(e)	The Manager will provide Sub-Advisor promptly with any changes to the Fund’s Articles of
	Incorporation, By-laws, registration statement, policies, procedures, instructions, and any other
	document relevant to the Sub-Advisor’s management of the Account. The parties agree that the
	Sub-Advisor is not responsible for compliance with any such changes until notified and provided
	with a written copy of such change.
(f)	This Agreement contains the entire understanding and agreement of the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written.

                                                                                              PRINCIPAL MANAGEMENT CORPORATION 

                                                                                            /s/ Xxxxxxx X. Beer

                                                                                             By:__________________________________ 

                                                                                                  Xxxxxxx X. Beer, Executive Vice President and 

                                                                                                  Chief Operating Officer 

                                                                                               EMERALD ADVISORS, INC. 

                                                                                               /s/ Xxxxxxx X. Xxxxx XX

                                                                                               By:___________________________ 

Xxxxxxx X. Xxxxx XX, President 

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APPENDIX A

The Sub-Advisor shall serve as investment sub-advisor for the Series. With respect to the Series, the 

Manager will pay the Sub-Advisor, as full compensation for all services provided under this Agreement, a fee 

computed at an annual rate as follows (the "Sub-Advisor Percentage Fee"): 

SmallCap Growth Fund II
Net Asset Value of Fund	Sub-Advisor Percentage Fee
First $200 million	0.50%
Over $200 million	0.45%

In calculating the fee for the Series, assets of any unregistered separate account of Principal Life 

Insurance Company and any investment company sponsored by Principal Life Insurance Company to which 

the Sub-Advisor provides investment advisory services and which have the same investment mandate as the 

Series, will be combined (together, the “Aggregated Assets”). The fee charged for the assets in the Series 

shall be determined by calculating a fee on the value of the Aggregated Assets and multiplying the aggregate 

fee by a fraction, the numerator of which is the amount of assets in the Series and the denominator of which is 

the amount of the Aggregated Assets. 

The Sub-Advisor Percentage Fee shall be accrued for each calendar day and the sum of the daily fee 

accruals shall be paid monthly to the Sub-Advisor. The daily fee accruals will be computed by multiplying the 

fraction of one over the number of calendar days in the year by the applicable annual rate described above 

and multiplying this product by the net assets of the Series as determined in accordance with the Fund’s 

prospectus and statement of additional information as of the close of business on the previous business day 

on which the Series was open for business. 

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