SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                               ------------------

                                    FORM 10-Q

                               ------------------

           |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2004

                                       OR

          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                               ------------------

                                     1-16725
                            (Commission file number)

                         PRINCIPAL FINANCIAL GROUP, INC.
             (Exact name of registrant as specified in its charter)

        DELAWARE                                             42-1520346
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                           Identification Number)

                               ------------------

                     711 HIGH STREET, DES MOINES, IOWA 50392
                    (Address of principal executive offices)
                                 (515) 247-5111
              (Registrant's telephone number, including area code)
                               ------------------

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|

The total number of shares of the  registrant's  Common Stock,  $0.01 par value,
outstanding as of July 28, 2004 was 313,410,192.

                         PRINCIPAL FINANCIAL GROUP, INC.
                                TABLE OF CONTENTS

                                                                           PAGE
PART I - FINANCIAL INFORMATION
     Item 1. Financial Statements
              Consolidated Statements of Financial Position at June
                  30, 2004 (Unaudited) and December 31, 2003...........      3
              Unaudited Consolidated Statements of Operations for the
                  three months and six months ended June 30, 2004
                  and 2003.............................................      4
              Unaudited Consolidated Statements of Stockholders'
                  Equity for the six months ended June 30, 2004
                  and 2003.............................................      6
              Unaudited Consolidated Statements of Cash Flows for
                  the six months ended June 30, 2004 and 2003..........      7
              Notes to Unaudited Consolidated Financial Statements
                  - June 30, 2004......................................      9
     Item 2. Management's Discussion and Analysis of Financial
                  Condition and Results of Operations..................     40
     Item 3. Quantitative and Qualitative Disclosures about Market
                  Risk.................................................     94
     Item 4. Controls and Procedures...................................    100

PART II - OTHER INFORMATION
     Item 1.  Legal proceedings........................................    100
     Item 2.  Changes in Securities, Use of Proceeds and Issuer
              Purchases of Equity Securities...........................    101
     Item 4.  Submission of Matters to a Vote of Security Holders......    102
     Item 6.  Exhibits and Reports on Form 8-K.........................    103
     Signature.........................................................    104

                                       2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         PRINCIPAL FINANCIAL GROUP, INC.
                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                                                                    JUNE 30,          DECEMBER 31,
                                                                                     2004                2003
                                                                               ------------------ ------------------
                                                                                  (Unaudited)           (Note 1)
                                                                                           (IN MILLIONS,
                                                                                      EXCEPT PER SHARE DATA)
                                                                                               
ASSETS
Fixed maturities, available-for-sale........................................      $   37,451.0       $   37,418.4
Fixed maturities, trading...................................................             100.3              102.9
Equity securities, available-for-sale.......................................             687.9              699.2
Mortgage loans..............................................................          11,327.6           11,251.6
Real estate.................................................................           1,046.7            1,526.1
Policy loans................................................................             805.2              804.1
Other investments...........................................................           1,282.8            1,412.1
                                                                               ------------------ ------------------
   Total investments........................................................          52,701.5           53,214.4

Cash and cash equivalents...................................................           1,475.9            1,192.5
Accrued investment income...................................................             633.8              656.6
Premiums due and other receivables..........................................             594.3              714.9
Deferred policy acquisition costs...........................................           1,740.3            1,568.9
Property and equipment......................................................             436.4              445.2
Goodwill....................................................................             231.8              175.8
Other intangibles...........................................................             156.8              121.0
Separate account assets.....................................................          46,412.4           43,407.8
Assets of discontinued operations...........................................           6,262.2            5,425.1
Other assets................................................................             727.5              832.2
                                                                               ------------------ ------------------
   Total assets.............................................................      $  111,372.9       $  107,754.4
                                                                               ================== ==================

LIABILITIES
Contractholder funds........................................................      $   30,130.2       $   28,896.4
Future policy benefits and claims...........................................          15,578.5           15,450.8
Other policyholder funds....................................................             634.7              709.1
Short-term debt.............................................................             626.2              702.8
Long-term debt..............................................................           1,069.7            1,374.3
Income taxes payable........................................................             123.9              113.9
Deferred income taxes.......................................................             950.6            1,198.9
Separate account liabilities................................................          46,412.4           43,407.8
Liabilities of discontinued operations......................................           4,917.4            4,575.3
Other liabilities...........................................................           3,790.2            3,925.5
                                                                               ------------------ ------------------
   Total liabilities........................................................         104,233.8          100,354.8

STOCKHOLDERS' EQUITY
Common stock,  par value  $.01 per share - 2,500.0  million  shares
   authorized, 378.0 million and 377.4 million shares issued, and 314.9
   million and 320.7 million shares outstanding in 2004 and 2003,
   respectively.............................................................               3.8                3.8
Additional paid-in capital..................................................           7,211.9            7,153.2
Retained earnings...........................................................             943.7              630.4
Accumulated other comprehensive income......................................             761.1            1,171.3
Treasury stock, at cost (63.1 million and 56.7 million shares in 2004 and
   2003, respectively)......................................................          (1,781.4)          (1,559.1)
                                                                               ------------------ ------------------
Total stockholders' equity..................................................           7,139.1            7,399.6
                                                                               ------------------ ------------------
Total liabilities and stockholders' equity..................................      $  111,372.9       $  107,754.4
                                                                               ================== ==================
SEE ACCOMPANYING NOTES.

                                       3

                         PRINCIPAL FINANCIAL GROUP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                     FOR THE THREE MONTHS ENDED        FOR THE SIX MONTHS ENDED
                                                              JUNE 30,                         JUNE 30,
                                                 --------------------------------- -------------------------------
                                                       2004             2003             2004            2003
                                                 ---------------- ---------------- --------------- ---------------
                                                                  (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                           
REVENUES
Premiums and other considerations..............      $  892.6         $  875.7         $1,813.0        $ 1,780.4
Fees and other revenues........................         364.2            276.7            696.8            543.3
Net investment income..........................         789.2            808.8          1,575.4          1,601.8
Net realized/unrealized capital losses.........         (66.3)            (9.7)          (108.8)           (84.2)
                                                 ---------------- ---------------- ---------------  ---------------
   Total revenues..............................       1,979.7          1,951.5          3,976.4          3,841.3

EXPENSES
Benefits, claims and settlement expenses.......       1,221.1          1,185.2          2,407.2          2,379.9
Dividends to policyholders.....................          74.4             73.9            147.7            154.0
Operating expenses.............................         521.1            490.3          1,050.6            975.6
                                                 ---------------- ---------------- ---------------  ---------------
   Total expenses..............................       1,816.6          1,749.4          3,605.5          3,509.5
                                                 ---------------- ---------------- ---------------  ---------------
Income from continuing operations before
   income taxes................................         163.1            202.1            370.9            331.8

Income taxes...................................          34.2             50.0             78.6             81.1
                                                 ---------------- ---------------- ---------------  ---------------
Income from continuing operations, net of
   related income taxes........................         128.9            152.1            292.3            250.7

Income (loss) from discontinued operations, net
   of related income taxes.....................          (9.2)            50.1             26.7            107.2
                                                 ---------------- ---------------- ---------------  ---------------
Income before cumulative effect of
   accounting change...........................         119.7            202.2            319.0            357.9
Cumulative effect of accounting change, net of
   related income taxes........................           -                -               (5.7)             -
                                                 ---------------- ---------------- ---------------  ---------------
Net income.....................................      $  119.7         $  202.2         $  313.3        $   357.9
                                                 ================ ================ ===============  ===============

                                       4

                         PRINCIPAL FINANCIAL GROUP, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
                                   (UNAUDITED)

                                                     FOR THE THREE MONTHS ENDED           FOR THE SIX MONTHS ENDED
                                                              JUNE 30,                            JUNE 30,
                                                   -------------------------------- --------------------------------
                                                        2004            2003             2004            2003
                                                   --------------- ---------------- --------------- ----------------
                                                                   (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                              
EARNINGS PER COMMON SHARE
Basic earnings per common share:
   Income from continuing operations, net of
     related income taxes.......................        $  0.41         $ 0.46           $  0.92          $ 0.76
   Income (loss) from discontinued operations,
     net of related income taxes................          (0.03)          0.16              0.08            0.33
                                                   --------------- ---------------- --------------- ----------------
   Income before cumulative effect of
     accounting change..........................           0.38           0.62              1.00            1.09
   Cumulative effect of accounting change,
     net of related income taxes................           -              -                (0.02)           -
                                                   --------------- ---------------- --------------- ----------------
   Net income...................................        $  0.38         $ 0.62           $  0.98          $ 1.09
                                                   =============== ================ =============== ================
Diluted earnings per common share:
   Income from continuing operations, net of
     related income taxes.......................        $  0.40         $ 0.46           $  0.91          $ 0.76
   Income (loss) from discontinued operations,
     net of related income taxes................          (0.03)          0.16              0.09            0.33
                                                   --------------- ---------------- --------------- ----------------
   Income before cumulative effect of
     accounting change..........................           0.37           0.62              1.00            1.09
   Cumulative effect of accounting change, net
     of related income taxes....................           -              -                (0.02)           -
                                                   --------------- ---------------- --------------- ----------------
   Net income...................................        $  0.37         $ 0.62           $  0.98          $ 1.09
                                                   =============== ================ =============== ================

SEE ACCOMPANYING NOTES.

                                       5

                         PRINCIPAL FINANCIAL GROUP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

                                                                               ACCUMULATED
                                                  ADDITIONAL                     OTHER                        TOTAL
                                     COMMON        PAID-IN       RETAINED     COMPREHENSIVE    TREASURY    STOCKHOLDERS'
                                     STOCK         CAPITAL       EARNINGS        INCOME         STOCK        EQUITY        SHARES
                                  -------------  ------------ ------------- ---------------- ----------- --------------- -----------
                                                                       (IN MILLIONS)                                  (IN THOUSANDS)

BALANCES AT JANUARY 1, 2003.......   $3.8         $7,106.3     $  29.4         $  635.8       $(1,118.1)     $6,657.2     334,419.3
Shares issued, net of call
  options.........................    -               11.7         -                -               -            11.7         441.7
Stock-based compensation..........    -               12.2         -                -               -            12.2
Treasury stock acquired and
  sold, net.......................    -                3.2         -                -            (288.0)       (284.8)     (9,779.2)
Comprehensive income:
  Net income......................    -                -         357.9              -               -           357.9
  Net unrealized gains............    -                -           -            1,147.0             -         1,147.0
  Provision for deferred income
    taxes.........................    -                -           -             (398.4)            -          (398.4)
  Net foreign currency
    translation adjustment........    -                -           -               36.2             -            36.2
                                                                                                         --------------
Comprehensive income..............                                                                            1,142.7
                                  ------------- ------------- ------------- ---------------- ----------- --------------- -----------
BALANCES AT JUNE 30, 2003.........   $3.8         $7,133.4     $ 387.3         $1,420.6       $(1,406.1)     $7,539.0     325,081.8
                                  ============= ============= ============= ================ =========== =============== ===========

BALANCES AT JANUARY 1, 2004.......   $3.8         $7,153.2     $ 630.4         $1,171.3       $(1,559.1)     $7,399.6     320,667.5
Shares issued.....................                    27.2         -                -               -            27.2         545.9
Stock-based compensation and
  additional related tax benefits.    -               22.7         -                -               -            22.7
Tax benefits related to initial
  public offering.................    -                8.8         -                -               -             8.8
Treasury stock acquired...........    -                -           -                -            (222.3)       (222.3)     (6,317.1)
Comprehensive loss:
  Net income......................    -                -         313.3              -               -           313.3
  Net unrealized losses...........    -                -           -             (596.2)            -          (596.2)
  Provision for deferred income
    tax benefit...................    -                -           -              228.9             -           228.9
  Net foreign currency
    translation adjustment........    -                -           -              (42.9)            -           (42.9)
                                                                                                         --------------
Comprehensive loss................                                                                              (96.9)
                                  ------------- ------------- ------------- ---------------- ----------- --------------- -----------
BALANCES AT JUNE 30, 2004.........   $3.8         $7,211.9     $ 943.7         $  761.1       $(1,781.4)     $7,139.1     314,896.3
                                  ============= ============= ============= ================ =========== =============== ===========

SEE ACCOMPANYING NOTES.

                                       6

                         PRINCIPAL FINANCIAL GROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                            FOR THE SIX MONTHS ENDED
                                                                     JUNE 30,
                                                      ----------------------------------
                                                              2004             2003
                                                      ----------------- ----------------
                                                                  (IN MILLIONS)
                                                                      
OPERATING ACTIVITIES
Net income............................................     $   313.3        $    357.9
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Income from discontinued operations, net of
    related income taxes..............................         (26.7)           (107.2)
  Cumulative effect of accounting change,
    net of related income taxes.......................           5.7               -
  Amortization of deferred policy acquisition costs...          92.4              98.4
  Additions to deferred policy acquisition costs......        (215.0)           (166.5)
  Accrued investment income...........................          22.8               1.4
  Premiums due and other receivables..................          33.8              (7.7)
  Contractholder and policyholder liabilities
     and dividends....................................         744.8           1,064.9
  Current and deferred income taxes (benefits)........          (5.3)            254.7
  Net realized/unrealized capital losses..............         108.8              84.2
  Depreciation and amortization expense...............          54.5              51.2
  Mortgage loans held for sale, acquired or
    originated........................................        (423.9)           (443.1)
  Mortgage loans held for sale, sold or repaid,
    net of gain.......................................         449.5             429.8
  Real estate acquired through operating activities...         (16.1)             (9.3)
  Real estate sold through operating activities.......          56.4               4.3
  Stock-based compensation............................          20.9              10.5
  Other...............................................        (223.1)            235.3
                                                      ----------------- ----------------
Net adjustments.......................................         679.5           1,500.9
                                                      ----------------- ----------------
Net cash provided by operating activities.............         992.8           1,858.8

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.........................................        (5,137.1)         (5,341.6)
  Sales............................................          1,477.3           1,787.8
  Maturities.......................................          2,802.0           1,916.2
Mortgage loans acquired or originated.................        (949.6)           (873.4)
Mortgage loans sold or repaid.........................         783.4             532.4
Real estate acquired..................................        (105.7)           (152.4)
Real estate sold......................................         131.7              31.5
Net change in property and equipment..................         (24.4)             (8.5)
Net proceeds from sales of subsidiaries...............          14.9              33.6
Purchases of interest in subsidiaries, net of
  cash acquired.............................                  (106.2)            (88.1)
Net change in other investments.......................         (65.5)            (67.1)
                                                      ----------------- ----------------
Net cash used in investing activities.................      (1,179.2)         (2,229.6)

                                       7

                         PRINCIPAL FINANCIAL GROUP, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)

                                                           FOR THE SIX MONTHS ENDED
                                                                    JUNE 30,
                                                      ----------------------------------
                                                               2004           2003
                                                      ----------------- ----------------
                                                                    (IN MILLIONS)
                                                                       
FINANCING ACTIVITIES
Issuance of common stock, net of call options........           14.1              11.7
Acquisition of treasury stock........................         (222.3)           (300.0)
Proceeds from financing element derivatives..........           94.0               -
Payments for financing element derivatives...........          (41.1)              -
Issuance of long-term debt...........................            7.8               1.9
Principal repayments of long-term debt...............         (221.1)             (8.4)
Net proceeds of short-term borrowings................           49.6               7.8
Investment contract deposits.........................        3,740.9           5,052.1
Investment contract withdrawals......................       (2,938.2)         (4,081.5)
Net increase (decrease) in banking operation
  deposits...........................................          (13.9)            150.9
                                                      ----------------- ----------------
Net cash provided by financing activities............          469.8             834.5
                                                      ----------------- ----------------
Net increase in cash and cash equivalents............          283.4             463.7

Cash and cash equivalents at beginning of period.....        1,192.5             727.8
                                                      ----------------- ----------------
Cash and cash equivalents at end of period...........      $ 1,475.9         $ 1,191.5
                                                      ================= ================

SEE ACCOMPANYING NOTES.

                                       8

                         PRINCIPAL FINANCIAL GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

1.   NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The  accompanying  unaudited  consolidated  financial  statements  of  Principal
Financial Group, Inc. ("PFG"),  its majority-owned  subsidiaries and, subsequent
to June 30, 2003, its consolidated variable interest entities ("VIE"), have been
prepared in conformity with accounting principles generally accepted in the U.S.
("U.S. GAAP") for interim financial statements and with the instructions to Form
10-Q and  Article  10 of  Regulation  S-X.  In the  opinion of  management,  all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months and
six months ended June 30, 2004,  are not  necessarily  indicative of the results
that may be  expected  for the year  ended  December  31,  2004.  These  interim
unaudited  consolidated  financial statements should be read in conjunction with
our annual audited financial statements as of December 31, 2003, included in our
Form 10-K for the year ended  December  31, 2003,  filed with the United  States
Securities  and  Exchange  Commission  ("SEC").  The  accompanying  consolidated
statement of financial  position at December 31, 2003, has been derived from the
audited consolidated statement of financial position but does not include all of
the  information  and  footnotes  required by U.S.  GAAP for complete  financial
statements.

Reclassifications  have been made to the  December  31,  2003 and June 30,  2003
financial statements to conform to the June 30, 2004 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

On March 9, 2004, the SEC Staff issued Staff  Accounting  Bulletin  ("SAB") 105,
APPLICATION OF ACCOUNTING  PRINCIPLES TO LOAN Commitments  ("SAB 105"), in which
the SEC  Staff  expressed  their  view  that the fair  value  of  recorded  loan
commitments,  including  interest  rate  lock  commitments  ("IRLCs"),  that are
required to follow derivative accounting under Statement of Financial Accounting
Standards  ("SFAS") No. 133,  ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING
ACTIVITIES,  should not consider the expected  future cash flows  related to the
associated  servicing  of the  loan.  We record  IRLCs at zero  value at date of
issuance with subsequent  gains or losses measured by changes in market interest
rates.  Therefore,  this SAB did not have a material impact on our  consolidated
financial statements.

On December 24, 2003,  the  Financial  Accounting  Standards  Board (the "FASB")
issued FASB  Interpretation  No. 46 (Revised  2003):  CONSOLIDATION  OF VARIABLE
INTEREST  ENTITIES ("FIN 46R"),  to clarify some of the provisions of FIN 46 and
to exempt certain entities from its  requirements.  We adopted FIN 46R effective
January  1,  2004,  which did not have a  material  impact  on our  consolidated
financial statements.

On July 7, 2003, the American  Institute of Certified Public  Accountants issued
Statement  of Position  ("SOP")  03-1,  ACCOUNTING  AND  REPORTING  BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL  LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance  enterprise's  accounting
for  certain  fixed  and  variable   contract  features  not  covered  by  other
authoritative  accounting  guidance.  We adopted SOP 03-1  effective  January 1,
2004, and recorded a cumulative  effect of accounting  change of $(5.7) million,
which is net of income tax  benefits  of $3.0  million.  The  accounting  change
impacted our Life and Health  Insurance,  U.S. Asset Management and Accumulation
and International Asset Management and Accumulation segments.

A  provision  of  SOP  03-1  relates  to the  classification  of  contracts  and
calculation of an additional  liability for contracts  that contain  significant
insurance  features.  The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit  feature  results in gains in early  years  followed  by losses in later
years.  The accrual and release of the  additional  liability  also  impacts the

                                       9

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

1.  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

amortization of deferred  policy  acquisition  costs ("DPAC").  As of January 1,
2004, we increased  future  policyholder  benefits due to our no lapse guarantee
feature of our universal life and variable  universal  life products  within our
Life and Health  Insurance  segment and for variable  annuities with  guaranteed
minimum death benefits in our U.S. Asset  Management and  Accumulation  segment.
This resulted in an after-tax  cumulative  effect of $(0.9)  million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.

We  also  had  an  after-tax  cumulative  effect  related  to an  equity  method
investment within our International Asset Management and Accumulation segment of
$(3.3) million,  net of income taxes, as of January 1, 2004, for select deferred
annuity products,  which include  guaranteed  annuitization  purchase rates. The
guidance requires  contracts which provide for potential benefits in addition to
the account  balance  that are payable only upon  annuitization  to establish an
additional  liability if the present value of the annuitized benefits exceed the
expected account balance at the expected annuitization date.

In addition,  the guidance clarifies the accounting and classification for sales
inducements.  Although the valuation  impacts were  immaterial,  we reclassified
$37.6 million of sales  inducements from DPAC to other assets effective  January
1, 2004.

SEPARATE ACCOUNTS

At June 30,  2004 and  December  31,  2003,  the  separate  accounts  included a
separate  account  valued at $755.7  million and $833.9  million,  respectively,
which  primarily  includes shares of our stock that were allocated and issued to
eligible  participants of qualified employee benefit plans administered by us as
part of the policy  credits issued under the  demutualization.  These shares are
included in both basic and diluted earnings per share calculations. The separate
account  shares are recorded at fair value and are reported as separate  account
assets  and  separate  account  liabilities  in the  consolidated  statement  of
financial  position.  Changes in fair value of the separate  account  shares are
reflected in both the separate account assets and separate account liabilities.

STOCK-BASED COMPENSATION

At June 30, 2004, we have four  stock-based  compensation  plans. We applied the
fair value method to all  stock-based  awards  granted  subsequent to January 1,
2002. For  stock-based  awards granted prior to this date, we used the intrinsic
value method.

                                       10

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

1.   NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Awards under our plans vest over  periods  ranging from one year to three years.
Therefore,  the  cost  related  to  stock-based  compensation  included  in  the
determination of net income for the three months ended and six months ended June
30, 2004,  is less than that which would have been  recognized if the fair value
based  method  had  been  applied  to all  awards  since  the  inception  of our
stock-based  compensation  plans. Had compensation  expense for our stock option
awards and employees'  purchase rights been determined based upon fair values at
the grant  dates for awards  under the plans in  accordance  with SFAS No.  123,
ACCOUNTING FOR STOCK-BASED  COMPENSATION,  our net income and earnings per share
would  have been  reduced  to the pro forma  amounts  indicated  below.  For the
purposes of pro forma  disclosures,  the estimated  fair value of the options is
amortized to expense over the options' vesting period.

                                                 FOR THE THREE MONTHS ENDED      FOR THE SIX MONTHS ENDED
                                                        ENDED JUNE 30,                   JUNE 30,
                                              ------------------------------- ------------------------------
                                                   2004            2003            2004           2003
                                              ---------------- -------------- --------------- --------------
                                                            (IN MILLIONS, EXCEPT PER SHARE DATA)

Net income, as reported......................   $ 119.7        $  202.2         $ 313.3       $ 357.9
Add:  Stock-based compensation expense
  included in reported net income, net
  of related tax effects.....................       9.2             6.1            12.6           9.1
Deduct:  Total stock-based compensation
  expense determined under fair value
  based method for all awards, net of
  related tax effects........................      10.1             6.9            14.3          10.8
                                              ---------------- -------------- --------------- --------------
Pro forma net income.........................   $ 118.8        $  201.4         $ 311.6       $ 356.2
                                              ================ ============== =============== ==============
Basic earnings per share:
  As reported................................   $   0.38       $    0.62        $   0.98      $   1.09
  Pro forma..................................       0.37            0.62            0.98          1.08

Diluted earnings per share:
  As reported................................   $   0.37       $    0.62        $   0.98      $   1.09
  Pro forma..................................       0.37            0.62            0.97          1.08

2. DISCONTINUED OPERATIONS

PRINCIPAL INTERNATIONAL ARGENTINA S.A.

On June 28, 2004, we entered into a definitive agreement for the sale of all the
stock of Principal International Argentina S.A. ("Argentina"), our subsidiary in
Argentina,  and its  wholly  owned  subsidiaries,  Principal  Life  Compania  de
Seguros, S.A. and Principal Retiro Compania de Seguros de Retiro, S.A. We closed
the transaction on July 2, 2004.

Our operations in Argentina qualify for discontinued  operations treatment under
SFAS No. 144,  ACCOUNTING  FOR THE  IMPAIRMENT OR DISPOSAL OF LONG-LIVED  ASSETS
("SFAS 144"),  therefore,  the results of operations  have been removed from our
results of continuing  operations and cash flows for all periods presented.  The
results of operations for Argentina are reported as other after-tax  adjustments
in our International Asset Management and Accumulation segment.

                                       11

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

2.   DISCONTINUED OPERATIONS (CONTINUED)

Selected financial  information for the discontinued  operations of Argentina is
as follows:

                                                       AS OF
                                       -------------------------------------
                                            JUNE 30,        DECEMBER 31,
                                             2004               2003
                                       ------------------ ------------------
                                                   (IN MILLIONS)
ASSETS
Total investments.................         $33.4              $31.3
All other assets..................           8.6               10.9
                                       ------------------ ------------------
  Total assets....................         $42.0              $42.2
                                       ================== ==================
LIABILITIES
Policyholder liabilities..........         $31.4              $31.1
All other liabilities.............           1.4                2.1
                                       ------------------ ------------------
  Total liabilities...............         $32.8              $33.2
                                       ================== ==================

                                                  FOR THE THREE MONTHS                 FOR THE SIX MONTHS
                                                     ENDED JUNE 30,                       ENDED JUNE 30,
                                                ----------------------------     ----------------------------
                                                    2004            2003            2004            2003
                                                -------------    -----------     ------------    ------------
                                                                       (IN MILLIONS)

Total revenues...............................        $3.6           $ 5.6          $5.8            $ 5.7
                                                =============    ===========     ============    ============
Income (loss) from discontinued operations:
  Income (loss) before income taxes..........        $0.5           $(1.1)         $0.3            $(2.6)
  Income taxes...............................         0.2             0.5           0.1              -
                                                -------------    -----------     ------------    ------------
  Income (loss) from discontinued
    operations, net of related income taxes..        $0.3           $(1.6)         $0.2            $(2.6)
                                                =============    ===========     ============    ============

PRINCIPAL RESIDENTIAL MORTGAGE, INC.

On May 11,  2004,  we  entered  into a  definitive  agreement  for  the  sale of
Principal  Residential  Mortgage,  Inc.  ("Principal  Residential  Mortgage") to
CitiMortgage, Inc. We closed the sale on July 1, 2004.

Our Mortgage Banking segment,  which includes Principal Residential Mortgage, is
accounted for as a discontinued  operation,  under SFAS 144 and  therefore,  the
results of operations  (excluding corporate overhead) have been removed from our
results  of  continuing  operations  and cash flows for all  periods  presented.
Corporate  overhead  allocated to our Mortgage  Banking segment does not qualify
for  discontinued  operations  treatment  under SFAS 144 and  therefore is still
included  in our results of  continuing  operations.  The results of  operations
(excluding corporate overhead) are reported as other after-tax adjustments.

                                       12

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

2.   DISCONTINUED OPERATIONS (CONTINUED)

Selected financial  information for the discontinued  operations of our Mortgage
Banking segment is as follows:

                                                         AS OF
                                          -------------------------------------
                                               JUNE 30,        DECEMBER 31,
                                                2004             2003
                                          ------------------ ------------------
                                                       (IN MILLIONS)
ASSETS
Mortgage loans.......................         $2,784.4           $2,256.5
Mortgage loan servicing rights.......          2,210.7            1,951.9
Cash and cash equivalents............            631.4              674.6
All other assets.....................            839.7              675.8
                                          ------------------ ------------------
  Total assets.......................         $6,466.2           $5,558.8
                                          ================== ==================
LIABILITIES
Short-term debt (1)..................         $2,501.1           $1,450.9
Long-term debt.......................          1,393.0            1,393.0
All other liabilities................          2,027.7            2,242.8
                                          ------------------ ------------------
  Total liabilities..................         $5,921.8           $5,086.7
                                          ================== ==================
- ----------------------
(1)  We were not in compliance with one of the covenants under a short-term debt
     agreement  at June 30,  2004.  We obtained a waiver  from the  unaffiliated
     entity.

                                                  FOR THE THREE MONTHS                FOR THE SIX MONTHS
                                                     ENDED JUNE 30,                      ENDED JUNE 30,
                                                ----------------------------     ----------------------------
                                                    2004            2003            2004            2003
                                                -------------    -----------     ------------    ------------
                                                                       (IN MILLIONS)
                                                                                      
Total revenues..............................      $190.6           $452.5         $ 446.1         $ 857.0
                                                =============    ===========     ============    ============
Loss from continuing operations, net of
  related income taxes (corporate
  overhead).................................      $ (5.4)          $ (4.5)        $ (10.3)        $  (8.4)

Income (loss) from discontinued operations:
  Income (loss) before income taxes.........        (5.7)            80.1            48.3           170.5
  Income taxes (benefits)...................        (2.2)            30.5            18.3            64.7
                                                -------------    -----------     ------------    ------------
  Income (loss) from discontinued
    operations, net of related income
    taxes...................................        (3.5)            49.6            30.0           105.8
                                                -------------    -----------     ------------    ------------
Net income (loss) .........................       $ (8.9)          $ 45.1         $  19.7         $  97.4
                                                =============    ===========     ============    ============

Our U.S. Asset  Management and  Accumulation  segment held $1,142.0  million and
$804.8 million of residential  mortgage  banking  escrow  deposits  (reported as
other  liabilities)  as of June 30, 2004 and December  31,  2003,  respectively,
which  were  transferred  as a result of the sale.  U.S.  Asset  Management  and
Accumulation segment revenues from this arrangement reclassified to discontinued
operations  for the three  months  ended  June 30,  2004 and 2003,  were  $(9.5)
million and $7.0 million,  respectively.  Revenues  reclassified to discontinued

                                       13

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

operations, for the six months ended June 30, 2004 and 2003, were $(5.6) million
and $13.1 million, respectively.  Income (loss) from discontinued operations net
of related income taxes,  for the three months ended June 30, 2004 and 2003, was
$(6.0) million and $2.5 million,  respectively.  Income (loss) from discontinued
operations,  net of related income taxes, for the six months ended June 30, 2004
and 2003, was $(3.5) million and $5.1 million, respectively.

3.  FEDERAL INCOME TAXES

The effective income tax rate on income from continuing operations for the three
months and six months ended June 30, 2004 and 2003, is lower than the prevailing
corporate federal income tax rate primarily due to income tax deductions allowed
for corporate dividends received and interest exclusion from taxable income. The
effective  income  tax  rate for the six  months  ended  June 30,  2004 was also
reduced due to a tax benefit associated with the sale of a foreign investment.

4.  EMPLOYEE AND AGENT BENEFITS

COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):

                                                                        OTHER POSTRETIREMENT
                                             PENSION BENEFITS                 BENEFITS
                                        ---------------------------- ----------------------------
                                            FOR THE THREE MONTHS        FOR THE THREE MONTHS
                                               ENDED JUNE 30,              ENDED JUNE 30,
                                        ---------------------------- ----------------------------
                                             2004         2003          2004          2003
                                        ------------- -------------- ------------- --------------
                                                                (IN MILLIONS)

Service cost..........................    $  12.8       $  12.3        $ 2.3         $ 3.1
Interest cost.........................       18.3          16.7          3.9           4.5
Expected return on plan assets........      (21.5)        (18.7)        (6.8)         (6.4)
Amortization of prior service
  cost (benefit)......................        0.5           0.4         (0.7)         (0.8)
Amortization of transition asset......        -            (0.1)         -             -
Recognized net actuarial loss.........        4.0           4.4          0.1           0.6
                                        ------------- -------------- ------------- --------------
Net periodic benefit cost (income)....    $  14.1       $  15.0        $(1.2)        $ 1.0
                                        ============= ============== ============= ==============

                                                                        OTHER POSTRETIREMENT
                                             PENSION BENEFITS                 BENEFITS
                                        ---------------------------- ----------------------------
                                            FOR THE SIX MONTHS ENDED    FOR THE SIX MONTHS ENDED
                                                 JUNE 30,                      JUNE 30,
                                        ---------------------------- ----------------------------
                                            2004          2003           2004          2003
                                        ------------- -------------- ------------- --------------
                                                                 (IN MILLIONS)
                                                                         
Service cost..........................    $  25.6       $  24.5        $ 4.5         $ 6.2
Interest cost.........................       36.6          33.5          7.7           8.9
Expected return on plan assets........      (43.1)        (37.4)       (13.6)        (12.9)
Amortization of prior service
  cost (benefit)......................        0.9           0.8         (1.4)         (1.6)
Amortization of transition asset......        -            (0.2)         -             -
Recognized net actuarial loss.........        8.2           8.9          0.3           1.4
                                        ------------- -------------- ------------- --------------
Net periodic benefit cost (income)....    $  28.2       $  30.1        $(2.5)        $ 2.0
                                        ============= ============== ============= ==============

                                       14

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

4.  EMPLOYEE AND AGENT BENEFITS (CONTINUED)

On  December  8,  2003,  the  Medicare   Prescription   Drug,   Improvement  and
Modernization Act of 2003 ("the Act") was signed into law. This Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health benefits. On May 19, 2004, the FASB issued
Staff Position No. 106-2,  ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE
MEDICARE  PRESCRIPTION DRUG  MODERNIZATION ACT OF 2003 ("FSP 106-2").  FSP 106-2
provides  guidance on the  accounting  for the effects of the Act. In accordance
with the  deferral  provision  of  FSP106-2,  our  benefit  obligations  and net
periodic  postretirement benefit costs do not reflect any amount associated with
the subsidy as we have not determined that the benefits provided by the plan are
actuarially  equivalent  to  Medicare.  The  Centers of  Medicare  and  Medicaid
Services ("CMS") are expected to issue guidance on the definition of actuarially
equivalent retiree health coverage later this year. This specific  authoritative
guidance,   when  issued,   could  require  us  to  change  previously  reported
The new Act will be reflected once the plan is amended or actuarial  equivalence
is determined.

CONTRIBUTIONS

We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans. We contributed approximately $0.4 million during the three months
ended and six months ended June 30, 2004.  Our funding  policy for the qualified
pension  plan is to fund the plan  annually  in an amount at least  equal to the
minimum annual  contribution  required under ERISA and,  generally,  not greater
than the maximum amount that can be deducted for federal income tax purposes. We
don't anticipate that we will be required to fund a minimum annual  contribution
under ERISA for the  qualified  pension  plan.  At this time, it is too early to
estimate the amount that may be contributed, but it is possible that we may fund
the  plans  in 2004 in the  range of $30  million  to $50  million  for both the
qualified and nonqualified  plans.  During the three months ended and six months
ended June 30, 2004, $10.5 million was contributed to the plans.

                                       15

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

5. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is as follows (in millions):

                                                FOR THE THREE MONTHS ENDED         FOR THE SIX MONTHS ENDED
                                                         JUNE 30,                          JUNE 30,
                                              -------------------------------    ------------------------------
                                                   2004             2003             2004             2003
                                              --------------    -------------    -------------    -------------

COMPREHENSIVE INCOME (LOSS):
Net income...............................       $    119.7          $ 202.2        $   313.3          $  357.9
Net change in unrealized gains and
  losses on fixed maturities,
  available-for-sale.....................         (1,411.7)           978.4           (773.4)          1,385.2
Net change in unrealized gains and
  losses on equity securities,
  available-for-sale.....................            (19.7)            16.6            (10.5)             14.0
Net change in unrealized gains and
  losses on equity method subsidiaries
  and minority interest adjustments......              5.6             (2.8)            (8.1)             (5.3)
Adjustments for assumed changes in
  amortization patterns:
  Deferred policy acquisition costs......            122.9            (90.8)            80.3            (138.9)
  Sales inducements......................              6.2              -                3.1               -
  Unearned revenue reserves..............             (6.1)             4.0             (4.8)              6.1
Net change in unrealized gains and
  losses on derivative instruments.......             36.4              3.7             39.0              18.1
Adjustments to unrealized gains for
  Closed Block policyholder dividend
  obligation.............................            133.1            (94.0)            78.2            (132.2)
Provision for deferred income tax
  benefit (expense)......................            401.6           (281.4)           228.9            (398.4)
Change in net foreign currency
  translation adjustment.................            (46.8)            45.4            (42.9)             36.2
                                              --------------    -------------    -------------    -------------
Comprehensive income (loss)..............       $   (658.8)         $ 781.3        $   (96.9)         $1,142.7
                                              ==============    =============    =============    =============

                                       16

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

6. DEBT

LONG-TERM DEBT

The components of long-term debt as of June 30, 2004 and December 31, 2003, were as follows (in millions):

                                                                            AS OF              AS OF
                                                                           JUNE 30,         DECEMBER 31,
                                                                            2004               2003
                                                                     ------------------- -------------------

7.95% notes payable, due 2004.......................................    $    200.0          $   200.0
8.2% notes payable, due 2009........................................         464.0              464.0
7.875% surplus notes payable, due 2024..............................           -                199.0
8% surplus notes payable, due 2044..................................          99.2               99.2
Nonrecourse mortgages and notes payable.............................         246.4              340.7
Other mortgages and notes payable...................................          60.1               71.4
                                                                     ------------------- -------------------
Total long-term debt................................................    $  1,069.7          $ 1,374.3
                                                                     =================== ===================

The amounts  included above are net of the discount and direct costs  associated
with  issuing  these  notes,  which are being  amortized  to expense  over their
respective terms using the interest method.

On March 10, 1994, our subsidiary,  Principal Life Insurance Company ("Principal
Life") issued $300.0  million of surplus  notes,  including  $200.0  million due
March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million
due March 1, 2044, at an 8% annual interest rate. Subject to the Commissioner of
Insurance of the State of Iowa (the "Commissioner")  approval, the surplus notes
due March 1, 2024, were optionally redeemable at Principal Life's election on or
after March 1, 2004, in whole or in part at a redemption  price of approximately
103.6% of par. We elected, with the Commissioner's  approval, to redeem on March
1, 2004, the entire outstanding $200.0 million principal amount of surplus notes
due March 1, 2024,  at a  redemption  price of  103.6%.  Total cash paid for the
surplus note redemption on March 1, 2004, was $207.2 million.

7.  CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS

LITIGATION

We are regularly involved in litigation,  both as a defendant and as a plaintiff
but  primarily as a defendant.  Litigation  naming us as a defendant  ordinarily
arises out of our  business  operations  as a provider of asset  management  and
accumulation  products and services,  life, health and disability  insurance and
mortgage banking.  Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages.  In addition,  regulatory bodies, such
as state insurance departments,  the SEC, the National Association of Securities
Dealers,  Inc., the Department of Labor and other  regulatory  bodies  regularly
make  inquiries  and  conduct  examinations  or  investigations  concerning  our
compliance with, among other things,  insurance laws, securities laws, ERISA and
laws governing the activities of broker-dealers.

While the  outcome of any  pending  or future  litigation  cannot be  predicted,
management  does not believe  that any pending  litigation  will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.

                                       17

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

7.  CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

GUARANTEES AND INDEMNIFICATIONS

In the normal course of business,  we have provided  guarantees to third parties
primarily related to a former subsidiary,  joint ventures and industrial revenue
bonds.  These  agreements  generally  expire from 2004 through 2019. The maximum
exposure under these  agreements as of June 30, 2004, was  approximately  $170.0
million;  however,  we believe the  likelihood is remote that material  payments
will  be  required  and  therefore  have  not  accrued  for a  liability  on our
consolidated statements of financial position.  Should we be required to perform
under these  guarantees,  we generally  could recover a portion of the loss from
third parties  through  recourse  provisions  included in  agreements  with such
parties,  the sale of assets held as  collateral  that can be  liquidated in the
event that  performance  is  required  under the  guarantees  or other  recourse
generally  available to us, minimizing the impact to net income.  The fair value
of such guarantees issued after January 1, 2003, was insignificant.

In connection  with the 2002 sale of BT Financial  Group, we agreed to indemnify
the purchaser,  Westpac Banking Corporation ("Westpac"), for among other things,
the costs  associated  with potential late filings made by BT Financial Group in
New Zealand  prior to Westpac's  ownership,  up to a maximum of A$250.0  million
Australian dollars  (approximately U.S. $175.0 million as of June 30, 2004). New
Zealand   securities   regulations  allow  Australian  issuers  to  issue  their
securities  in New Zealand  provided that certain  documents  are  appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to  constitutions  and compliance plans be filed in
New Zealand.  In April 2003, the New Zealand  Securities  Commission opined that
such late filings would result in certain New Zealand  investors  having a right
to return of their  investment  plus  interest at 10% per annum from the date of
investment.  We view these  potential  late filings as a technical  matter as we
believe  investors  received  the  information  that is  required to be provided
directly to them. This technical  issue affected many in the industry.  On April
15,  2004,  the New Zealand  government  enacted  legislation  that will provide
issuers,  including BT Financial Group,  the opportunity for retroactive  relief
from such late filing  violations.  The law allows issuers to apply for judicial
validation of  non-compliant  issuances  resulting  from late  filings.  The law
further provides that judicial relief is mandatory and  unconditional  unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending.  Although we cannot predict the outcome of this matter or reasonably
estimate  losses,  we do not believe that it would result in a material  adverse
effect on our business or financial position.  It is possible,  however, that it
could have a material  adverse  effect on net income in a particular  quarter or
annual period.

We are also  subject  to various  other  indemnification  obligations  issued in
conjunction with certain transactions,  primarily the sale of BT Financial Group
and other  divestitures,  the sale of  residential  mortgage loans and servicing
rights in our mortgage banking business, acquisitions and financing transactions
whose terms  range in duration  and often are not  explicitly  defined.  Certain
portions of these  indemnifications  may be capped, while other portions are not
subject to such limitations.  Generally,  a maximum obligation is not explicitly
stated;  therefore,  the  overall  maximum  amount of the  obligation  under the
indemnifications cannot be reasonably estimated. While we are unable to estimate
with certainty the ultimate legal and financial  liability with respect to these
indemnifications,  we believe the  likelihood is remote that  material  payments
would   be   required   under   such   indemnifications   and   therefore   such
indemnifications  would not result in a material adverse effect on our business,
financial position or net income. The fair value of such indemnifications issued
after January 1, 2003, was insignificant.

                                       18

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

8.  SEGMENT INFORMATION

We provide financial products and services through the following segments:  U.S.
Asset   Management  and   Accumulation,   International   Asset  Management  and
Accumulation, Life and Health Insurance and Mortgage Banking. In addition, there
is a  Corporate  and Other  segment.  The  segments  are  managed  and  reported
separately because they provide different products and services,  have different
strategies or have different markets and distribution channels.

The U.S.  Asset  Management and  Accumulation  segment  provides  retirement and
related financial products and services primarily to businesses, their employees
and other  individuals  and  provides  asset  management  services  to our asset
accumulation business,  the life and health insurance operations,  the Corporate
and Other segment and third-party clients.

The  International  Asset Management and Accumulation  segment offers retirement
products and  services,  annuities,  long-term  mutual funds and life  insurance
through  subsidiaries  in  Argentina,  Chile,  Mexico,  and Hong  Kong and joint
ventures in Brazil, India, Japan and Malaysia. On June 28, 2004, we entered into
a definitive agreement for the sale of all the stock of our Argentine companies,
described  further  in Note 2.  Consequently,  the  results  of  operations  for
Argentina are reported as other after-tax adjustments for all periods presented.

The Life and Health insurance segment provides individual life insurance,  group
health  insurance and  specialty  benefits,  which  consists of group dental and
vision  insurance,  individual and group  disability  insurance,  and group life
insurance, throughout the U.S.

The Mortgage Banking segment originates and services  residential  mortgage loan
products for customers in the U.S. On May 11, 2004, we entered into a definitive
agreement for the sale of Principal Residential Mortgage to CitiMortgage,  Inc.,
described further in Note 2. Consequently,  the results of operations (excluding
corporate  overhead)  for  Mortgage  Banking  are  reported  as other  after-tax
adjustments for all periods presented.

The Corporate and Other segment manages the assets representing capital that has
not been allocated to any other segment.  Financial results of the Corporate and
Other segment primarily  reflect our financing  activities  (including  interest
expense),  income on  capital  not  allocated  to other  segments,  intersegment
eliminations,  income tax risks and certain income, expenses and other after-tax
adjustments not allocated to the segments based on the nature of such items.

Management  uses  segment  operating  earnings  for  goal  setting,  determining
employee compensation,  and evaluating performance on a basis comparable to that
used  by  securities  analysts.  We  determine  segment  operating  earnings  by
adjusting  U.S.  GAAP net income for net  realized/unrealized  capital gains and
losses, as adjusted,  and other after-tax  adjustments which management believes
are not indicative of overall operating trends. Net realized/unrealized  capital
gains and losses, as adjusted,  are net of income taxes,  related changes in the
amortization  pattern of deferred policy acquisition and sales inducement costs,
recognition of front-end fee revenues for sales charges on pension  products and
services,  net realized capital gains and losses distributed,  minority interest
capital gains and losses and certain  market value  adjustments to fee revenues.
Segment  operating  revenues exclude net  realized/unrealized  capital gains and
their impact on  recognition  of front-end fee revenues and certain market value
adjustments to fee revenues.  While these items may be significant components in
understanding and assessing the consolidated financial  performance,  management
believes  the   presentation  of  segment   operating   earnings   enhances  the
understanding of our results of operations by highlighting earnings attributable
to the normal, ongoing operations of the business.

                                       19

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

8.  SEGMENT INFORMATION (CONTINUED)

The  accounting  policies of the segments  are  consistent  with the  accounting
policies for the consolidated financial statements, with the exception of income
tax  allocation.  The Corporate  and Other segment  functions to absorb the risk
inherent in interpreting and applying tax law. The segments are allocated tax
adjustments  consistent  with  the  positions  we took on our tax  returns.  The
Corporate  and Other segment  results  reflect any  differences  between the tax
returns and the estimated resolution of any disputes.

The following tables summarize  selected  financial  information on a continuing
basis  by  segment  and  reconcile  segment  totals  to  those  reported  in the
consolidated financial statements:

                                                                AS OF JUNE 30,        AS OF DECEMBER 31,
                                                                   2004                     2003
                                                          ----------------------   ---------------------
                                                                          (IN MILLIONS)
                                                                                    
ASSETS:
U.S. Asset Management and Accumulation ...............         $   87,733.0               $  83,904.8
International Asset Management and Accumulation.......              3,123.9                   3,011.4
Life and Health Insurance.............................             12,472.5                  12,171.8
Mortgage Banking......................................              6,466.2                   5,558.8
Corporate and Other ..................................              1,577.3                   3,107.6
                                                          ----------------------   ---------------------
  Total consolidated assets...........................         $  111,372.9               $ 107,754.4
                                                          ======================   =====================

                                                FOR THE THREE MONTHS ENDED       FOR THE SIX MONTHS ENDED
                                                         JUNE 30,                         JUNE 30,
                                              --------------------------------   -------------------------------
                                                   2004             2003             2004             2003
                                              --------------    --------------   --------------   --------------
                                                                        (IN MILLIONS)
                                                                                         
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and
  Accumulation............................      $   906.8          $  862.0        $ 1,800.1         $1,741.9
International Asset Management and
  Accumulation............................          122.3             106.2            235.3            180.7
Life and Health Insurance.................        1,030.7           1,001.8          2,066.0          2,014.1
Corporate and Other.......................          (11.9)             (2.0)           (10.3)             1.0
                                              --------------    --------------   --------------   --------------
  Total segment operating revenues........        2,047.9           1,968.0          4,091.1          3,937.7
Net realized/unrealized capital losses,
  including recognition of front-end fee
  revenues and certain market value
  adjustments to fee revenues.............          (68.2)            (16.5)          (114.7)           (96.4)
                                              --------------    --------------   --------------   --------------
  Total revenue per consolidated
    statements of operations..............      $ 1,979.7          $1,951.5        $ 3,976.4         $3,841.3
                                              ==============    ==============   ==============   ==============

                                       20

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

8.  SEGMENT INFORMATION (CONTINUED)

                                                FOR THE THREE MONTHS ENDED          FOR THE SIX MONTHS ENDED
                                                         JUNE 30,                           JUNE 30,
                                              --------------------------------   -------------------------------
                                                   2004             2003             2004             2003
                                              --------------    --------------   --------------   --------------
                                                                          (IN MILLIONS)
                                                                                          
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ...        $ 121.7           $ 105.7         $ 241.2           $ 200.6
International Asset Management and
  Accumulation............................            9.3              11.9            17.9              18.5
Life and Health Insurance.................           56.9              62.9           131.7             122.0
Mortgage Banking..........................           (5.4)             (4.5)          (10.3)             (8.4)
Corporate and Other ......................           (9.1)            (10.4)          (20.6)            (15.4)
                                              --------------    --------------   --------------   --------------
  Total segment operating earnings........          173.4             165.6           359.9             317.3
Net realized/unrealized capital losses,
  as adjusted.............................          (44.5)            (13.5)          (67.6)            (66.6)
Other after-tax adjustments (1)...........           (9.2)             50.1            21.0             107.2
                                              --------------    --------------   --------------   --------------
Net income per consolidated
  statements of operations................        $ 119.7           $ 202.2         $ 313.3           $ 357.9
                                              ==============    ==============   ==============   ==============
- --------------------------

(1)  For the three months ended June 30, 2004,  other  after-tax  adjustments of
     $(9.2)  million  included the negative  effect of a loss from  discontinued
     operations  of  Principal  Residential  Mortgage  ($9.5  million)  and  the
     positive effect of income from  discontinued  operations of Argentina ($0.3
     million).

     For the three months ended June 30, 2003,  other  after-tax  adjustments of
     $50.1  million  included  the positive  effect of income from  discontinued
     operations  of Principal  Residential  Mortgage  ($52.1  million);  and the
     negative effects of: (1) a loss from  discontinued  operations of Argentina
     ($1.6  million)  and (2) a change in the  estimated  loss on disposal of BT
     Financial Group ($0.4 million).

     For the six months  ended June 30,  2004,  other after tax  adjustments  of
     $21.0   million   included  the  positive   effects  of:  (1)  income  from
     discontinued  operations of Principal  Residential Mortgage ($26.5 million)
     and (2) income from  discontinued  operations of Argentina  ($0.2 million);
     and the negative  effect from a cumulative  change in accounting  principle
     related to the implementation of SOP 03-1 ($5.7 million).

     For the six months  ended June 30, 2003,  other  after-tax  adjustments  of
     $107.2  million  included the positive  effect of income from  discontinued
     operations of Principal  Residential  Mortgage  ($110.9  million);  and the
     negative effects of: (1) a loss from  discontinued  operations of Argentina
     ($2.6  million)  and a  change  in the  estimated  loss on  disposal  of BT
     Financial Group ($1.1 million).

9. STOCKHOLDERS' EQUITY

In May 2004,  our board of directors  authorized  the repurchase of up to $700.0
million of our outstanding  common stock.  The  repurchases  will be made in the
open market or through  privately  negotiated  transactions,  from time to time,
depending on market conditions.

                                       21

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

10.  EARNINGS PER SHARE

The  computations  of the basic and diluted per share amounts for our continuing
operations were as follows:

                                    FOR THE THREE MONTHS ENDED           FOR THE SIX MONTHS ENDED
                                            JUNE 30,                           JUNE 30,
                                ----------------------------------   ----------------------------------
                                      2004             2003                 2004             2003
                                ----------------- ----------------   ----------------- ----------------
                                                  (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                               
Income from continuing
  operations, net of related
  income taxes................       $128.9            $152.1             $  292.3         $ 250.7
                                ================= ================   ================= ================
Weighted-average shares
  outstanding:
  Basic.......................        317.9             326.9                319.4           329.1
  Dilutive effect:
    Stock options.............          1.1               0.5                  1.1             0.5
    Restricted stock units....          0.2               -                    0.1             -
                               ----------------- ----------------    ----------------- ----------------
  Diluted.....................        319.2             327.4                320.6           329.6
                                ================= ================   ================= ================
  Income from continuing
    operations per share:
    Basic.....................       $  0.41           $  0.46            $    0.92        $   0.76
                                ================= ================   ================= ================
    Diluted...................       $  0.40           $  0.46            $    0.91        $   0.76
                                ================= ================   ================= ================

The  calculation  of  diluted  earnings  per share for the three  months and six
months ended June 30, 2004 and 2003,  excludes the incremental effect related to
certain stock-based compensation grants due to their anti-dilutive effect.

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Principal  Life has  established  special  purpose  entities  to  issue  secured
medium-term notes. Under the program,  the payment  obligations of principal and
interest  on the notes are  secured by funding  agreements  issued by  Principal
Life.  Principal Life's payment  obligations on the funding agreements are fully
and unconditionally guaranteed by PFG. All of the outstanding stock of Principal
Life is  indirectly  owned by PFG and PFG is the only  guarantor  of the payment
obligations of the funding agreements.

The following tables set forth condensed  consolidating financial information of
Principal  Life and PFG as of June 30, 2004 and December  31, 2003,  and for the
six months ended June 30, 2004 and 2003.

                                       22

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                  JUNE 30, 2004

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                     PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                      FINANCIAL
                                 GROUP, INC.       COMPANY      OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- ---------------
                                                                  (IN MILLIONS)
                                                                                        
ASSETS
Investments, excluding
   investment in
   unconsolidated entities......   $     -        $   48,705.9      $    5,192.7       $ (1,367.5)     $   52,531.1
Investment in unconsolidated
   entities.....................     6,474.2             852.4           4,365.8        (11,522.0)            170.4
Cash and cash equivalents.......       263.7              53.5           1,366.8           (208.1)          1,475.9
Other intangibles...............         -                 4.2             152.6              -               156.8
Separate account assets.........         -            45,725.1             687.3              -            46,412.4
Assets of discontinued
   operations...................         -                 -             6,508.2           (246.0)          6,262.2
All other assets................       402.5           3,921.0           1,284.8         (1,244.2)          4,364.1
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total assets.................   $ 7,140.4      $   99,262.1      $   19,558.2       $(14,587.8)     $  111,372.9
                                ============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............   $     -        $   30,283.9      $        6.2       $   (159.9)     $   30,130.2
Future policy benefits and
   claims.......................         -            14,141.1           1,437.4              -            15,578.5
Other policyholder funds........         -               631.9               2.8              -               634.7
Short-term debt.................         -                (0.5)            818.5           (191.8)            626.2
Long-term debt..................         -               210.7           1,098.1           (239.1)          1,069.7
Income taxes currently
   payable...................            1.4             111.2              31.4            (20.1)            123.9
Deferred income taxes...........        (0.4)            746.0             217.8            (12.8)            950.6
Separate account liabilities....         -            45,725.1             687.3              -            46,412.4
Liabilities of discontinued
   operations...................         -                 -             5,218.5           (301.1)          4,917.4
Other liabilities...............         0.3           1,741.4           3,565.9         (1,517.4)          3,790.2
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total liabilities............         1.3          93,590.8          13,083.9         (2,442.2)        104,233.8

STOCKHOLDERS' EQUITY
Common stock....................         3.8               2.5               -               (2.5)              3.8
Additional paid-in capital......     7,211.9           5,085.3           6,831.8        (11,917.1)          7,211.9
Retained earnings (deficit).....       943.7            (203.7)         (1,118.8)         1,322.5             943.7
Accumulated other comprehensive
   income.......................       761.1             787.2             761.3         (1,548.5)            761.1
Treasury stock, at cost.........    (1,781.4)              -                 -                -            (1,781.4)
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total stockholders' equity...     7,139.1           5,671.3           6,474.3        (12,145.6)          7,139.1
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total liabilities and
   stockholders' equity.........   $ 7,140.4      $   99,262.1      $   19,558.2       $(14,587.8)     $  111,372.9
                                ============== ================ ==================== ================= ===============

- ---------------------------
(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.

                                       23

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

           CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2003

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                     PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                      FINANCIAL
                                 GROUP, INC.       COMPANY      OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- ---------------
                                                                  (IN MILLIONS)
                                                                                        
ASSETS
Investments, excluding
   investment in
   unconsolidated entities......    $    -          $48,156.9         $  6,247.5       $ (1,357.2)     $   53,047.2
Investment in unconsolidated
   entities.....................     7,234.0            793.8            5,693.3        (13,553.9)            167.2
Cash and cash equivalents.......       173.8            640.5              684.2           (306.0)          1,192.5
Other intangibles...............         -                4.5              116.5              -               121.0
Separate account assets.........         -           42,753.4              632.2             22.2          43,407.8
Assets of discontinued
   operations...................         -                -              5,601.1           (176.0)          5,425.1
All other assets................         1.7          3,825.7              766.5           (200.3)          4,393.6
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total assets.................    $7,409.5        $96,174.8         $ 19,741.3       $(15,571.2)     $  107,754.4
                                ============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............    $    -          $29,040.4         $      5.8       $   (149.8)     $   28,896.4
Future policy benefits and
   claims.......................         -           14,025.3            1,425.5              -            15,450.8
Other policyholder funds........         -              706.2                2.9              -               709.1
Short-term debt.................         -                -                888.8           (186.0)            702.8
Long-term debt..................         -              423.3            1,237.7           (286.7)          1,374.3
Income taxes currently
   payable......................         -              160.0               28.2            (74.3)            113.9
Deferred income taxes...........         8.2            974.0              221.8             (5.1)          1,198.9
Separate account liabilities....         -           42,753.4              632.2             22.2          43,407.8
Liabilities of discontinued
   operations...................          -               -              4,834.1           (258.8)          4,575.3
Other liabilities...............         1.7          1,226.1            3,230.4           (532.7)          3,925.5
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total liabilities............         9.9         89,308.7           12,507.4         (1,471.2)        100,354.8

STOCKHOLDERS' EQUITY
Common stock....................         3.8              2.5                -               (2.5)              3.8
Additional paid-in capital......     7,153.2          5,052.1            6,796.9        (11,849.0)          7,153.2
Retained earnings (deficit).....       630.4            594.6             (734.4)           139.8             630.4
Accumulated other comprehensive
   income.......................     1,171.3          1,216.9            1,171.4         (2,388.3)          1,171.3
Treasury stock, at cost.........    (1,559.1)             -                  -                -            (1,559.1)
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total stockholders' equity...     7,399.6          6,866.1            7,233.9        (14,100.0)          7,399.6
                                -------------- ------------------------------------- ----------------- ---------------
   Total liabilities and
   stockholders' equity.........    $7,409.5        $96,174.8         $ 19,741.3       $(15,571.2)     $  107,754.4
                                ============== ================ ==================== ================= ===============

- -----------------------
(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.

                                       24

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                     PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                      FINANCIAL
                                 GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- ---------------
                                                                   (IN MILLIONS)

Premiums and other
   considerations...............  $   -          $ 1,694.1            $ 118.9          $    -             $ 1,813.0
Fees and other revenues.........      -              493.2              321.2            (117.6)              696.8
Net investment income...........      1.2          1,416.8              144.5              12.9             1,575.4
Net realized/unrealized
   capital losses...............      -             (100.2)             (14.1)              5.5              (108.8)
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total revenues...............      1.2          3,503.9              570.5             (99.2)            3,976.4

EXPENSES
Benefits, claims, and settlement
   expenses.....................      -            2,249.2              163.1              (5.1)            2,407.2
Dividends to policyholders......      -              147.7                -                 -                 147.7
Operating expenses..............      4.8            786.2              360.9            (101.3)            1,050.6
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total expenses...............      4.8          3,183.1              524.0            (106.4)            3,605.5
                                -------------- ---------------- -------------------- ----------------- ---------------
Income (loss) from continuing
   operations before income
   taxes........................     (3.6)           320.8               46.5               7.2               370.9
Income taxes (benefits).........     (1.3)            72.8                4.8               2.3                78.6
Equity in the net income of
   subsidiaries, excluding
   discontinued operations and
   cumulative effect of
   accounting change............    294.6             53.3              252.9            (600.8)                -
                                -------------- ---------------- -------------------- ----------------- ---------------
Income from continuing
   operations, net of related
   income taxes.................    292.3            301.3              294.6            (595.9)              292.3
Income (loss) from discontinued
   operations, net of related
   income taxes.................     26.7             (3.3)              26.7             (23.4)               26.7
                                -------------- ---------------- -------------------- ----------------- ---------------
Income before cumulative effect
   of accounting change.........    319.0            298.0              321.3            (619.3)              319.0
Cumulative effect of accounting
   change, net of related income
   taxes........................     (5.7)            (2.5)              (5.7)              8.2                (5.7)
                                -------------- ---------------- -------------------- ----------------- ---------------
Net income......................  $ 313.3        $   295.5            $ 315.6          $ (611.1)          $   313.3
                                ============== ================ ==================== ================= ===============

- ------------------------
(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.

                                       25

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                   PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                     PRINCIPAL
                                   FINANCIAL       INSURANCE      SERVICES, INC. AND                      FINANCIAL
                                  GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                      GROUP, INC.
                                  PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                 -------------- ---------------- -------------------- ----------------- ---------------
                                                                  (IN MILLIONS)
                                                                                          
REVENUES
Premiums and other
   considerations................    $   -        $  1,692.2          $  88.2          $   -             $ 1,780.4
Fees and other revenues..........        -             397.8            231.8            (86.3)              543.3
Net investment income............        1.7         1,470.6            127.1              2.4             1,601.8
Net realized/unrealized capital
   gains (losses)................        -             (83.6)            13.4            (14.0)              (84.2)
                                 -------------- ---------------- -------------------- ----------------- ---------------
   Total revenues................        1.7         3,477.0            460.5            (97.9)            3,841.3

EXPENSES
Benefits, claims, and settlement
   expenses......................        -           2,259.3            124.2             (3.6)            2,379.9
Dividends to policyholders.......        -             154.0              -                -                 154.0
Operating expenses...............        4.5           764.8            280.0            (73.7)              975.6
                                 -------------- ---------------- -------------------- ----------------- ---------------
  Total expenses.................        4.5         3,178.1            404.2            (77.3)            3,509.5
                                 -------------- ---------------- -------------------- ----------------- ---------------
Income (loss) from continuing
   operations before income
   taxes.........................       (2.8)          298.9             56.3            (20.6)              331.8
Income taxes (benefits)..........       (1.0)           66.0             21.2             (5.1)               81.1
Equity in the net income of
   subsidiaries, excluding
   discontinued operations.......      252.5            89.7            217.4           (559.6)                -
                                 -------------- ---------------- -------------------- ----------------- ---------------
Income from continuing
   operations, net of related
   income taxes..................      250.7           322.6            252.5           (575.1)              250.7
Income (loss) from discontinued
   operations, net of related
   income taxes..................      107.2            (3.1)           107.2           (104.1)              107.2
                                 -------------- ---------------- -------------------- ----------------- ---------------
Net income.......................    $ 357.9      $    319.5          $ 359.7          $(679.2)          $   357.9
                                 ============== ================ ==================== ================= ===============

- -----------------------
(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.

                                       26

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                  (IN MILLIONS)
                                                                                         
OPERATING ACTIVITIES
Net cash provided by (used in)
   operating activities........    $  (2.2)        $  958.8       $    (83.5)         $  119.7          $   992.8

INVESTING ACTIVITIES
Available-for-sale securities:
   Purchases...................        -           (4,335.7)          (810.9)              9.5           (5,137.1)
   Sales.......................        -              750.8            726.5               -              1,477.3
   Maturities..................        -            2,222.5            579.5               -              2,802.0
Mortgage loans acquired or
   originated..................        -             (967.5)           (18.3)             36.2             (949.6)
Mortgage loans sold or repaid..        -              806.0             57.2             (79.8)             783.4
Real estate acquired...........        -              (87.2)           (18.5)              -               (105.7)
Real estate sold...............        -               83.0             48.7               -                131.7
Net change in property and
   equipment...................        -              (20.2)            (4.2)              -                (24.4)
Net proceeds from sale of
   subsidiaries................        -                -               14.9               -                 14.9
Purchases of interest in
   subsidiaries, net of cash
   acquired....................        -                -             (106.2)              -               (106.2)
Dividends received from
   unconsolidated entities.....      300.0             26.0            557.2            (883.2)               -
Net change in other
   investments.................        0.3           (171.7)            45.7              60.2              (65.5)
                                -------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
   investing activities........      300.3         (1,694.0)         1,071.6            (857.1)          (1,179.2)

                                       27

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)

FINANCING ACTIVITIES
Issuance of common stock........      14.1              -               -                 -                  14.1
Acquisition of treasury stock...    (222.3)             -               -                 -                (222.3)
Proceeds from financing element
   derivatives..................       -               94.0             -                 -                  94.0
Payments for financing element
   derivatives..................       -              (41.1)            -                 -                 (41.1)
Issuance of long-term debt......       -                4.7             3.1               -                   7.8
Principal repayments of long-
   debt.........................       -             (218.1)          (50.7)             47.7              (221.1)
Net proceeds of short-term
   borrowings...................       -                -              56.0              (6.4)               49.6
Dividends paid to parent........       -             (494.0)         (300.0)            794.0                 -
Investment contract deposits....       -            3,740.9             -                 -               3,740.9
Investment contract
   withdrawals..................       -           (2,938.2)            -                 -              (2,938.2)
Net decrease in banking
   operation deposits...........       -                -             (13.9)              -                 (13.9)
                                -------------- ---------------  -------------------- ----------------- -----------------
Net cash provided by (used in)
   financing activities.........    (208.2)           148.2          (305.5)            835.3               469.8
                                -------------- ---------------  -------------------- ----------------- -----------------

Net increase (decrease) in cash
   and cash equivalents.........      89.9           (587.0)          682.6              97.9               283.4
Cash and cash equivalents at
   beginning of year............     173.8            640.5           684.2            (306.0)            1,192.5
                                -------------- ---------------  -------------------- ----------------- -----------------
Cash and cash equivalents at
   end of year..................   $ 263.7       $     53.5        $1,366.8           $(208.1)          $ 1,475.9
                                ============== ===============  ==================== ================= =================

- -----------------------

(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.

                                       28

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)

OPERATING ACTIVITIES
Net cash provided by (used in)
   operating activities.........      $ (1.5)        $1,101.5          $  815.7         $  (56.9)     $  1,858.8

INVESTING ACTIVITIES
Available-for-sale securities:
    Purchases...................         -           (4,555.6)           (812.7)            26.7        (5,341.6)
    Sales.......................         -            1,559.8             228.0              -           1,787.8
    Maturities..................         -            1,693.0             223.2              -           1,916.2
Net cash flows from trading
   securities...................         -                -                 2.0             (2.0)            -
Mortgage loans acquired or
   originated...................         -             (801.2)            (87.3)            15.1          (873.4)
Mortgage loans sold or repaid...         -              421.2             131.0            (19.8)          532.4
Real estate acquired............         -             (143.2)             (9.2)             -            (152.4)
Real estate sold................         -               20.9              10.6              -              31.5
Net change in property and
   equipment....................         -               (6.2)             (2.3)             -              (8.5)
Net proceeds from sales of
   subsidiaries.................         -                -                33.6              -              33.6
Purchases of interest in
   subsidiaries, net of cash
   acquired.....................         -              (26.0)            (62.1)             -             (88.1)
Dividends received from
   (contributions to)
   unconsolidated entities......       300.0             73.3             (68.8)          (304.5)            -
Net change in other investments.         -              (74.4)            (91.8)            99.1           (67.1)
                                -------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
   investing activities.........       300.0         (1,838.4)           (505.8)          (185.4)       (2,229.6)

                                       29

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY           COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)

FINANCING ACTIVITIES
Issuance of common stock........       11.7            -                    -              -                 11.7
Acquisition of treasury stock...     (300.0)           -                    -              -               (300.0)
Issuance of long-term debt......        -              -                    1.9            -                  1.9
Principal repayments of long-
   debt.........................          -          (11.4)                (1.7)           4.7               (8.4)
Net proceeds of short-term
   borrowings...................        -              -                    5.7            2.1                7.8
Dividends paid to parent........        -              -                 (300.0)         300.0                -
Investment contract deposits....        -          5,052.1                  -              -              5,052.1
Investment contract
   withdrawals..................        -         (4,081.5)                 -              -             (4,081.5)
Net increase in banking
   operation deposits...........        -              -                  150.9            -                150.9
                                -------------- ---------------  -------------------- ----------------- -----------------
Net cash provided by (used in)
   financing activities.........     (288.3)         959.2               (143.2)         306.8              834.5
                                -------------- ---------------  -------------------- ----------------- -----------------
Net increase in cash and cash
   equivalents..................       10.2          222.3                166.7           64.5              463.7
Cash and cash equivalents at
    beginning of year...........      332.1          585.7                391.9         (581.9)             727.8
                                -------------- ---------------  -------------------- ----------------- -----------------
Cash and cash equivalents at
   end of year..................    $ 342.3       $  808.0              $ 558.6        $(517.4)         $ 1,191.5
                                ============== ===============  ==================== ================= =================

- -----------------------
(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.

                                       30

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

On June 30, 2004,  our shelf  registration  statement  with the  Securities  and
Exchange  Commission was effective.  We now have the ability to issue up to $3.0
billion of debt  securities,  preferred  stock,  common stock,  warrants,  stock
purchase  contracts  and  stock  purchase  units  of  PFG  and  trust  preferred
securities of three subsidiary trusts. If we issue securities,  we intend to use
the  proceeds  from  the  sale  of the  securities  offered  by the  prospectus,
including the corresponding junior subordinated  debentures issued to the trusts
in  connection  with  their  investment  of all the  proceeds  from  the sale of
preferred securities, for general corporate purposes, including working capital,
capital expenditures, investments in subsidiaries,  acquisitions and refinancing
of debt, including commercial paper and other short-term indebtedness. Principal
Financial Services, Inc. unconditionally guarantees our obligations with respect
to one or more series of debt  securities  described  in the shelf  registration
statement.

The following tables set forth condensed  consolidating financial information of
Principal  Financial  Services,  Inc. and Principal  Financial Group, Inc. as of
June 30, 2004 and December 31, 2003,  and for the six months ended June 30, 2004
and 2003.

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                  JUNE 30, 2004

                                                                  PRINCIPAL LIFE
                                  PRINCIPAL        PRINCIPAL        INSURANCE                            PRINCIPAL
                                  FINANCIAL        FINANCIAL       COMPANY AND                           FINANCIAL
                                 GROUP, INC.    SERVICES, INC.   OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY             COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                          
ASSETS
Investments, excluding
   investment in
   unconsolidated entities......   $     -          $   14.2        $  52,516.9        $       -         $  52,531.1
Investment in unconsolidated
   entities.....................     6,474.2         6,601.5              170.4          (13,075.7)            170.4
Cash and cash equivalents.......       263.7         1,104.3              226.5             (118.6)          1,475.9
Other intangibles...............         -               -                156.8                -               156.8
Separate account assets.........         -               -             46,412.4                -            46,412.4
Assets of discontinued
    operations..................         -               -              6,262.2                              6,262.2
All other assets................       402.5           672.2            4,315.7           (1,026.3)          4,364.1
                                -------------- ---------------- -------------------- ----------------- -----------------
    Total assets................   $ 7,140.4        $8,392.2        $ 110,060.9        $ (14,220.6)      $ 111,372.9
                                ============== ================ ==================== ================= =================

                                       31

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

      CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION (CONTINUED)
                                  JUNE 30, 2004

                                                                   PRINCIPAL LIFE
                                  PRINCIPAL        PRINCIPAL         INSURANCE                           PRINCIPAL
                                  FINANCIAL        FINANCIAL        COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.  OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY             COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                         
LIABILITIES
Contractholder funds...........   $     -          $     -        $  30,130.2         $        -        $  30,130.2
Future policy benefits and
  claims.......................         -                -           15,578.5                  -           15,578.5
Other policyholder funds.......         -                -              634.7                  -              634.7
Short-term debt................         -              475.0            151.2                  -              626.2
Long-term debt.................         -              664.1            405.6                  -            1,069.7
Income taxes currently
  payable......................         1.4             12.5            123.4                (13.4)           123.9
Deferred income taxes..........        (0.4)            17.7            940.8                 (7.5)           950.6
Separate account liabilities...         -                -           46,412.4                  -           46,412.4
Liabilities of discontinued
  operations...................         -                -            4,917.4                  -            4,917.4
Other liabilities..............         0.3            748.7          4,165.2             (1,124.0)         3,790.2
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total liabilities............         1.3          1,918.0        103,459.4             (1,144.9)       104,233.8

STOCKHOLDERS' EQUITY
Common stock...................         3.8              -               16.8                (16.8)             3.8
Additional paid-in capital.....     7,211.9          6,831.8          5,914.2            (12,746.0)         7,211.9
Retained earnings (deficit)....       943.7         (1,118.8)           (90.2)             1,209.0            943.7
Accumulated other
  comprehensive income.........       761.1            761.2            760.7             (1,521.9)           761.1
Treasury stock, at cost........    (1,781.4)             -                -                    -           (1,781.4)
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total stockholders' equity...     7,139.1          6,474.2          6,601.5            (13,075.7)         7,139.1
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total liabilities and
    stockholders' equity.......   $ 7,140.4        $ 8,392.2      $ 110,060.9         $  (14,220.6)     $ 111,372.9
                                ============== ================ ==================== ================= =================

                                       32

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2003

                                                                  PRINCIPAL LIFE
                                  PRINCIPAL       PRINCIPAL         INSURANCE                            PRINCIPAL
                                  FINANCIAL       FINANCIAL        COMPANY AND                           FINANCIAL
                                 GROUP, INC.    SERVICES, INC.   OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY             COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                        
ASSETS
Investments, excluding
  investment in
  unconsolidated entities.......   $     -        $     150.5    $     52,896.7       $        -       $  53,047.2
Investment in unconsolidated
  entities......................     7,234.0          7,771.7             167.2          (15,005.7)          167.2
Cash and cash equivalents.......       173.8            872.7             369.7             (223.7)        1,192.5
Other intangibles...............         -                -               121.0                -             121.0
Separate account assets.........         -                -            43,407.8                -          43,407.8
Assets of discontinued
  operations....................         -                -             5,425.1                -           5,425.1
All other assets................         1.7            186.1           4,223.3              (17.5)        4,393.6
                                -------------- ---------------- -------------------- ----------------- -----------------
   Total assets.................   $ 7,409.5      $   8,981.0    $    106,610.8       $  (15,246.9)    $ 107,754.4
                                ============== ================ ==================== ================= =================
LIABILITIES
Contractholder funds............   $     -        $       -      $     28,896.4       $        -       $  28,896.4
Future policy benefits and
  claims........................         -                -            15,450.8                -          15,450.8
Other policyholder funds........         -                -               709.1                -             709.1
Short-term debt.................         -              399.9             313.6              (10.7)          702.8
Long-term debt..................         -              664.0             710.3                -           1,374.3
Income taxes currently
  payable.......................         -               14.1             100.5               (0.7)          113.9
Deferred income taxes...........         8.2             20.7           1,170.0                -           1,198.9
Separate account liabilities....         -                -            43,407.8                -          43,407.8
Liabilities of discontinued
  operations....................         -                -             4,575.3                -           4,575.3
Other liabilities...............         1.7            648.3           3,505.3             (229.8)        3,925.5
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total liabilities.............         9.9          1,747.0          98,839.1             (241.2)      100,354.8

STOCKHOLDERS' EQUITY
Common stock....................         3.8              -                64.4              (64.4)            3.8
Additional paid-in capital......     7,153.2          6,796.9           5,851.8          (12,648.7)        7,153.2
Retained earnings (deficit).....       630.4           (734.3)            685.6               48.7           630.4
Accumulated other
  comprehensive income..........     1,171.3          1,171.4           1,169.9           (2,341.3)        1,171.3
Treasury stock, at cost.........    (1,559.1)             -                 -                  -          (1,559.1)
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total stockholders' equity....     7,399.6          7,234.0           7,771.7          (15,005.7)        7,399.6
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total liabilities and
    stockholders' equity........   $ 7,409.5      $   8,981.0    $    106,610.8       $  (15,246.9)    $ 107,754.4
                                ============== ================ ==================== ================= =================

                                       33

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004

                                                                   PRINCIPAL LIFE
                                  PRINCIPAL        PRINCIPAL         INSURANCE                           PRINCIPAL
                                  FINANCIAL        FINANCIAL        COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.  OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY             COMBINED          ELIMINATIONS     CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                         
REVENUES
Premiums and other
  considerations................   $     -           $  -          $    1,813.0        $   -            $ 1,813.0
Fees and other revenues.........         -              -                 697.5           (0.7)             696.8
Net investment income...........         1.2            6.6             1,567.0            0.6            1,575.4
Net realized/unrealized
  capital losses................         -            (25.0)              (83.8)           -               (108.8)
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total revenues................         1.2          (18.4)            3,993.7           (0.1)           3,976.4

EXPENSES
Benefits, claims, and settlement
  expenses......................         -              -               2,407.2            -              2,407.2
Dividends to policyholders......         -              -                 147.7            -                147.7
Operating expenses..............         4.8           30.0             1,015.9           (0.1)           1,050.6
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total expenses................         4.8           30.0             3,570.8           (0.1)           3,605.5
                                -------------- ---------------- -------------------- ----------------- -----------------
Income (loss) from continuing
  operations before income
  taxes.........................        (3.6)         (48.4)              422.9            -                370.9

Income taxes (benefits).........        (1.3)         (18.4)               98.3            -                 78.6
Equity in the net income of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of
  accounting change.............       294.6          324.6                 -           (619.2)               -
                                -------------- ---------------- -------------------- ----------------- -----------------
Income from continuing
  operations, net of related
  income taxes..................       292.3          294.6               324.6         (619.2)             292.3

Income (loss) from discontinued
  operations, net of related
  income taxes..................        26.7           26.7                10.3          (37.0)              26.7
                                -------------- ---------------- -------------------- ----------------- -----------------
Income before cumulative effect
  of accounting change..........       319.0          321.3               334.9         (656.2)             319.0

Cumulative effect of accounting
  change, net of related income
  taxes.........................        (5.7)          (5.7)               (5.7)          11.4               (5.7)
                                -------------- ---------------- -------------------- ----------------- -----------------
Net income......................   $   313.3         $315.6        $      329.2        $(644.8)         $   313.3
                                ============== ================ ==================== ================= =================

                                       34

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                                                   PRINCIPAL LIFE
                                  PRINCIPAL        PRINCIPAL         INSURANCE                           PRINCIPAL
                                  FINANCIAL        FINANCIAL        COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.  OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY             COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                         
REVENUES
Premiums and other
  considerations................  $   -          $   -              $ 1,780.4         $   -             $  1,780.4
Fees and other revenues.........      -              -                  543.8            (0.5)               543.3
Net investment income...........      1.7           12.4              1,587.3             0.4              1,601.8
Net realized/unrealized capital
  gains (losses)................      -              8.7                (92.9)            -                  (84.2)
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total revenues................      1.7           21.1              3,818.6            (0.1)             3,841.3

EXPENSES
Benefits, claims, and settlement
  expenses......................      -              -                2,379.9             -                2,379.9
Dividends to policyholders......      -              -                  154.0             -                  154.0
Operating expenses..............      4.5           30.2                941.0            (0.1)               975.6
                                -------------- ---------------- -------------------- ----------------- -----------------
  Total expenses................      4.5           30.2              3,474.9            (0.1)             3,509.5
                                -------------- ---------------- -------------------- ----------------- -----------------
Income (loss) from continuing
  operations before income
  taxes.........................     (2.8)          (9.1)               343.7             -                  331.8

Income taxes (benefits).........     (1.0)          (3.5)                85.6             -                   81.1
Equity in the net income of
  subsidiaries, excluding
  discontinued operations.......    252.5          258.1                  -            (510.6)                 -
                                -------------- ---------------- -------------------- ----------------- -----------------
Income from continuing
  operations, net of related
  income taxes..................    250.7          252.5                258.1          (510.6)               250.7

Income from discontinued
  operations, net of related
  income taxes..................    107.2          107.2                 73.2          (180.4)               107.2
                                -------------- ---------------- -------------------- ----------------- -----------------
Net income......................  $ 357.9        $ 359.7            $   331.3         $(691.0)          $    357.9
                                ============== ================ ==================== ================= =================

                                       35

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004

                                                                   PRINCIPAL LIFE
                                  PRINCIPAL        PRINCIPAL         INSURANCE                           PRINCIPAL
                                  FINANCIAL        FINANCIAL        COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.  OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY         ONLY            COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                         
OPERATING ACTIVITIES
Net cash provided by (used in)
  operating activities..........    $  (2.2)   $   (160.8)        $ 1,019.7            $136.1           $     992.8

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.....................        -          (218.0)         (4,919.1)              -                (5,137.1)
  Sales.........................        -           168.8           1,308.5               -                 1,477.3
  Maturities....................        -             -             2,802.0               -                 2,802.0
Mortgage loans acquired or
  originated....................        -             -              (949.6)              -                  (949.6)
Mortgage loans sold or repaid...        -             -               783.4               -                   783.4
Real estate acquired............        -             -              (105.7)              -                  (105.7)
Real estate sold................        -             -               131.7               -                   131.7
Net change in property and
  equipment.....................        -             -               (24.4)              -                   (24.4)
Net proceeds from sale of
  subsidiaries..................        -             9.3               5.6               -                    14.9
Purchases of interest in
  subsidiaries, net of cash
  acquired......................        -           (25.7)            (80.5)              -                  (106.2)
Dividends received from
  unconsolidated entities.......      300.0         527.9               -              (827.9)                  -
Net change in other investments.        0.3         155.1            (202.2)            (18.7)                (65.5)
                                -------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
  investing activities..........      300.3         617.4          (1,250.3)           (846.6)             (1,179.2)

                                       36

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004

                                                                   PRINCIPAL LIFE
                                  PRINCIPAL        PRINCIPAL         INSURANCE                           PRINCIPAL
                                  FINANCIAL        FINANCIAL        COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.  OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY         ONLY            COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                         
FINANCING ACTIVITIES
Issuance of common stock........       14.1            -                     -              -                14.1
Acquisition of treasury stock...     (222.3)           -                     -              -              (222.3)
Proceeds from financing element
  derivatives...................        -              -                    94.0            -                94.0
Payments for financing element
  derivatives...................        -              -                   (41.1)           -               (41.1)
Issuance of long-term debt......        -              -                     7.8            -                 7.8
Principal repayments of
  long-term debt................        -              -                  (221.1)           -              (221.1)
Net proceeds (repayments) of
  short-term borrowings.........        -             75.0                 (36.1)          10.7              49.6
Dividends paid to parent........        -           (300.0)               (504.9)         804.9               -
Investment contract deposits....        -              -                 3,740.9            -             3,740.9
Investment contract withdrawals.        -              -                (2,938.2)           -            (2,938.2)
Net decrease in banking
  operation deposits............        -              -                   (13.9)           -               (13.9)
                                -------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
  financing activities..........     (208.2)        (225.0)                 87.4          815.6             469.8
                                -------------- ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in cash
  and cash equivalents..........       89.9          231.6                (143.2)         105.1             283.4

Cash and cash equivalents at
  beginning of year.............      173.8          872.7                 369.7         (223.7)          1,192.5
                                -------------- ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
  of year.......................  $   263.7       $1,104.3            $    226.5        $(118.6)        $ 1,475.9
                                ============== ================ ==================== ================= =================

                                       37

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                  PRINCIPAL                        PRINCIPAL LIFE
                                  FINANCIAL        PRINCIPAL         INSURANCE                           PRINCIPAL
                                  GROUP, INC.      FINANCIAL        COMPANY AND                          FINANCIAL
                                   PARENT       SERVICES, INC.   OTHER SUBSIDIARIES                      GROUP, INC.
                                    ONLY             ONLY             COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                          
OPERATING ACTIVITIES
Net cash provided by (used in)
  operating activities..........     $(1.5)       $178.1           $  1,639.3         $  42.9            $  1,858.8

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.....................       -            88.5             (5,430.1)            -                (5,341.6)
  Sales.........................       -            10.4              1,777.4             -                 1,787.8
  Maturities....................       -             -                1,916.2             -                 1,916.2
Mortgage loans acquired or
  originated....................       -             -                 (873.4)            -                  (873.4)
Mortgage loans sold or repaid...       -             -                  532.4             -                   532.4
Real estate acquired............       -             -                 (152.4)            -                  (152.4)
Real estate sold................       -             -                   31.5             -                    31.5
Net change in property and
  equipment.....................       -             -                   (8.5)            -                    (8.5)
Net proceeds from sales of
  subsidiaries..................       -             -                   33.6             -                    33.6
Purchases of interest in
  subsidiaries, net of cash
  acquired......................       -             -                  (88.1)            -                   (88.1)
Dividends received from
  unconsolidated entities.......     300.0         (67.9)                81.3          (313.4)                  -
Net change in other investments.       -           (46.6)               (61.1)           40.6                 (67.1)
                                -------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
  investing activities..........     300.0         (15.6)            (2,241.2)         (272.8)             (2,229.6)

                                       38

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JUNE 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                  PRINCIPAL                        PRINCIPAL LIFE
                                  FINANCNIAL       PRINCIPAL         INSURANCE                           PRINCIPAL
                                  GROUP, INC.      FINANCIAL        COMPANY AND                          FINANCIAL
                                   PARENT        SERVICES, INC.  OTHER SUBSIDIARIES                      GROUP, INC.
                                    ONLY             ONLY             COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- -----------------
                                                                   (IN MILLIONS)
                                                                                        
FINANCING ACTIVITIES
Issuance of common stock........       11.7            -                    -               -              11.7
Acquisition of treasury stock...     (300.0)           -                    -               -            (300.0)
Issuance of long-term debt......        -              0.1                  1.9            (0.1)            1.9
Principal repayments of
  long-term debt................        -              -                   (8.4)            -              (8.4)
Net proceeds of short-term
  borrowings....................        -             (7.5)                26.9           (11.6)            7.8
Dividends paid to parent........        -           (300.0)                (4.0)          304.0             -
Investment contract deposits....        -              -                5,052.1             -           5,052.1
Investment contract withdrawals.        -              -               (4,081.5)            -          (4,081.5)
Net increase in banking
  operation deposits............        -              -                  150.9             -             150.9
                                  ------------ ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
  financing activities..........     (288.3)        (307.4)             1,137.9           292.3           834.5
                                  ------------ ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in cash
  and cash equivalents..........       10.2         (144.9)               536.0            62.4           463.7

Cash and cash equivalents at
  beginning of year.............      332.1          977.7                 (9.4)         (572.6)          727.8
                                  ------------ ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
  of year.......................    $ 342.3       $  832.8            $   526.6        $ (510.2)       $1,191.5
                                  ============ ================ ==================== ================= =================

                                       39

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following  analysis  discusses our financial  condition as of June 30, 2004,
compared with December 31, 2003, and our consolidated  results of operations for
the three  months  and six  months  ended June 30,  2004 and 2003,  prepared  in
conformity  with  accounting  principles  generally  accepted in the U.S. ("U.S.
GAAP").  The discussion and analysis includes,  where appropriate,  factors that
may affect our future financial  performance.  The discussion  should be read in
conjunction with our Form 10-K, for the year ended December 31, 2003, filed with
the  United  States  Securities  and  Exchange   Commission  and  the  unaudited
consolidated  financial  statements  and  the  related  notes  to the  financial
statements and the other financial  information  included elsewhere in this Form
10-Q.

FORWARD-LOOKING INFORMATION

Our narrative  analysis below contains  forward-looking  statements  intended to
enhance  the  reader's  ability  to assess  our  future  financial  performance.
Forward-looking  statements  include,  but are not limited to,  statements  that
represent  our  beliefs  concerning  future  operations,  strategies,  financial
results  or  other   developments,   and  contain  words  and  phrases  such  as
"anticipate,"  "believe," "plan,"  "estimate,"  "expect,"  "intend," and similar
expressions. Forward-looking statements are made based upon management's current
expectations  and beliefs  concerning  future  developments  and their potential
effects on us. Such  forward-looking  statements  are not  guarantees  of future
performance.

Actual results may differ materially from those included in the  forward-looking
statements as a result of risks and uncertainties  including, but not limited to
the following:  (1) a decline or increased  volatility in the securities markets
could result in investors withdrawing from the markets or decreasing their rates
of investment,  either of which could reduce our net income, revenues and assets
under management; (2) our investment portfolio is subject to several risks which
may  diminish   the  value  of  our  invested   assets  and  affect  our  sales,
profitability  and  the  investment  returns  credited  to  our  customers;  (3)
competition from companies that may have greater  financial  resources,  broader
arrays of products, higher ratings and stronger financial performance may impair
our ability to retain existing customers, attract new customers and maintain our
profitability; (4) a downgrade in Principal Life Insurance Company's ("Principal
Life")   financial   strength   ratings  may  increase  policy   surrenders  and
withdrawals,  reduce new sales and terminate relationships with distributors and
cause some of our existing liabilities to be subject to acceleration, additional
collateral  support,  changes in terms,  or  creation  of  additional  financial
obligations;  (5) our efforts to reduce the impact of interest  rate  changes on
our  profitability  and  surplus may not be  effective;  (6) if we are unable to
attract and retain sales  representatives and develop new distribution  sources,
sales  of our  products  and  services  may be  reduced;  (7) our  international
businesses face political,  legal, operational and other risks that could reduce
our profitability in those businesses;  (8) our reserves  established for future
policy  benefits  and  claims may prove  inadequate,  requiring  us to  increase
liabilities;  (9)  our  ability  to  pay  stockholder  dividends  and  meet  our
obligations  may be constrained  by the  limitations on dividends Iowa insurance
laws impose on  Principal  Life;  (10) we may need to fund  deficiencies  in our
closed block  ("Closed  Block")  assets which benefit only the holders of Closed
Block policies;  (11) changes in laws,  regulations or accounting  standards may
reduce our profitability; (12) litigation and regulatory investigations may harm
our  financial  strength  and reduce our  profitability;  (13)  fluctuations  in
foreign currency exchange rates could reduce our profitability;  (14) applicable
laws and our stockholder  rights plan,  certificate of incorporation and by-laws
may discourage  takeovers and business  combinations that our stockholders might
consider in their best  interests;  and (15) a downgrade in our debt ratings may
adversely  affect  our  ability to secure  funds and cause some of our  existing
liabilities  to be  subject  to  acceleration,  additional  collateral  support,
changes in terms, or creation of additional financial obligations.

OVERVIEW

We provide financial products and services through the following segments:

o    U.S.  Asset  Management  and  Accumulation,  which  consists  of our  asset
     accumulation  operations,  which provide  products and services,  including
     retirement  savings and related investment  products and services,  and our
     asset management  operations  conducted through Principal Global Investors.

                                       40

     We provide a  comprehensive  portfolio of asset  accumulation  products and
     services to businesses and individuals in the U.S., with a concentration on
     small and medium-sized businesses, which we define as businesses with fewer
     than 1,000  employees.  We offer to  businesses  products  and services for
     defined  contribution  pension  plans,  including  401(k) and 403(b) plans,
     defined benefit pension plans and non-qualified executive benefit plans. We
     also offer  annuities,  mutual funds and bank  products and services to the
     employees of our business customers and other individuals.

o    International   Asset  Management  and  Accumulation,   which  consists  of
     Principal   International,   offers   retirement   products  and  services,
     annuities,  long-term mutual funds and life insurance through  subsidiaries
     in  Argentina,  Chile,  Mexico and Hong Kong and joint  ventures in Brazil,
     India, Japan, and Malaysia.  On June 28, 2004, we entered into a definitive
     agreement  for the  sale  of all  the  stock  of our  Argentine  companies.
     Consequently, the results of operations for Argentina are reported as other
     after-tax adjustments for all periods presented. Prior to October 31, 2002,
     the segment  included BT Financial Group, an Australia based asset manager.
     We sold  substantially  all of BT Financial  Group,  effective  October 31,
     2002. See "Transactions  Affecting  Comparability of Results of Operations"
     for further information about these two dispositions.

o    Life and Health Insurance, which provides individual life insurance, health
     insurance as well as specialty benefits  throughout the U.S. Our individual
     life insurance  products include universal and variable  universal life and
     traditional  life.  Our health  insurance  products  include  group medical
     insurance and fee-for-service. Our specialty benefit products include group
     dental and vision insurance, individual and group disability insurance, and
     group life insurance.

o    Mortgage  Banking,  which engages in originating,  purchasing,  selling and
     servicing  residential  mortgage  loans in the  U.S.  On May 11,  2004,  we
     entered into a definitive  agreement for the sale of Principal  Residential
     Mortgage,  Inc. ("Principal  Residential Mortgage") to CitiMortgage,  Inc.,
     described  further in "Transactions  Affecting  Comparability of Results of
     Operations".  As a result, the results of operations  (excluding  corporate
     overhead) for Mortgage Banking are reported as other after-tax  adjustments
     for all periods presented.

o    Corporate and Other, which manages the assets representing capital that has
     not been allocated to any other segment. Financial results of the Corporate
     and Other segment  primarily  reflect our financing  activities  (including
     interest  expense),  income on capital  not  allocated  to other  segments,
     intersegment  eliminations,  income tax risks and certain income,  expenses
     and other after-tax  adjustments not allocated to the segments based on the
     nature of such items.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

ACQUISITIONS

We acquired the following businesses, among others, during 2004 and 2003:

DAO HENG FUND  MANAGEMENT.  On January 31, 2004,  our wholly  owned  subsidiary,
Principal Asset Management Company (Asia) Limited, purchased a 100% ownership of
Dao Heng  Fund  Management  ("DHFM")  in Hong  Kong  from  Guoco  Group  Limited
("Guoco").  The  acquisition  of DHFM  increases  our  presence in the Hong Kong
defined contribution pension market and increases the potential of our long-term
mutual fund operations.  Effective  January 31, 2004, the operations of DHFM are
reported in our International Asset Management and Accumulation segment.

MOLLOY  COMPANIES.  On December 17, 2003,  we signed an agreement to acquire the
Molloy  Companies.  The Molloy  Companies  consist of J.F.  Molloy & Associates,
Inc.,  Molloy  Medical   Management,   Inc.,  Molloy  Actuarial  and  Consulting
Corporation and Molloy Wellness  Company.  The Molloy  Companies offer companies
and organizations  consultative,  administrative and claims services for insured
and  self-funded  health  plans  through  top benefit  brokers and  consultants.
Effective  January 2, 2004, the operations of the Molloy  Companies are reported
in our Life and Health segment.

                                       41

POST ADVISORY GROUP. On August 21, 2003, we agreed to purchase approximately 68%
of Post Advisory  Group ("Post  Advisory")  for  approximately  $101.6  million.
Effective  October 15,  2003,  we owned 23% of Post  Advisory  and  purchased an
additional 45% on, January 5, 2004. Our assets under  management  have increased
$5.3 billion as a result of the  acquisition.  Effective  October 15, 2003,  the
operations  of Post  Advisory  are  reported in our U.S.  Asset  Management  and
Accumulation segment.

PRINCIPAL PNB ASSET  MANAGEMENT  COMPANY.  On August 31, 2003, we announced that
our wholly owned  subsidiary,  Principal  Financial Group  (Mauritius) Ltd., had
entered into a joint  venture  agreement  with Punjab  National Bank ("PNB") and
Vijaya Bank, two large Indian  commercial  banks, to sell long-term mutual funds
and  related  financial  services  in  India.  The new  company  will be  called
Principal PNB Asset Management  Company.  As part of this  transaction,  we will
roll our existing fund management  company,  Principal Asset Management Company,
into the joint  venture.  We will retain 65% of the new company,  selling 30% to
PNB,  who will  merge its own PNB funds into the new  company,  and 5% to Vijaya
Bank. We closed the transaction on May 5, 2004.

On June 24,  2003,  Principal  Financial  Group  (Mauritius)  Ltd.  purchased an
additional 50% ownership of IDBI - Principal Asset  Management  Company in India
from Industrial Development Bank of India ("IDBI") for 940 million Indian Rupees
("INR")  (approximately  U.S. $20.3 million).  This  transaction  gave Principal
Financial  Group  (Mauritius)  Ltd.  100%  ownership  of IDBI - Principal  Asset
Management Company.  Upon completion of the transaction,  IDBI - Principal Asset
Management Company was renamed to Principal Asset Management Company.

As part of our  International  Asset  Management and  Accumulation  segment,  we
account for Principal  PNB Asset  Management  Company's  statements of financial
position  using the full  consolidation  method  of  accounting.  Activity  that
affected  our  statements  of  operations  before our  acquisition  of  majority
ownership  of the  subsidiary  is  accounted  for  using  the  equity  method of
accounting.

AFORE TEPEYAC S.A. DE C.V. On February 28, 2003,  we purchased a 100%  ownership
of AFORE Tepeyac S.A. de C.V.  ("AFORE  Tepeyac") in Mexico from Mapfre American
Vida, Caja Madrid and Mapfre Tepeyac for MX$590.0  million Mexican Pesos ("MX$")
(approximately  U.S. $53.5  million).  The operations of AFORE Tepeyac have been
integrated into Principal  International,  Inc., as a part of our  International
Asset Management and Accumulation segment.

DISPOSITIONS

PRINCIPAL  INTERNATIONAL  ARGENTINA  S.A. On June 28,  2004,  we entered  into a
definitive  agreement  for the sale of all the stock of Principal  International
Argentina S.A. ("Argentina"),  our subsidiary in Argentina, and its wholly owned
subsidiaries,  Principal  Life Compania de Seguros,  S.A. and  Principal  Retiro
Compania de Seguros de Retiro, S.A. We closed the transaction on July 2, 2004.

Our operations in Argentina qualify for discontinued  operations treatment under
Statement  of  Financial   Accounting  Standard  No.  144,  ACCOUNTING  FOR  THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), therefore, the results
of operations  have been removed from our results of continuing  operations  and
cash flows for all periods  presented.  The results of operations  for Argentina
are  reported  as  other  after-tax   adjustments  in  our  International  Asset
Management and Accumulation segment.

                                       42

Selected financial  information for the discontinued  operations of Argentina is
as follows:

                                                       AS OF,
                                         -------------------------------------
                                              JUNE 30,        DECEMBER 31,
                                               2004              2003
                                         ------------------ ------------------
                                                     (IN MILLIONS)
ASSETS
Total investments...................         $33.4              $31.3
All other assets....................           8.6               10.9
                                         ------------------ ------------------
  Total assets......................         $42.0              $42.2
                                         ================== ==================

LIABILITIES
Policyholder liabilities............         $31.4              $31.1
All other liabilities...............           1.4                2.1
                                         ------------------ ------------------

Total liabilities...................         $32.8              $33.2
                                         ================== ==================

                                              FOR THE THREE MONTHS ENDED          FOR THE SIX MONTHS ENDED
                                                       JUNE 30,                           JUNE 30,
                                            --------------------------------     ----------------------------
                                                  2004              2003            2004            2003
                                            -----------------    -----------     ------------    ------------
                                                                       (IN MILLIONS)

Total revenues..........................             $3.6           $ 5.6           $5.8           $  5.7
                                            =================    ===========     ============    ============
Income (loss) from discontinued
    operations:

    Income (loss) before income taxes...             $0.5           $(1.1)          $0.3           $ (2.6)
    Income taxes........................              0.2             0.5            0.1              -
                                            -----------------    -----------     ------------    ------------
    Income (loss) from discontinued
      operations, net of related income
      taxes.............................             $0.3           $(1.6)          $0.2           $ (2.6)
                                            =================    ===========     ============    ============

PRINCIPAL  RESIDENTIAL  MORTGAGE,  INC.  On May  11,  2004,  we  entered  into a
definitive  agreement  for  the  sale  of  Principal   Residential  Mortgage  to
CitiMortgage, Inc. We closed the sale on July 1, 2004.

Our Mortgage Banking segment,  which includes Principal Residential Mortgage, is
accounted for as a discontinued  operation,  under SFAS 144 and  therefore,  the
results of operations  (excluding corporate overhead) have been removed from our
results  of  continuing  operations  and cash flows for all  periods  presented.
Corporate  overhead  allocated to our Mortgage  Banking segment does not qualify
for  discontinued  operations  treatment  under SFAS 144 and  therefore is still
included  in our results of  continuing  operations.  The results of  operations
(excluding corporate overhead) are reported as other after-tax adjustments.

                                       43

Selected financial  information for the discontinued  operations of Our Mortgage
Banking segment is as follows:

                                                         AS OF,
                                           -------------------------------------
                                               JUNE 30,        DECEMBER 31,
                                                2004              2003
                                           ------------------ ------------------
                                                       (IN MILLIONS)
ASSETS
Mortgage loans.........................      $2,784.4             $2,256.5
Mortgage loan servicing rights.........       2,210.7              1,951.9
Cash and cash equivalents..............         631.4                674.6
All other assets.......................         839.7                675.8
                                           ------------------ ------------------
  Total assets.........................      $6,466.2             $5,558.8
                                           ================== ==================

                                                         AS OF,
                                           -------------------------------------
                                               JUNE 30,        DECEMBER 31,
                                                2004              2003
                                           ------------------ ------------------
                                                       (IN MILLIONS)
LIABILITIES
Short-term debt........................      $2,501.1             $1,450.9
Long-term debt.........................       1,393.0              1,393.0
All other liabilities..................       2,027.7              2,242.8
                                           ------------------ ------------------
  Total liabilities....................      $5,921.8             $5,086.7
                                           ================== ==================

                                                     FOR THE THREE MONTHS              FOR THE SIX MONTHS
                                                         ENDED JUNE 30,                  ENDED JUNE 30,
                                                ----------------------------     ----------------------------
                                                    2004            2003            2004            2003
                                                -------------    -----------     ------------    ------------
                                                                       (IN MILLIONS)

Total revenues..........................            $190.6        $   452.5         $446.1         $  857.0
                                                =============    ===========     ============    ============
Loss from continuing operations, net of
    related income taxes (corporate
    overhead)...........................            $ (5.4)       $    (4.5)        $(10.3)        $   (8.4)
Income (loss) from discontinued
    operations:
    Income (loss) before income taxes...              (5.7)            80.1           48.3            170.5
    Income taxes (benefits).............              (2.2)            30.5           18.3             64.7
                                                -------------    -----------     ------------    ------------
    Income (loss) from discontinued
       operations, net of related
       income taxes.....................              (3.5)            49.6           30.0            105.8
                                                -------------    -----------     ------------    ------------
Net income (loss) ......................            $ (8.9)       $    45.1         $ 19.7          $  97.4
                                                =============    ===========     ============    ============

Our U.S. Asset  Management and  Accumulation  segment held $1,142.0  million and
$804.8 million of residential  mortgage  banking  escrow  deposits  (reported as
other  liabilities)  as of June 30, 2004 and December  31,  2003,  respectively,
which  were  transferred  as a result of the sale.  U.S.  Asset  Management  and
Accumulation segment revenues from this arrangement reclassified to discontinued
operations  for the three  months  ended  June 30,  2004 and 2003,  were  $(9.5)
million and $7.0 million,  respectively.  Revenues  reclassified to discontinued
operations, for the six months ended June 30, 2004 and 2003, were $(5.6) million
and $13.1 million, respectively.  Income (loss) from discontinued operations net
of related income taxes,  for the three months ended June 30, 2004 and 2003, was
$(6.0) million and $2.5 million,  respectively.  Income (loss) from discontinued
operations,  net of related income taxes, for the six months ended June 30, 2004
and 2003, was $(3.5) million and $5.1 million, respectively.

BT  FINANCIAL  GROUP.  On October  31,  2002,  we sold  substantially  all of BT
Financial Group to Westpac Banking Corporation ("Westpac"). As of June 30, 2004,
we have received  proceeds of A$958.9  million  Australian  dollars ("A$") (U.S.

                                       44

$537.4 million) from Westpac,  with future contingent  proceeds in 2004 of up to
A$150.0 million  (approximately  U.S. $105.0 million).  The contingent  proceeds
will be  based on  Westpac's  future  success  in  growing  retail  funds  under
management. We do not anticipate receiving the contingent proceeds.

Excluding contingent  proceeds,  our total after-tax proceeds from the sale were
approximately  U.S.  $890.0  million.  This amount  includes  cash proceeds from
Westpac,  expected  tax  benefits,  and gain from  unwinding  the  hedged  asset
associated with our investment in BT Financial Group.

As of December 31, 2002, we accrued for an estimated  after-tax loss on disposal
of $208.7  million.  During the three months ended and six months ended June 30,
2003, we incurred an additional after-tax loss of $0.4 million and $1.1 million,
respectively. These losses are recorded in the loss from discontinued operations
in the consolidated statements of operations.  During the three months ended and
six months  ended June 30,  2004,  we did not incur any  after-tax  gain or loss
associated with the loss on disposal of BT Financial Group.

BT Financial  Group is accounted for as a discontinued  operation and therefore,
the results of  operations  and cash flows have been removed from our results of
continuing operations for all periods presented.

In connection  with the 2002 sale of BT Financial  Group, we agreed to indemnify
the  purchaser,  Westpac for,  among other  things,  the costs  associated  with
potential  late  filings  made by BT  Financial  Group in New  Zealand  prior to
Westpac's  ownership,  up to a maximum of  A$250.0  million  Australian  dollars
(approximately  U.S. $175.0 million as of June 30, 2004). New Zealand securities
regulations  allow  Australian  issuers to issue their securities in New Zealand
provided  that certain  documents are  appropriately  filed with the New Zealand
Registrar  of  Companies.   Specifically,  the  regulations  required  that  any
amendments to  constitutions  and compliance  plans be filed in New Zealand.  In
April 2003, the New Zealand Securities  Commission opined that such late filings
would result in certain New Zealand  investors having a right to return of their
investment  plus interest at 10% per annum from the date of investment.  We view
these  potential  late  filings as a  technical  matter as we believe  investors
received the information that is required to be provided  directly to them. This
technical  issue  affected  many in the  industry.  On April 15,  2004,  the New
Zealand government enacted  legislation that will provide issuers,  including BT
Financial  Group,  the opportunity for retroactive  relief from such late filing
violations.  The  law  allows  issuers  to  apply  for  judicial  validation  of
non-compliant  issuances  resulting from late filings.  The law further provides
that  judicial  relief is  mandatory  and  unconditional  unless an investor was
materially  prejudiced by the late filing. A related judicial action is pending.
Although we cannot  predict the  outcome of this matter or  reasonably  estimate
losses,  we do not believe that it would result in a material  adverse effect on
our business or financial position. It is possible,  however, that it could have
a  material  adverse  effect on net  income in a  particular  quarter  or annual
period.

OTHER TRANSACTIONS

SYNTHETIC  FUEL  PRODUCTION  FACILITY.  In June 2004,  we acquired a significant
variable  interest in a coal-based  synthetic fuel production  facility where we
are not the primary beneficiary. Our minority ownership interest was acquired in
exchange for consideration of $37.0 million,  which is primarily  comprised of a
non-recourse note payable for $36.0 million, as well as a commitment to fund our
pro-rata  share  of the  operations.  We have  also  agreed  to make  additional
payments  to the seller  based on our  pro-rata  allocation  of the tax  credits
generated by the facility.  The synthetic fuel produced at the facility  through
2007  qualifies for tax credits  pursuant to Section 29 of the Internal  Revenue
Code  (currently  credits are not available for fuel produced  after 2007).  Our
obligation to support the entity's future operations is,  therefore,  limited to
the tax benefit we expect to receive.

SALE OF RETAIL  FIELD  MORTGAGE  LENDING  BRANCH  OFFICES.  On February 4, 2003,
Principal  Residential Mortgage signed a definitive agreement to sell the retail
field mortgage lending branches to American Home Mortgage,  Inc. ("American Home
Mortgage"),  an  independent  retail  mortgage  banking  company.  American Home
Mortgage has paid Principal  Residential  Mortgage a guaranteed profit margin on

                                       45

its application  pipeline that existed as of February 4, 2003, and has purchased
the assets of the branch network and assumed related liabilities.

PRINCIPAL  RESIDENTIAL  MORTGAGE  CAPITAL  RESOURCES,  LLC.  As a result  of the
implementation   of   Financial   Accounting   Standards   Board  (the   "FASB")
Interpretation  No. 46:  CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46"),
effective July 1, 2003, Mortgage Banking assets and liabilities include the full
consolidation  of  Principal   Residential   Mortgage  Capital  Resources,   LLC
("PRMCR"),  which provides a source of funding for our residential mortgage loan
production. On May 11, 2004, we entered into a definitive agreement for the sale
of Principal  Residential Mortgage to CitiMortgage,  Inc, which was completed on
July 1, 2004.

FLUCTUATIONS IN FOREIGN CURRENCY TO U.S. DOLLAR EXCHANGE RATES

Fluctuations in foreign  currency to U.S. dollar exchange rates for countries in
which we have operations can affect reported  financial  results.  In years when
foreign  currencies  weaken  against  the  U.S.  dollar,   translating   foreign
currencies into U.S. dollars results in fewer U.S. dollars to be reported.  When
foreign currencies strengthen,  translating foreign currencies into U.S. dollars
results in more U.S. dollars to be reported.

Foreign currency  exchange rate  fluctuations  create variances in our financial
statement  line  items but have not had a  material  impact on our  consolidated
income from  continuing  operations.  Our  consolidated  income from  continuing
operations  was positively  impacted $0.5 million and  negatively  impacted $2.8
million  for the  three  months  ended  June 30,  2004  and 2003 and  positively
impacted  $1.1 million and  negatively  impacted $4.9 million for the six months
ended  June 30,  2004 and 2003,  respectively,  as a result of  fluctuations  in
foreign  currency  to  U.S.  dollar  exchange  rates.  For a  discussion  of our
approaches to foreign currency exchange rate risk, see Item 3. "Quantitative and
Qualitative Disclosures about Market Risk."

PENSION AND OTHER POSTRETIREMENT BENEFIT EXPENSE

The 2004 annual pension benefit expense for  substantially  all of our employees
and certain  agents is  approximately  $56.4  million  pre-tax,  which is a $3.8
million  decrease  from the  2003  pre-tax  pension  expense  of $60.2  million.
Approximately  $14.1  million and $28.2 million of pre-tax  pension  expense was
reflected in the determination of net income for the three months and six months
ended June 30, 2004, respectively.  In addition,  approximately $14.1 million of
pre-tax  pension expense will be reflected in each of the following two quarters
for 2004.  This  decrease in expense  over 2003 is  primarily  due to the plan's
liability  experience,  an increase in the plan's turnover  assumption,  and the
plan's asset  performance.  The discount rate used to determine the 2004 expense
was 6.25%,  which is down from the 6.5% discount rate used to calculate the 2003
expense.  The expected  long-term return on assets  assumption used for the 2004
pension expense remained at 8.5%.

The  divestiture  of Principal  Residential  Mortgage will result in curtailment
accounting  under  the  pension  and  other  postretirement  benefit  plans.  We
anticipate the curtailment  will result in a gain, which will be included in the
discontinued  operations in third  quarter 2004.  Estimates are not available at
this time,  but we do not  expect  the gain will have a  material  impact on net
income.  The pension and other  postretirement  benefit  plan expense for fourth
quarter is anticipated  to be lower than previous  quarters as the result of the
curtailment.

RECENT ACCOUNTING PRONOUNCEMENTS

On March 9, 2004, the SEC Staff issued Staff  Accounting  Bulletin  ("SAB") 105,
APPLICATION OF ACCOUNTING  PRINCIPLES TO LOAN COMMITMENTS  ("SAB 105"), in which
the SEC  Staff  expressed  their  view  that the fair  value  of  recorded  loan
commitments,  including  interest  rate  lock  commitments  ("IRLCs"),  that are
required to follow derivative accounting under Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
should not  consider the expected  future cash flows  related to the  associated
servicing  of the loan.  We record  IRLCs at zero value at the date of  issuance

                                       46

with  subsequent  gains or losses  measured by change in market  interest rates.
Therefore, this SAB did not have a material impact on our consolidated financial
statements.

On December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised 2003):
CONSOLIDATION OF VARIABLE  INTEREST ENTITIES ("FIN 46R"), to clarify some of the
provisions of FIN 46 and to exempt certain  entities from its  requirements.  We
adopted FIN 46R effective  January 1, 2004, which did not have a material impact
on our consolidated financial statements.

On July 7, 2003, the American  Institute of Certified Public  Accountants issued
Statement  of Position  ("SOP")  03-1,  ACCOUNTING  AND  REPORTING  BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL  LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance  enterprise's  accounting
for  certain  fixed  and  variable   contract  features  not  covered  by  other
authoritative  accounting  guidance.  We adopted SOP 03-1  effective  January 1,
2004, and recorded a cumulative  effect of accounting  change of $(5.7) million,
which is net of income tax  benefits  of $3.0  million.  The  accounting  change
impacted our Life and Health  Insurance,  U.S. Asset Management and Accumulation
and International Asset Management and Accumulation segments.

A  provision  of  SOP  03-1  relates  to the  classification  of  contracts  and
calculation of an additional  liability for contracts  that contain  significant
insurance  features.  The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit  feature  results in gains in early  years  followed  by losses in later
years.  The accrual and release of the  additional  liability  also  impacts the
amortization of deferred  policy  acquisition  costs ("DPAC").  As of January 1,
2004, we increased  future  policyholder  benefits due to our no lapse guarantee
feature of our universal life and variable  universal  life products  within our
Life and Health  Insurance  segment and for variable  annuities with  guaranteed
minimum death benefits in our U.S. Asset  Management and  Accumulation  segment.
This resulted in an after-tax  cumulative  effect of $(0.9)  million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.

We  also  had  an  after-tax  cumulative  effect  related  to an  equity  method
investment within our International Asset Management and Accumulation segment of
$(3.3) million,  net of income taxes, as of January 1, 2004, for select deferred
annuity products,  which include  guaranteed  annuitization  purchase rates. The
guidance requires  contracts which provide for potential benefits in addition to
the account  balance  that are payable only upon  annuitization  to establish an
additional  liability if the present value of the annuitized benefits exceed the
expected account balance at the expected annuitization date.

In addition,  the guidance clarifies the accounting and classification for sales
inducements.  Although the valuation  impacts were  immaterial,  we reclassified
$37.6 million of sales  inducements from DPAC to other assets effective  January
1, 2004.

                                       47

RESULTS OF OPERATIONS

The following table presents summary consolidated  financial information for the
periods indicated:

                                                        FOR THE THREE                      FOR THE SIX
                                                        MONTHS ENDED                       MONTHS ENDED
                                                          JUNE 30,                           JUNE 30,
                                                   ---------------------------     --------------------------
                                                        2004         2003            2004           2003
                                                   -------------  ------------     ------------   -----------
                                                                            (IN MILLIONS)
                                                                                      
INCOME STATEMENT DATA:
Revenues:
  Premiums and other considerations...............    $   892.6      $  875.7      $ 1,813.0      $ 1,780.4
  Fees and other revenues.........................        364.2         276.7          696.8          543.3
  Net investment income...........................        789.2         808.8        1,575.4        1,601.8
  Net realized/unrealized capital losses..........        (66.3)         (9.7)        (108.8)         (84.2)
                                                   -------------  ------------     ------------   -----------
    Total revenues................................      1,979.7       1,951.5        3,976.4        3,841.3

Expenses:
  Benefits, claims and settlement expenses........      1,221.1       1,185.2        2,407.2        2,379.9
  Dividends to policyholders......................         74.4          73.9          147.7          154.0
  Operating expenses..............................        521.1         490.3        1,050.6          975.6
                                                   -------------  ------------     ------------   -----------
    Total expenses................................      1,816.6       1,749.4        3,605.5        3,509.5
                                                   -------------  ------------     ------------   -----------
Income from continuing operations before income
  taxes...........................................        163.1         202.1          370.9          331.8
Income taxes......................................         34.2          50.0           78.6           81.1
                                                   -------------  ------------     ------------   -----------
Income from continuing operations, net of
  related income taxes............................        128.9         152.1          292.3          250.7

Income (loss) from discontinued operations, net
  of related income taxes.........................         (9.2)         50.1           26.7          107.2
                                                   -------------  ------------     ------------   -----------
Income before cumulative effect of accounting
  change..........................................        119.7         202.2          319.0          357.9
Cumulative effect of accounting change, net of
  related income taxes............................          -             -             (5.7)           -
                                                   -------------  ------------     ------------   -----------
  Net income .....................................    $   119.7      $  202.2      $   313.3      $   357.9
                                                   =============  ============     ============   ===========

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Premiums and other  considerations  increased  $16.9  million,  or 2%, to $892.6
million for the three months ended June 30,  2004,  from $875.7  million for the
three  months  ended June 30,  2003.  The  increase  reflected  a $12.5  million
increase  from  the Life and  Health  segment  primarily  due to  growth  in our
specialty benefits business partially offset by the shift in customer preference
from individual  traditional life insurance products to individual universal and
variable universal life insurance products. In addition, the increase was due to
a $2.7 million increase from the U.S. Asset Management and Accumulation segment,
primarily a result of an increase in pension full-service payout sales of single
premium group  annuities  with life  contingencies,  which are typically used to
fund defined benefit plan  terminations.  The premium income received from these
contracts  fluctuates  due to the  variability in the number and size of pension
plan terminations,  the interest rate environment and the ability to attract new
sales.

Fees and other revenues  increased $87.5 million,  or 32%, to $364.2 million for
the three months ended June 30, 2004,  from $276.7  million for the three months
ended June 30, 2003.  The increase was largely due to a $66.6  million  increase
from the U.S. Asset Management and  Accumulation  segment  primarily  related to
increased fees from our separate  accounts,  due to  improvements  in the equity
markets  and net cash  flow from  customers,  which  have led to higher  account
values. In addition, Life and Health Insurance fees and other revenues increased
$19.6  million  primarily  due to  growth  in the  universal  life and  variable
universal life insurance  business and the  acquisition of the Molloy  Companies
effective January 2, 2004.

                                       48

Net investment income decreased $19.6 million,  or 2%, to $789.2 million for the
three months ended June 30, 2004, from $808.8 million for the three months ended
June 30, 2003.  The decrease was  primarily  related to a decrease in annualized
investment  yields. The annualized yield on average invested assets and cash was
5.8% for the three months  ended June 30,  2004,  compared to 6.2% for the three
months ended June 30, 2003. This reflects lower yields on invested assets due in
part to a lower interest rate environment. Partially offsetting the decrease was
a $2,447.4 million, or 5%, increase in average invested assets and cash.

Net realized/unrealized  capital losses increased $56.6 million to $66.3 million
for the three months ended June 30, 2004, from $9.7 million for the three months
ended June 30, 2003.  The increase in net realized  losses was  primarily due to
the mark to market of  certain  seed money  investments  and the  realized  loss
related to the sale of a foreign investment.

The following  table  highlights  the  contributors  to net  realized/unrealized
capital gains and losses for the three months ended June 30, 2004.

                                                     FOR THE THREE MONTHS ENDED JUNE 30, 2004
                                 ----------------------------------------------------------------------------
                                                       NET REALIZED                           NET REALIZED/
                                                          GAINS                                UNREALIZED
                                                       (LOSSES) ON          HEDGING           CAPITAL GAINS
                                   IMPAIRMENTS           DISPOSAL         ADJUSTMENTS           (LOSSES)
                                 ---------------- ------------------- ----------------- ---------------------
                                                                (IN MILLIONS)

Fixed maturity securities (1)...  $   (14.8)          $    (7.1)         $   (58.0)         $   (79.9)
Equity securities (2)...........       (0.2)                1.2                -                  1.0
Mortgage loans on real
  estate (3)....................      (11.1)                -                  -                (11.1)
Real estate.....................        -                   0.4                -                  0.4
Derivatives.....................        -                   -                 68.9               68.9
Other (4).......................        -                 (30.7)             (14.9)             (45.6)
                                 ---------------- ------------------- ----------------- ---------------------
  Total.........................  $   (26.1)          $   (36.2)         $    (4.0)         $   (66.3)
                                 ================ =================== ================= =====================

- -----------------------
(1)  Impairments  include $7.4 million in  recoveries  on the sale of previously
     impaired assets and $22.2 million of impairment  losses. Net realized gains
     (losses) on disposal  includes  gross  realized  gains of $7.5  million and
     gross realized losses of $14.6 million, excluding the impact of hedging.
(2)  Impairments  include $0.2 million of impairment  losses. Net realized gains
     (losses) on disposal  includes  gross  realized  gains of $2.1  million and
     gross realized losses of $0.9 million.
(3)  Includes  $9.8  million in  realized  losses due to sale,  foreclosure,  or
     impairment  write-down  of  commercial  mortgage  loans and a $1.3  million
     increase in commercial mortgage valuation allowance.
(4)  Net realized gains (losses) on disposal  includes $9.9 million in losses on
     seed  money and $20.1  million  in losses  related to the sale of a foreign
     investment.

Benefits,  claims and settlement  expenses  increased  $35.9 million,  or 3%, to
$1,221.1 million for the three months ended June 30, 2004, from $1,185.2 million
for the three  months ended June 30, 2003.  The increase  resulted  from a $31.8
million  increase  in the  Life  and  Health  Insurance  segment  due to  health
insurance reserve refinements, increased health insurance claim costs per member
and growth in our specialty benefits business.

Dividends to policyholders  increased $0.5 million,  or 1%, to $74.4 million for
the three months ended June 30,  2004,  from $73.9  million for the three months
ended June 30, 2003. The increase was  attributable  to a $2.0 million  increase
from the U.S. Management and Accumulation segment, resulting from an increase in
dividends for our  participating  pension  full-service  accumulation  products.
Partially  offsetting this increase was a $1.5 million  decrease in dividends to
policyholders  for the Life and Health  Insurance  segment due to changes in the

                                       49

individual  life insurance  dividend  crediting rates resulting from a declining
interest rate environment.

Operating  expenses  increased  $30.8 million,  or 6%, to $521.1 million for the
three months ended June 30, 2004, from $490.3 million for the three months ended
June 30, 2003. The increase was largely due to a $24.9 million increase from the
U.S Asset  Management and  Accumulation  segment due to our  acquisition of Post
Advisory  in the third  quarter of 2003 and to a lesser  extent an  increase  in
management fees.

Income taxes  decreased  $15.8  million,  or 32%, to $34.2 million for the three
months  ended June 30, 2004 from $50.0  million for the three  months ended June
30, 2003. The effective  income tax rate was 21% for the three months ended June
30, 2004 and 25% for the three months ended June 30, 2003. The effective  income
tax rates for the three  months ended June 30, 2004 and 2003 were lower than the
corporate income tax rate of 35% primarily due to income tax deductions  allowed
for corporate dividends received and interest exclusion from taxable income. The
decrease in the  effective  tax rate to 21% for the three  months ended June 30,
2004,  from 25% for the three months ended June 30, 2003,  was  primarily due to
reduced pre-tax net income relative to a moderate increase in expected permanent
tax differences.

As a result of the  foregoing  factors and the  inclusion of income  (loss) from
discontinued  operations,  net income decreased $82.5 million, or 41%, to $119.7
million for the three months ended June 30,  2004,  from $202.2  million for the
three months ended June 30, 2003. The income (loss) from discontinued operations
was  related  to our  sale  of  Principal  Residential  Mortgage  and  Argentine
companies in 2004 and a change in the estimated loss on disposal of BT Financial
Group in 2003

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Premiums and other  considerations  increased $32.6 million,  or 2%, to $1,813.0
million for the six months ended June 30, 2004,  from  $1,780.4  million for the
six months ended June 30, 2003. The increase  reflected a $30.6 million increase
from the International  Asset Management and Accumulation  segment,  primarily a
result of an increase  in Chile due to the  strengthening  of the  Chilean  peso
versus the U.S.  dollar and record sales of single  premium  annuities with life
contingencies  in  2004  following  a year  of  decreased  sales  due to  market
contraction.  In addition,  Life and Health  segment  premiums  increased  $24.2
million  primarily due to growth in our specialty  benefits  business  partially
offset by the shift in customer  preference  from  individual  traditional  life
insurance products to individual universal and variable universal life insurance

products.  The increases were partially  offset by a $22.2 million decrease from
the U.S. Asset Management and Accumulation segment, resulting from a decrease in
individual  payout annuity  sales,  primarily  related to increased  competitive
pressures  and  decrease  in our  pension  full-service  payout  sales of single
premium group annuities with life contingencies.

Fees and other revenues increased $153.5 million,  or 28%, to $696.8 million for
the six months ended June 30, 2004, from $543.3 million for the six months ended
June 30, 2003.  The increase was largely due to a $113.0  million  increase from
the U.S. Asset Management and  Accumulation  segment  primarily  related to fees
from our separate  accounts,  due to  improvements in the equity markets and net
cash flow from customers,  which have led to higher account values. In addition,
Life and  Health  Insurance  fees and other  revenues  increased  $32.8  million
primarily due to the acquisition of the Molloy  Companies  effective  January 2,
2004 and due to  growth  in the  universal  life  and  variable  universal  life
insurance business.

Net investment  income  decreased $26.4 million,  or 2%, to $1,575.4 million for
the six months ended June 30,  2004,  from  $1,601.8  million for the six months
ended June 30,  2003.  The  decrease  was  primarily  related  to a decrease  in
annualized  investment  yields.  The annualized yield on average invested assets
and cash was 5.8% for the six months ended June 30,  2004,  compared to 6.2% for
the six months  ended June 30,  2003.  This  reflects  lower  yields on invested
assets due in part to a lower interest rate  environment.  Partially  offsetting
the decrease was a $2,953.2 million,  or 6%, increase in average invested assets
and cash.

Net  realized/unrealized  capital losses  increased  $24.6  million,  or 29%, to
$108.8  million for the six months ended June 30, 2004,  from $84.2  million for
the six months  ended June 30, 2003.  The  increase in net  realized  losses was

                                       50

primarily  due to the mark to market  of  certain  seed  money  investments,  an
increase in commercial  mortgage losses, and a realized loss related to the sale
of a foreign  investment  offset by lower other than  temporary  impairments  on
fixed maturity securities.

The following  table  highlights  the  contributors  to net  realized/unrealized
capital gains and losses for the six months ended June 30, 2004.

                                                          FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                 ----------------------------------------------------------------------------
                                                       NET REALIZED                          NET REALIZED/
                                                          GAINS                               UNREALIZED
                                                       (LOSSES) ON           HEDGING         CAPITAL GAINS
                                   IMPAIRMENTS           DISPOSAL          ADJUSTMENTS          (LOSSES)
                                 ------------------ ----------------- ------------------- -------------------
                                                                (IN MILLIONS)

Fixed maturity securities (1)...  $   (36.6)          $    (1.9)         $   (30.0)         $   (68.5)
Equity securities (2)...........       (4.2)                5.1                 -                 0.9
Mortgage loans on real
  estate (3)....................      (22.8)                 -                  -               (22.8)
Real estate.....................       (3.3)                4.4                 -                 1.1
Derivatives.....................        -                   -                 (4.0)              (4.0)
Other (4).......................        -                  (7.1)              (8.4)             (15.5)
                                 ------------------ ----------------- ------------------- -------------------
  Total.........................  $   (66.9)          $     0.5          $   (42.4)         $  (108.8)
                                 ================== ================= =================== ===================

- -----------------------
(1)  Impairments  include $9.8 million in  recoveries  on the sale of previously
     impaired assets and $46.4 million of impairment  losses. Net realized gains
     (losses) on disposal  includes  gross  realized  gains of $17.3 million and
     gross realized losses of $19.2 million, excluding the impact of hedging.
(2)  Impairments  include $4.2 million of impairment  losses. Net realized gains
     (losses) on disposal  includes  gross  realized  gains of $7.1  million and
     gross realized losses of $2.0 million.
(3)  Includes  $15.4  million in realized  losses due to sale,  foreclosure,  or
     impairment  write-down  of  commercial  mortgage  loans and a $7.4  million
     increase in commercial mortgage valuation allowance.
(4)  Net realized gains  (losses) on disposal  includes $7.5 million in gains on
     seed  money and $20.0  million  in losses  related to the sale of a foreign
     investment.

Benefits,  claims and settlement  expenses  increased  $27.3 million,  or 1%, to
$2,407.2  million for the six months ended June 30, 2004, from $2,379.9  million
for the six months ended June 30, 2003.  The  increase  was  primarily  due to a
$39.0 million increase from the International  Asset Management and Accumulation
segment,  primarily a result of an increase in Chile due to the strengthening of
the  Chilean  peso versus the U.S.  dollar and higher  reserve  expenses  due to
record  sales of  single  premium  annuities  with  life  contingencies  in 2004
following a year of decreased sales due to market contraction.  In addition, the
Life and Health  Insurance  segment  benefits,  claims,  and settlement  expense
increased $30.1 million due to growth in our specialty benefits business, health
insurance  reserve  refinements,  and increased health insurance claim costs per
member.  Partially  offsetting  these increases was a $40.3 million decrease for
the U.S. Asset Management and Accumulation segment, reflecting a decrease in our
pension full-service accumulation products due to lower interest credited on our
non-participating  deposit type business and to a lesser extent due to decreases
in cost of interest credited on declining business from our participating block.

Dividends to policyholders  decreased $6.3 million, or 4%, to $147.7 million for
the six months ended June 30, 2004, from $154.0 million for the six months ended
June 30, 2003. The decrease was attributable to a $5.0 million decrease from the
Life and Health Insurance segment, resulting from changes in the individual life
insurance dividend crediting rates due to a declining interest rate environment.
In  addition,  U.S.  Management  and  Accumulation  dividends  to  policyholders
decreased  $1.3  million   resulting  from  a  decrease  in  dividends  for  our
participating pension full-service accumulation products.

                                       51

Operating expenses  increased $75.0 million,  or 8%, to $1,050.6 million for the
six months  ended June 30,  2004,  from $975.6  million for the six months ended
June 30, 2003. The increase was largely due to a $42.0 million increase from the
U.S Asset  Management and  Accumulation  segment due to our  acquisition of Post
Advisory  in the third  quarter of 2003 and to a lesser  extent an  increase  in
investment management expenses. In addition,  the International Asset Management
and Accumulation  segment operating  expenses  increased $12.0 million partially
due to an increase in Mexico  primarily due to the acquisition of Genera in July
2003 and an increase in Chile  primarily due to  non-deferrable  commissions  on
record  sales of  single  premium  annuities  with  life  contingencies  and the
strengthening  of the Chilean peso versus the U.S.  dollar.  Also, the operating
expenses for the Life and Health Insurance  segment  increased $11.1 million due
to  the  acquisition  of  the  Molloy  Companies  and  increased  non-deferrable
production related expenses due to growth in the business.

Income taxes decreased $2.5 million,  or 3%, to $78.6 million for the six months
ended June 30, 2004 from $81.1  million for the six months  ended June 30, 2003.
The effective income tax rate was 21% for the six months ended June 30, 2004 and
24% for the six months ended June 30, 2003.  The  effective  income tax rate for
the six months ended June 30, 2004 was lower than the corporate  income tax rate
of 35% primarily due to income tax  deductions  allowed for corporate  dividends
received,  a tax benefit  associated  with the sale of a foreign  investment and
interest  exclusion from taxable income.  The effective  income tax rate for the
six months ended June 30, 2003 was lower than the  corporate  income tax rate of
35%  primarily  due to income tax  deductions  allowed for  corporate  dividends
received  and  interest  exclusion  from  taxable  income.  The  decrease in the
effective  tax rate to 21% for the six months ended June 30, 2004,  from 24% for
the  six  months  ended  June  30,  2003,  was  primarily  due to a tax  benefit
associated with the sale of a foreign investment.

As a result of the  foregoing  factors and the  inclusion of income  (loss) from
discontinued  operations and the cumulative change in accounting principle,  net
of related income taxes, net income  decreased $44.6 million,  or 12%, to $313.3
million for the six months ended June 30, 2004,  from $357.9 million for the six
months ended June 30, 2003. The income (loss) from  discontinued  operations was
related to our sale of Principal Residential Mortgage and Argentine companies in
2004 and a change in the  estimated  loss on disposal of BT  Financial  Group in
2003.   The  cumulative   effect  of  accounting   change  was  related  to  our
implementation of SOP 03-1.

RESULTS OF OPERATIONS BY SEGMENT

We use operating earnings,  which excludes the effect of net realized/unrealized
capital gains and losses, as adjusted, and other after-tax adjustments, for goal
setting,  determining  employee  compensation,  and evaluating  performance on a
basis comparable to that used by securities analysts. Segment operating earnings
are  determined by adjusting  U.S.  GAAP net income for net  realized/unrealized
capital  gains and losses,  as  adjusted,  and other  after-tax  adjustments  we
believe are not  indicative of overall  operating  trends.  Note that  after-tax
adjustments  have  occurred  in the past and  could  recur in  future  reporting
periods.  While these items may be significant  components in understanding  and
assessing our consolidated financial performance, we believe the presentation of
segment  operating  earnings  enhances  the  understanding  of  our  results  of
operations  by  highlighting  earnings  attributable  to  the  normal,   ongoing
operations of our businesses.

                                       52

The  following  table  presents  segment  information  as of or for the  periods
indicated:

                                                      AS OF OR FOR THE THREE             AS OF OR FOR THE SIX
                                                           MONTHS ENDED                      MONTHS ENDED
                                                             JUNE 30,                          JUNE 30,
                                                  -------------------------------    -------------------------------
                                                      2004              2003             2004            2003
                                                  --------------    -------------    --------------    -------------
                                                                           (IN MILLIONS)

OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation........     $     906.8       $     862.0      $   1,800.1      $   1,741.9
International Asset Management and
   Accumulation...............................           122.3             106.2            235.3            180.7
Life and Health Insurance.....................         1,030.7           1,001.8          2,066.0          2,014.1
Mortgage Banking..............................             -                 -                -                -
Corporate and Other (1).......................           (11.9)             (2.0)           (10.3)             1.0
                                                  --------------    -------------    --------------    -------------
  Total segment operating revenues............         2,047.9           1,968.0          4,091.1          3,937.7
Net realized/unrealized capital losses,
  including recognition of front-end fee
  revenues and certain market value
  adjustments to fee revenues(2)..............           (68.2)            (16.5)          (114.7)           (96.4)
                                                  --------------    -------------    --------------    -------------
  Total revenue per consolidated statements
   of operations..............................     $   1,979.7       $   1,951.5      $   3,976.4      $   3,841.3
                                                  ==============    =============    ==============    =============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation .......     $     121.7       $     105.7      $     241.2      $     200.6
International Asset Management and
   Accumulation...............................             9.3              11.9             17.9             18.5
Life and Health Insurance.....................            56.9              62.9            131.7            122.0
Mortgage Banking..............................            (5.4)             (4.5)           (10.3)            (8.4)
Corporate and Other ..........................            (9.1)            (10.4)           (20.6)           (15.4)
                                                  --------------    -------------    --------------    -------------
  Total segment operating earnings............           173.4             165.6            359.9            317.3
Net realized/unrealized capital losses, as
   adjusted(2)................................           (44.5)            (13.5)           (67.6)           (66.6)
Other after-tax adjustments(3)................            (9.2)             50.1             21.0            107.2
                                                  --------------    -------------    --------------    -------------
   Net income per consolidated statements of
     operations...............................     $     119.7       $     202.2      $     313.3      $     357.9
                                                  ==============    =============    ==============    =============
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation (4)....     $  87,733.0       $  77,647.6      $  87,733.0      $  77,647.6
International Asset Management and
   Accumulation...............................         3,123.9           2,531.3          3,123.9          2,531.3
Life and Health Insurance.....................        12,472.5          11,857.0         12,472.5         11,857.0
Mortgage Banking (5)..........................         6,466.2           4,119.5          6,466.2          4,119.5
Corporate and Other (6).......................         1,577.3           2,466.3          1,577.3          2,466.3
                                                  --------------    -------------    --------------    -------------
  Total assets................................     $ 111,372.9       $  98,621.7      $ 111,372.9      $  98,621.7
                                                  ==============    =============    ==============    =============

- -----------------------
(1)  Includes   inter-segment   eliminations   primarily   related  to  internal
     investment management fee revenues and commission fee revenues paid to U.S.
     Asset  Management  and  Accumulation  agents  for  selling  Life and Health
     Insurance segment insurance products.

(2)  In addition to sales  activity and other than  temporary  impairments,  net
     realized/unrealized   capital  gains  (losses)  include   unrealized  gains
     (losses) on mark to market  changes of certain seed money  investments  and
     investments  classified as trading securities,  as well as unrealized gains
     (losses) on certain  derivatives.  Net  realized/unrealized  capital  gains
     (losses), as adjusted,  are net of income taxes, net realized capital gains
     and losses distributed, minority interest capital gains and losses, related
     changes in the  amortization  pattern of deferred  policy  acquisition  and
     sales  inducement  costs,  recognition  of front-end fee revenues for sales
     charges  on  pension   products  and  services  and  certain  market  value
     adjustments to fee revenues.

                                       53

                                                          FOR THE THREE                       FOR THE SIX
                                                           MONTHS ENDED                      MONTHS ENDED
                                                             JUNE 30,                          JUNE 30,
                                                  --------------------------------   -------------------------------
                                                      2004              2003             2004             2003
                                                  -------------     --------------   -------------    --------------
                                                                           (IN MILLIONS)

Net realized/unrealized capital losses...........     $ (66.3)       $     (9.7)      $   (108.8)      $    (84.2)
Certain market value adjustments to fee revenues         (2.9)             (6.7)            (5.8)           (16.5)
Recognition of front-end fee revenues............         1.0              (0.1)            (0.1)             4.3
                                                  -------------     --------------   -------------    --------------
  Net realized/unrealized capital losses,
    including recognition of front-end fee
    revenues and certain market value
    adjustments to fee revenues .................       (68.2)            (16.5)          (114.7)           (96.4)
Amortization of deferred policy acquisition and
    sales inducement costs related to net
    realized/unrealized capital gains
    (losses) ....................................         0.5              (0.4)             2.6              3.3
Capital (gains) losses distributed...............         0.8              (1.9)            (1.2)            (1.0)
Minority interest capital (gains) losses.........        (0.1)              0.4             (0.2)             0.3
                                                  -------------     --------------   -------------    --------------
  Net realized/unrealized capital losses,
    including recognition of front-end fee
    revenues and certain market value
    adjustments to fee revenues, net of related
    amortization of deferred policy acquisition
    and sales inducement costs, capital gains
    (losses) distributed and minority capital
    gains (losses)...............................       (67.0)            (18.4)          (113.5)           (93.8)

Income tax effect ...............................        22.5               4.9             45.9             27.2
                                                  -------------     --------------   -------------    --------------
  Net realized/unrealized capital losses, as
    adjusted.....................................     $ (44.5)       $    (13.5)      $    (67.6)      $    (66.6)
                                                  =============     ==============   =============    ==============

(3)For the three months  ended June 30, 2004,  other  after-tax  adjustments  of
   $9.2 million  included (1) the  negative  effect of a loss from  discontinued
   operations  of  Principal  Residential  Mortgage  ($9.5  million) and (2) the
   positive  effect of income from  discontinued  operations of Argentina  ($0.3
   million).  For  the  three  months  ended  June  30,  2003,  other  after-tax
   adjustments of $50.1 million  included (1) the positive effect of income from
   discontinued operations of Principal Residential Mortgage ($52.1 million) and
   (2) the  negative  effects  of: (a) a loss from  discontinued  operations  of
   Argentina  ($1.6  million) and (b) a change in the estimated loss on disposal
   of BT Financial Group ($0.4 million). For the six months ended June 30, 2004,
   other  after-tax  adjustments of $21.0 included (1) the positive  effects of:
   (a) income from  discontinued  operations of Principal  Residential  Mortgage
   ($26.5  million)  and (b) income from  discontinued  operations  of Argentina
   ($0.2  million)  and (2) the negative  effect from a cumulative  effect of an
   accounting change, a result of our implementation of SOP 03-1 ($5.7 million).
   For the six months ended June 30, 2003, other after-tax adjustments of $107.2
   million  included  (1)  the  positive  effect  of  income  from  discontinued
   operations of Principal  Residential  Mortgage  ($110.9  million) and (2) the
   negative  effects of: (a) a loss from  discontinued  operations  of Argentina
   ($2.6  million)  and (b) a change in the  estimated  loss on  disposal  of BT
   Financial Group ($1.1 million).

(4)U.S.  Asset  Management  and  Accumulation  separate  account  assets include
   shares of Principal  Financial Group stock allocated to a separate account, a
   result of our  demutualization.  The value of the separate account was $755.7
   million at June 30, 2004,  and $927.8  million at June 30,  2003.  Changes in
   fair value of the separate  account are  reflected in both  separate  account
   assets and separate account liabilities.

(5)As a  result  of our  implementation  of FIN  46,  effective  July  1,  2003,
   Mortgage  Banking  assets  include  the full  consolidation  of PRMCR,  which
   provides a source of funding for our  residential  mortgage loan  production.
   PRMCR held $2.3 billion in mortgage  loans held for sale as of June 30, 2004,
   which are reported as assets of discontinued  operations on our  consolidated
   statements of financial position.

(6)Includes  inter-segment  elimination  amounts  related to an internal line of
   credit,  long-term  borrowings,  and internally generated mortgage loans. The
   Corporate and Other segment  managed a revolving line of credit used by other
   segments.  The U.S. Asset  Management  and  Accumulation  segment  provides a

                                       54

   source of funding  for the  Mortgage  Banking  segment's  mortgage  servicing
   rights.  The U.S. Asset Management and Accumulation  segment and the Life and
   Health Insurance segment reported mortgage loan assets issued for real estate
   joint  ventures.  These  mortgage  loans were reported as  liabilities in the
   Corporate and Other segment.

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

The following table presents certain summary financial data relating to the U.S.
Asset Management and Accumulation segment for the periods indicated:

                                                      FOR THE THREE                       FOR THE SIX
                                                       MONTHS ENDED                      MONTHS ENDED
                                                         JUNE 30,                          JUNE 30,
                                              -------------------------------    ------------------------------
                                                  2004              2003             2004             2003
                                              --------------    -------------    -------------    -------------
                                                                        (IN MILLIONS)
                                                                                       
OPERATING EARNINGS DATA:
Operating revenues(1):
  Premiums and other considerations.....       $      77.1       $      74.4      $    166.0       $    188.2
  Fees and other revenues...............             255.2             193.5           485.0            378.3
  Net investment income.................             574.5             594.1         1,149.1          1,175.4
                                              --------------    -------------    -------------    -------------
    Total operating revenues............             906.8             862.0         1,800.1          1,741.9

Expenses:
  Benefits, claims and settlement
    expenses, including dividends to
    policyholders.......................             504.1             508.6         1,002.7          1,044.2
  Operating expenses....................             241.5             216.9           479.9            439.8
                                              --------------    -------------    -------------    -------------
    Total expenses......................             745.6             725.5         1,482.6          1,484.0
                                              --------------    -------------    -------------    -------------
Pre-tax operating earnings..............             161.2             136.5           317.5            257.9
Income taxes............................              39.5              30.8            76.3             57.3
                                              --------------    -------------    -------------    -------------
Operating earnings......................             121.7             105.7           241.2            200.6
Net realized/unrealized capital losses,
  as adjusted ..........................             (20.3)            (29.0)          (57.5)           (60.1)
Other after-tax adjustments.............              (6.0)              2.5            (5.0)             5.1
                                              --------------    -------------    -------------    -------------
U. S. GAAP REPORTED:
Net income..............................       $      95.4       $      79.2      $    178.7       $    145.6
                                              ==============    =============    =============    =============

- --------------------------
(1)  Excludes  net  realized/unrealized  capital  losses  and  their  impact  on
     recognition of front-end fee revenues and certain market value  adjustments
     to fee revenues.

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Premiums  and  other  considerations  increased  $2.7  million,  or 4%, to $77.1
million for the three  months ended June 30,  2004,  from $74.4  million for the
three months ended June 30, 2003. The increase  primarily resulted from an $11.9
million  increase in pension  full-service  payout sales of single premium group
annuities  with life  contingencies,  which are  typically  used to fund defined
benefit plan  terminations.  The premium  income  received from these  contracts
fluctuates  due to the  variability  in the  number  and  size of  pension  plan
terminations,  the  interest  rate  environment  and the  ability to attract new
sales. Offsetting this increase was a $9.2 million decrease in individual payout
annuity sales, primarily related to increased competitive pressures.

Fees and other revenues  increased $61.7 million,  or 32%, to $255.2 million for
the three months ended June 30, 2004,  from $193.5  million for the three months
ended June 30, 2003.  Pension  full-service  accumulation fees and other revenue

                                       55

increased  $36.5 million  primarily due to an increase in fees from our separate
accounts,  due to  improvements  in the  equity  markets  and net cash flow from
customers,  which have led to higher  account  values.  In  addition,  Principal
Global Investors fees and other revenues  increased $22.5 million  primarily due
to increased  management  fees stemming from our acquisition of Post Advisory in
third quarter of 2003 and an increase in assets under management.

Net investment income decreased $19.6 million,  or 3%, to $574.5 million for the
three months ended June 30, 2004, from $594.1 million for the three months ended
June 30, 2003.  The decrease  primarily  resulted from a decrease in the average
annualized  yield on  invested  assets  and  cash,  which was 5.6% for the three
months ended June 30, 2004, compared to 6.1% for the three months ended June 30,
2003.  This  reflects  lower yields on cash and fixed  maturity  securities  and
commercial  mortgages  due in part to a lower  interest  rate  environment.  The
decrease was partially offset by a $1,840.3 million,  or 5%, increase in average
invested assets and cash.

Benefits, claims and settlement expenses,  including dividends to policyholders,
decreased $4.5 million, or 1%, to $504.1 million for the three months ended June
30, 2004,  from $508.6  million for the three  months  ended June 30, 2003.  The
decrease primarily  resulted from an $11.1 decrease in our pension  full-service
accumulation  business due to lower interest  credited on our  non-participating
deposit  type  business.  Also  contributing  to the decrease was a $6.1 million
decrease from individual  payout annuity,  which resulted largely from the lower
sales of individual  payout life  annuities.  Partially  offsetting  the overall
decrease  was a  $12.1  million  increase  in our  pension  full-service  payout
business as a result of increased  sales of single premium group  annuities with
life contingencies.

Operating  expenses  increased $24.6 million,  or 11%, to $241.5 million for the
three months ended June 30, 2004, from $216.9 million for the three months ended
June 30, 2003. The increase primarily resulted from an $11.3 million increase in
Principal  Global Investors due to our acquisition of Post Advisory in the third
quarter of 2003 and to a lesser  extent an  increase  in  investment  management
expenses. In addition, pension full-service accumulation expenses increased $6.1
million primarily due to an increase in amortization of DPAC and  non-deferrable
expenses. Furthermore,  individual fixed annuity expenses increased $5.4 million
primarily due to our growing block of fixed deferred annuity business.

Income taxes  increased  $8.7  million,  or 28%, to $39.5  million for the three
months ended June 30, 2004,  from $30.8  million for the three months ended June
30, 2003.  The effective  income tax rate for this segment was 25% for the three
months  ended June 30,  2004,  and 23% for the three months ended June 30, 2003.
The  effective  income tax rates for the three  months  ended June 30,  2004 and
2003,  were lower than the  corporate  income tax rate of 35%  primarily  due to
income tax  deductions  allowed for the corporate  dividends  received and other
tax-exempt income. The increase in the effective tax rate was primarily due to a
greater  increase in pre-tax  operating  earnings  relative  to the  increase in
permanent tax differences.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $16.0
million, or 15%, to $121.7 million for the three months ended June 30, 2004 from
$105.7 million for the three months ended June 30, 2003.

Net realized/unrealized capital losses, as adjusted,  decreased $8.7 million, or
30%,  to $20.3  million for the three  months  ended June 30,  2004,  from $29.0
million for the three months ended June 30, 2003.  The decrease is primarily due
to fewer mark to market losses related to hedging activities partially offset by
losses on sales of other fixed maturity  securities compared to gains on sale in
2Q 03.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income  increased $16.2 million,  or 20%, to $95.4 million for
the three months ended June 30,  2004,  from $79.2  million for the three months
ended  June 30,  2003.  For the three  months  ended June 30,  2004,  net income
included  the  negative  effect of other  after-tax  adjustments  totaling  $6.0
million related to a loss from discontinued  operations associated with the sale
of Principal Residential Mortgage. For the three months ended June 30, 2003, net
income included the positive effect of other after-tax adjustments totaling $2.5
million related to income from discontinued  operations associated with the sale
of Principal Residential Mortgage.

                                       56

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Premiums and other  considerations  decreased  $22.2 million,  or 12%, to $166.0
million for the six months ended June 30, 2004,  from $188.2 million for the six
months ended June 30, 2003. The decrease primarily resulted from a $14.3 million
decrease in individual  payout  annuity  sales,  primarily  related to increased
competitive  pressures.  Also  contributing  to the  decrease was a $7.9 million
decrease in pension  full-service payout sales of single premium group annuities
with life  contingencies,  which are typically used to fund defined benefit plan
terminations. The premium income received from these contracts fluctuates due to
the  variability  in the  number  and size of  pension  plan  terminations,  the
interest rate environment and the ability to attract new sales.

Fees and other revenues increased $106.7 million,  or 28%, to $485.0 million for
the six months ended June 30, 2004, from $378.3 million for the six months ended
June  30,  2003.  Pension  full-service  accumulation  fees  and  other  revenue
increased  $57.6 million  primarily due to an increase in fees from our separate
accounts,  due to  improvements  in the  equity  markets  and net cash flow from
customers,  which have led to higher  account  values.  In  addition,  Principal
Global Investors fees and other revenues  increased $37.1 million  primarily due
to increased  management  fees stemming from our acquisition of Post Advisory in
third quarter of 2003 and an increase in assets under management.

Net investment  income  decreased $26.3 million,  or 2%, to $1,149.1 million for
the six months ended June 30,  2004,  from  $1,175.4  million for the six months
ended June 30, 2003.  The  decrease  primarily  resulted  from a decrease in the
average annualized yield on invested assets and cash, which was 5.7% for the six
months ended June 30,  2004,  compared to 6.2% for the six months ended June 30,
2003.  This reflects  lower yields on fixed  maturity  securities and commercial
mortgages  due in part to a lower  interest rate  environment.  The decrease was
partially  offset by a $2,343.6  million,  or 6%,  increase in average  invested
assets and cash.

Benefits, claims and settlement expenses,  including dividends to policyholders,
decreased  $41.5  million,  or 4%, to $1,002.7  million for the six months ended
June 30, 2004, from $1,044.2 million for the six months ended June 30, 2003. The
decrease  primarily  resulted  from a  $20.3  million  decrease  in our  pension
full-service  accumulation  products  due  to  lower  interest  credited  on our
non-participating  deposit type business and to a lesser extent due to decreases
in cost of interest credited on declining business from our participating block.
Also  contributing to the decrease was a $10.7 million  decrease from individual
payout annuity, which resulted largely from the lower sales of individual payout
life annuities. In addition,  pension full-service payout decreased $8.7 million
primarily due to decreased  sales of single  premium group  annuities  with life
contingencies.

Operating expenses increased $40.1 million, or 9%, to $479.9 million for the six
months  ended June 30, 2004,  from $439.8  million for the six months ended June
30, 2003.  The increase  primarily  resulted  from a $20.1  million  increase in
Principal  Global Investors due to our acquisition of Post Advisory in the third
quarter of 2003 and to a lesser  extent an  increase  in  investment  management
expenses.  In addition,  pension  full-service  accumulation  expenses increased
$12.5 million primarily due to an increase in non-deferrable expenses.

Income  taxes  increased  $19.0  million,  or 33%, to $76.3  million for the six
months ended June 30, 2004, from $57.3 million for the six months ended June 30,
2003. The effective  income tax rate for this segment was 24% for the six months
ended  June 30,  2004,  and 22% for the six  months  ended  June 30,  2003.  The
effective income tax rates for the six months ended June 30, 2004 and 2003, were
lower  than the  corporate  income tax rate of 35%  primarily  due to income tax
deductions  allowed for the corporate  dividends  received and other  tax-exempt
income.  The increase in the  effective  tax rate was primarily due to a greater
increase in pre-tax operating earnings relative to the increase in permanent tax
differences.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $40.6
million,  or 20%, to $241.2  million for the six months ended June 30, 2004 from
$200.6 million for the six months ended June 30, 2003.

                                       57

Net realized/unrealized capital losses, as adjusted,  decreased $2.6 million, or
4%, to $57.5 million for the six months ended June 30, 2004,  from $60.1 million
for the six months ended June 30, 2003.  The decrease is primarily  due to lower
other than temporary declines in the value of certain fixed maturity  securities
and fewer mark to market losses related to hedging  activities  partially offset
by an  increase  in  commercial  mortgage  losses  and  losses  on sale of fixed
maturity securities compared to gains in 2003.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $33.1 million,  or 23%, to $178.7 million for
the six months ended June 30, 2004, from $145.6 million for the six months ended
June 30, 2003. For the six months ended June 30, 2004,  net income  included the
negative effect of other after-tax adjustments totaling $5.0 million related to:
(1) a loss from  discontinued  operations  associated with the sale of Principal
Residential  Mortgage ($3.5  million) and (2) a cumulative  effect of accounting
change due to our implementation of SOP 03-1 ($1.5 million).  For the six months
ended June 30, 2003, net income  included the positive effect of other after-tax
adjustments totaling $5.1 million related to income from discontinued operations
associated with the sale of Principal Residential Mortgage.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

The following  table  presents  certain  summary  financial data relating to the
International  Asset  Management  and  Accumulation   segment  for  the  periods
indicated:

                                       58

                                                  FOR THE THREE                       FOR THE SIX
                                                  MONTHS ENDED                       MONTHS ENDED
                                                    JUNE 30,                           JUNE 30,
                                         --------------------------------    ------------------------------
                                             2004              2003             2004              2003
                                         -------------     --------------    ------------     -------------
                                                                    (IN MILLIONS)
                                                                                  
OPERATING EARNINGS DATA:
Operating revenues (1):
  Premiums and other consideration...      $    52.3       $       50.6       $   111.1       $      80.5
  Fees and other revenues............           21.2               16.9            42.2              30.9
  Net investment income..............           48.8               38.7            82.0              69.3
                                         -------------     --------------    ------------     -------------
    Total operating revenues.........          122.3              106.2           235.3             180.7

Expenses:
   Benefits, claims and settlement
    expenses.........................           84.0               72.4           158.3             119.3
   Operating expenses................           26.2               20.8            51.7              40.3
                                         -------------     --------------    ------------     -------------
       Total expenses................          110.2               93.2           210.0             159.6
                                         -------------     --------------    ------------     -------------
Pre-tax operating earnings...........           12.1               13.0            25.3              21.1
Income taxes.........................            2.8                1.1             7.4               2.6
                                         -------------     --------------    ------------     -------------
Operating earnings...................            9.3               11.9            17.9              18.5
Net realized/unrealized capital gains
    (losses), as adjusted............            0.2               (0.5)            4.0              (3.9)

Other after-tax adjustments..........            0.3               (2.0)           (3.1)             (3.7)
                                         -------------     --------------    ------------     -------------
U.S. GAAP REPORTED:
Net income...........................      $     9.8             $  9.4       $    18.8       $      10.9
                                         =============     ==============    ============     =============
OTHER DATA:
Operating earnings:
   Principal International...........      $     9.3       $       11.9       $    17.9       $      18.5
   BT Financial Group................            -                  -               -                 -

Net income (loss):
    Principal International..........      $     9.8       $        9.8       $    18.8       $      12.0
    BT Financial Group...............            -                 (0.4)            -                (1.1)

- ----------------------------
(1) Excludes net realized/unrealized capital gains (losses).

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Premiums  and  other  considerations  increased  $1.7  million,  or 3%, to $52.3
million for the three  months ended June 30,  2004,  from $50.6  million for the
three  months  ended June 30,  2003.  An increase of $4.8  million in Mexico was
primarily  due to  additional  premiums on single  premium  annuities  with life
contingencies. Partially offsetting this increase was a decrease of $3.2 million
in Chile primarily a result of lower sales of single premium annuities with life
contingencies,  offset partially by the strengthening of the Chilean peso versus
the U.S. dollar.

Fees and other revenues increased $4.3 million, or 25%, to $21.2 million for the
three months ended June 30, 2004,  from $16.9 million for the three months ended
June 30, 2003.  An increase of $1.8 million in Hong Kong was  primarily a result
of an increase in assets under  management  due to the  acquisition  of Dao Heng
Fund  Management  in 2004.  An increase of $1.6 million in India was primarily a
result of accounting for Principal PNB Asset  Management  Company using the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003;  prior to third quarter 2003,  results were reported  using equity
method of  accounting.  In  addition,  an increase of $1.2 million in Mexico was

                                       59

primarily due to the acquisition of Principal Genera, S.A. de C.V., Operadora de
Fondos de Inversion ("Genera") in July 2003.

Net investment income increased $10.1 million,  or 26%, to $48.8 million for the
three months ended June 30, 2004,  from $38.7 million for the three months ended
June 30, 2003.  The  increase was  primarily  due to a $433.1  million,  or 28%,
increase in average invested assets and cash, excluding our equity investment in
subsidiaries.  The increase  was  partially  offset by a decrease in  investment
yields. The annualized yield on average invested assets and cash,  excluding our
equity investment in subsidiaries,  was 9.3% for the three months ended June 30,
2004, compared to 9.6% for the three months ended June 30, 2003.

Benefits,  claims and settlement  expenses  increased $11.6 million,  or 16%, to
$84.0  million for the three months ended June 30, 2004,  from $72.4 million for
the three months  ended June 30, 2003.  An increase of $7.3 million in Chile was
primarily  a result of the  strengthening  of the  Chilean  peso versus the U.S.
dollar,  offset  partially by decreased  reserve  expenses due to lower sales of
single premium annuities with life  contingencies.  In addition,  an increase of
$4.4 million in Mexico was primarily a result of higher reserve  expenses due to
additional premiums on single premium annuities with life contingencies.

Operating  expenses  increased  $5.4  million,  or 26%, to $26.2 million for the
three months ended June 30, 2004,  from $20.8 million for the three months ended
June 30, 2003.  An increase of $2.6 million in Mexico was  partially  due to the
acquisition  of  Genera  in 2003.  An  increase  of $1.4  million  in India  was
primarily a result of  accounting  for Principal  PNB Asset  Management  Company
using the full consolidation  method of accounting due to our majority ownership
beginning third quarter 2003; prior to third quarter 2003, results were reported
using equity method of accounting.  In addition,  an increase of $1.1 million in
Hong Kong was  primarily  a result of  increased  marketing  efforts  and higher
investment  management  expense caused by an increase in assets under management
due to the acquisition of Dao Heng Fund Management in 2004.

Income taxes  increased  $1.7 million to $2.8 million for the three months ended
June 30, 2004,  from $1.1 million for the three months ended June 30, 2003.  The
increase was  partially a result of an increase in deferred  taxes  related to a
Brazilian  equity method  investment,  coupled with a tax benefit in Mexico that
was received in 2003.

As a result of the foregoing factors, operating earnings decreased $2.6 million,
or 22%, to $9.3 million for the three  months  ended June 30,  2004,  from $11.9
million for the three months ended June 30, 2003.

Net  realized/unrealized  capital gains, as adjusted,  increased $0.7 million to
$0.2 million of net realized/unrealized capital gains for the three months ended
June 30, 2004, from $0.5 million of net  realized/unrealized  capital losses for
the three months  ended June 30, 2003.  An increase of $2.6 million in Hong Kong
was  primarily  due to a change  in the  fair  value  of  embedded  derivatives.
Partially  offsetting  this  increase  was a decrease  of $1.9  million in Chile
primarily due to losses realized on the sale of fixed maturity securities.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $0.4 million,  or 4%, to $9.8 million for the
three months  ended June 30, 2004,  from $9.4 million for the three months ended
June 30, 2003. For the three months ended June 30, 2004, net income included the
positive effect of other after-tax  adjustments totaling $0.3 million related to
income from  discontinued  operations of  Argentina.  For the three months ended
June 30,  2003,  net income  included  the  negative  effect of other  after-tax
adjustments  totaling $2.0 million,  related to: (1) the loss from  discontinued
operations of Argentina  ($1.6 million) and (2) the change in the estimated loss
on disposal of BT Financial Group ($0.4 million).

                                       60

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Premiums and other  considerations  increased  $30.6 million,  or 38%, to $111.1
million for the six months ended June 30, 2004,  from $80.5  million for the six
months ended June 30, 2003.  An increase of $27.0 million in Chile was primarily
a result of the  strengthening  of the Chilean  peso versus the U.S.  dollar and
record  sales of  single  premium  annuities  with  life  contingencies  in 2004
following a year of decreased sales due to market contraction.

Fees and other revenues  increased  $11.3 million,  or 37%, to $42.2 million for
the six months ended June 30, 2004,  from $30.9 million for the six months ended
June 30, 2003.  An increase of $4.1 million in Mexico was  primarily a result of
an increase in the number of retirement plan participants due to the acquisition
of AFORE Tepeyac in February 2003 and the acquisition of Genera in July 2003. An
increase of $4.0  million in Hong Kong was  primarily a result of an increase in
assets under  management due to the  acquisition of Dao Heng Fund  Management in
2004.  In addition,  an increase of $2.7 million in India was primarily a result
of  accounting  for  Principal  PNB  Asset  Management  Company  using  the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003;  prior to third quarter 2003,  results were reported  using equity
method of accounting.

Net investment income increased $12.7 million,  or 18%, to $82.0 million for the
six months ended June 30, 2004, from $69.3 million for the six months ended June
30, 2003. The increase was primarily due to a $433.1 million,  or 28%,  increase
in  average  invested  assets  and cash,  excluding  our  equity  investment  in
subsidiaries.  The increase  was  partially  offset by a decrease in  investment
yields. The annualized yield on average invested assets and cash,  excluding our
equity  investment in  subsidiaries,  was 7.5% for the six months ended June 30,
2004, compared to 8.6% for the six months ended June 30, 2003.

Benefits,  claims and settlement  expenses  increased $39.0 million,  or 33%, to
$158.3  million for the six months ended June 30, 2004,  from $119.3 million for
the six months  ended June 30, 2003.  An increase of $32.8  million in Chile was
primarily  a result of the  strengthening  of the  Chilean  peso versus the U.S.
dollar  and  higher  reserve  expenses  due to record  sales of  single  premium
annuities with life  contingencies  in 2004 following a year of decreased  sales
due to market contraction.

Operating expenses increased $11.4 million, or 28%, to $51.7 million for the six
months ended June 30, 2004, from $40.3 million for the six months ended June 30,
2003. An increase of $3.6 million in Mexico was primarily due to the acquisition
of Genera in 2003.  An increase of $3.2  million in Chile was  primarily  due to
non-deferrable commissions on record sales of single premium annuities with life
contingencies  and the strengthening of the Chilean peso versus the U.S. dollar.
An increase  of $2.1  million in Hong Kong was  primarily a result of  increased
marketing efforts and higher investment management fees caused by an increase in
assets under  management due to the  acquisition of Dao Heng Fund  Management in
2004.  In addition,  an increase of $2.1 million in India was primarily a result
of  accounting  for  Principal  PNB  Asset  Management  Company  using  the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003;  prior to third quarter 2003,  results were reported  using equity
method of accounting.

Income  taxes  increased  $4.8  million to $7.4 million for the six months ended
June 30, 2004,  from $2.6  million for the six months  ended June 30, 2003.  The
increase was primarily a result of an increase in deferred  taxes related to our
Brazilian equity method investment.

As a result of the foregoing factors, operating earnings decreased $0.6 million,
or 3%, to $17.9  million  for the six  months  ended June 30,  2004,  from $18.5
million for the six months ended June 30, 2003.

Net  realized/unrealized  capital gains, as adjusted,  increased $7.9 million to
$4.0 million of net  realized/unrealized  capital gains for the six months ended
June 30, 2004, from $3.9 million of net  realized/unrealized  capital losses for
the six months ended June 30, 2003. An increase of $7.2 million in Hong Kong was
primarily due to a change in the fair value of embedded derivatives.

                                       61

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments, net income increased $7.9 million, or 72%, to $18.8 million for the
six months ended June 30, 2004, from $10.9 million for the six months ended June
30, 2003. For the six months ended June 30, 2004, net income included the effect
of other  after-tax  adjustments  totaling  $3.1  million,  related  to: (1) the
negative  effect of  cumulative  effect of an accounting  change  related to the
implementation  of SOP 03-1 ($3.3 million) and (2) the positive effect of income
from  discontinued  operations of Argentina ($0.2  million).  For the six months
ended June 30, 2003, net income  included the negative effect of other after-tax
adjustments  totaling $3.7 million,  related to: (1) the loss from  discontinued
operations of Argentina  ($2.6 million) and (2) the change in the estimated loss
on disposal of BT Financial Group ($1.1 million).

LIFE AND HEALTH INSURANCE SEGMENT

Beginning January 1, 2004, we strategically  realigned  products and services of
the Life and Health  segment to better  reflect how we manage our business.  The
new  divisions of the Life and Health  segment are  individual  life  insurance,
health insurance and specialty benefits.  Our individual life insurance products
include  universal and variable  universal life insurance and  traditional  life
insurance.  Our health insurance  products  include group medical  insurance and
fee-for-service.  Our specialty benefit products include group dental and vision
insurance, individual and group disability insurance, and group life insurance.

The following table presents certain summary financial data relating to the Life
and Health Insurance segment for the periods indicated:

                                                         FOR THE THREE                     FOR THE SIX
                                                         MONTHS ENDED                      MONTHS ENDED
                                                           JUNE 30,                          JUNE 30,
                                                 ------------------------------    -----------------------------
                                                     2004             2003            2004             2003
                                                 --------------   -------------    ------------     ------------
                                                                         (IN MILLIONS)
                                                                                         
OPERATING EARNINGS DATA:
Operating Revenues(1):
  Premiums and other considerations........       $    763.2       $    750.7       $ 1,535.9        $ 1,511.7
  Fees and other revenues..................            103.2             83.6           200.8            168.0
  Net investment income....................            164.3            167.5           329.3            334.4
                                                 --------------   -------------    ------------     ------------
     Total operating revenues..............          1,030.7          1,001.8         2,066.0          2,014.1

Expenses:
  Benefits, claims and settlement expenses.            636.5            604.7         1,252.6          1,222.5
  Dividends to policyholders...............             73.1             74.6           145.1            150.1
  Operating expenses.......................            236.0            227.3           469.6            457.4
                                                 --------------   -------------    ------------     ------------
     Total expenses........................            945.6            906.6         1,867.3          1,830.0
                                                 --------------   -------------    ------------     ------------
Pre-tax operating earnings.................             85.1             95.2           198.7            184.1
Income taxes...............................             28.2             32.3            67.0             62.1
                                                 --------------   -------------    ------------     ------------
Operating earnings.........................             56.9             62.9           131.7            122.0

Net realized/unrealized capital losses, as
  adjusted.................................             (5.9)            (1.1)           (7.8)           (10.4)
Other after-tax adjustments................               -                -             (0.9)             -
                                                 --------------   -------------    ------------     ------------
U.S. GAAP REPORTED:
Net income.................................       $     51.0       $     61.8       $   123.0        $   111.6
                                                 ==============   =============    ============     ============

- -----------
(1) Excludes net realized/unrealized capital gains (losses).

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Premiums and other  considerations  increased  $12.5  million,  or 2%, to $763.2
million for the three months ended June 30,  2004,  from $750.7  million for the
three  months  ended  June  30,  2003.  Specialty  benefits  insurance  premiums

                                       62

increased  $21.3 million  primarily due to growth in the business.  In addition,
health insurance premiums increased $2.3 million, primarily due to rate increase
partially  offset by a  decrease  in average  covered  medical  members  and the
establishment  of a premium refund accrual for pending  litigation  related to a
business  exited in the  1990's.  Partially  offsetting  these  increases  was a
decrease of $11.1 million in individual  life  insurance  premiums,  primarily a
result of the  continued  shift of customer  preference  from  traditional  life
insurance products to fee-based  universal and variable universal life insurance
products.

Fees and other revenues  increased $19.6 million,  or 23%, to $103.2 million for
the three months ended June 30,  2004,  from $83.6  million for the three months
ended June 30, 2003.  Fee revenues from our individual  life insurance  business
increased  $11.0  million,  primarily  due to the  continued  shift in  customer
preference  to  fee-based   universal  and  variable  universal  life  insurance
products.  Fee  revenues  from our  health  insurance  business  increased  $9.0
million, primarily a result of the acquisition of the Molloy Companies effective
January 2, 2004.

Net investment  income decreased $3.2 million,  or 2%, to $164.3 million for the
three months ended June 30, 2004, from $167.5 million for the three months ended
June 30,  2003.  The  decrease  primarily  relates to a decrease  in the average
annualized  yield on  invested  assets  and  cash,  which was 6.5% for the three
months ended June 30, 2004, compared to 6.8% for the three months ended June 30,
2003.  This  reflects  lower  yields on  invested  assets due in part to a lower
interest  rate  environment.  The  decrease  was  partially  offset  by a $361.0
million, or 4%, increase in average invested assets and cash for the segment.

Benefits,  claims and settlement  expenses  increased  $31.8 million,  or 5%, to
$636.5 million for the three months ended June 30, 2004, from $604.7 million for
the three months  ended June 30, 2003.  Health  insurance  benefits,  claims and
settlement   expenses   increased  $19.7  million,   primarily  due  to  reserve
refinements and increased claim costs per member.  Specialty  benefit  insurance
benefits, claims and settlement expenses increased $15.6 million,  primarily due
to growth in the business.

Dividends to policyholders  decreased $1.5 million,  or 2%, to $73.1 million for
the three months ended June 30,  2004,  from $74.6  million for the three months
ended June 30,  2003.  The  decrease is  primarily  related to a decrease in the
individual  life insurance  dividend  crediting rates resulting from a declining
interest rate environment.

Operating  expenses  increased  $8.7 million,  or 4%, to $236.0  million for the
three months ended June 30, 2004, from $227.3 million for the three months ended
June 30, 2003.  Health  insurance  operating  expenses  increased  $5.3 million,
primarily a result of the acquisition of the Molloy  Companies  partially offset
by a  reduction  in salary and  benefit  related  expenses.  Specialty  benefits
operating  expenses  increased $4.5 million  primarily  resulting from increased
non-deferrable  production  related  expenses  due to growth in the business and
from increased DPAC amortization.

Income taxes  decreased  $4.1  million,  or 13%, to $28.2  million for the three
months ended June 30, 2004,  from $32.3  million for the three months ended June
30, 2003.  The  effective  income tax rate for the segment was 33% for the three
months ended June 30, 2004 and 34% for the three months ended June 30, 2003. The
effective  income tax rates for the three  months  ended June 30,  2004 and 2003
were lower than the corporate income tax rate of 35% primarily due to tax-exempt
income.

As a result of the foregoing factors, operating earnings decreased $6.0 million,
or 10%, to $56.9  million for the three months  ended June 30, 2004,  from $62.9
million for the three months ended June 30, 2003.

Net realized/unrealized  capital losses, as adjusted,  increased $4.8 million to
$5.9 million for the three months ended June 30, 2004, from $1.1 million for the
three months ended June 30, 2003. The increase is primarily the result of higher
capital  losses on other than  temporary  declines in the value of certain fixed
maturity securities.

As a result of the foregoing  factors,  net income  decreased $10.8 million,  or
17%,  to $51.0  million for the three  months  ended June 30,  2004,  from $61.8
million for the three months ended June 30, 2003.

                                       63

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Premiums and other  considerations  increased $24.2 million,  or 2%, to $1,535.9
million for the six months ended June 30, 2004,  from  $1,511.7  million for the
six months ended June 30, 2003.  Specialty benefits insurance premiums increased
$41.5  million  primarily  due to growth in the  business.  In addition,  health
insurance  premiums  increased  $3.6  million,  primarily  due to rate  increase
partially  offset by a  decrease  in average  covered  medical  members  and the
establishment  of a premium refund accrual for pending  litigation  related to a
business  exited in the  1990's.  Partially  offsetting  these  increases  was a
decrease of $20.9 million in individual  life  insurance  premiums,  primarily a
result of the  continued  shift of customer  preference  from  traditional  life
insurance products to fee-based  universal and variable universal life insurance
products.

Fees and other revenues  increased $32.8 million,  or 20%, to $200.8 million for
the six months ended June 30, 2004, from $168.0 million for the six months ended
June 30, 2003. Fee revenues from our health insurance  business  increased $17.0
million, primarily a result of the acquisition of the Molloy Companies effective
January 2, 2004.  Fee  revenues  from our  individual  life  insurance  business
increased  $15.6  million,  primarily  due to the  continued  shift in  customer
preference  to  fee-based   universal  and  variable  universal  life  insurance
products.

Net investment  income decreased $5.1 million,  or 2%, to $329.3 million for the
six months  ended June 30,  2004,  from $334.4  million for the six months ended
June 30,  2003.  The  decrease  primarily  relates to a decrease  in the average
annualized  yield on invested assets and cash, which was 6.6% for the six months
ended June 30,  2004,  compared to 6.9% for the six months  ended June 30, 2003.
This reflects  lower yields on invested  assets due in part to a lower  interest
rate environment.  The decrease was partially offset by a $287.5 million, or 3%,
increase in average invested assets and cash for the segment.

Benefits,  claims and settlement  expenses  increased  $30.1 million,  or 2%, to
$1,252.6  million for the six months ended June 30, 2004, from $1,222.5  million
for the six months ended June 30, 2003.  Specialty benefit  insurance  benefits,
claims and settlement expenses increased $25.4 million,  primarily due to growth
in the business.  Health  insurance  benefits,  claims and  settlement  expenses
increased  $17.2  million,  primarily due to reserve  refinements  and increased
claim costs per member. Partially offsetting these increases was a $12.5 million
decrease  in the  individual  life  insurance  benefits,  claims and  settlement
expenses,  primarily  due to the impact of  decreased  premium  and lower  death
claims.

Dividends to policyholders  decreased $5.0 million, or 3%, to $145.1 million for
the six months ended June 30, 2004, from $150.1 million for the six months ended
June 30, 2003. The decrease is primarily related to a decrease in the individual
life insurance dividend crediting rates resulting from a declining interest rate
environment.

Operating expenses increased $12.2 million, or 3%, to $469.6 million for the six
months  ended June 30, 2004,  from $457.4  million for the six months ended June
30, 2003. Health insurance operating expenses increased $9.7 million,  primarily
a result  of the  acquisition  of the  Molloy  Companies  partially  offset by a
decrease in premium tax related  expenses and lower  salary and benefit  related
expenses. Specialty benefits operating expenses increased $9.1 million primarily
resulting  from  increased  non-deferrable  production  related  expenses due to
growth  in  the  business  and  increased  DPAC  amortization.  Individual  life
insurance  operating expenses decreased $6.6 million primarily due to lower DPAC
amortization  resulting from the impact of updating the mortality assumptions in
the DPAC  models  for  universal  life and  variable  universal  life  insurance
products.

Income taxes increased $4.9 million,  or 8%, to $67.0 million for the six months
ended June 30, 2004,  from $62.1 million for the six months ended June 30, 2003.
The  effective  income tax rate for the segment was 34% for the six months ended
June 30, 2004 and 2003. The effective  income tax rates for the six months ended
June 30,  2004 and 2003 were  lower  than the  corporate  income tax rate of 35%
primarily due to tax-exempt income.

                                       64

As a result of the foregoing factors, operating earnings increased $9.7 million,
or 8%, to $131.7  million for the six months  ended June 30,  2004,  from $122.0
million for the six months ended June 30, 2003.

Net realized/unrealized capital losses, as adjusted,  decreased $2.6 million, or
25%, to $7.8 million for the six months ended June 30, 2004,  from $10.4 million
for the six months ended June 30, 2003.  The decrease is primarily the result of
lower capital  losses on other than  temporary  declines in the value of certain
fixed maturity securities.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $11.4 million,  or 10%, to $123.0 million for
the six months ended June 30, 2004, from $111.6 million for the six months ended
June 30, 2003. For the six months ended June 30, 2004,  net income  included the
negative effect of other after-tax  adjustments  totaling $0.9 million, due to a
cumulative  effect of accounting  change, a result of our  implementation of SOP
03-1.

MORTGAGE BANKING SEGMENT

The following  table  presents  certain  summary  financial data relating to the
Mortgage Banking segment for the periods indicated:

                                                     FOR THE THREE                    FOR THE SIX
                                                      MONTHS ENDED                    MONTHS ENDED
                                                        JUNE 30,                        JUNE 30,
                                               ---------------------------    -----------------------------
                                                  2004            2003           2004             2003
                                               -----------     -----------    ------------     ------------
                                                                      (IN MILLIONS)
                                                                                    
OPERATING EARNINGS DATA:
Operating Revenues:
  Total operating revenues..................    $ -             $  -            $ -             $   -

Expenses:
  Total expenses............................      8.8              7.4           16.7              13.7
                                               -----------     -----------    ------------     ------------
Pre-tax operating loss......................     (8.8)            (7.4)         (16.7)            (13.7)
Income tax benefits.........................     (3.4)            (2.9)          (6.4)             (5.3)
                                               -----------     -----------    ------------     ------------
Operating loss..............................     (5.4)            (4.5)         (10.3)             (8.4)
Net realized/unrealized capital losses,
  as adjusted ..............................      -                -              -                 -
Other after-tax adjustments.................     (3.5)            49.6           30.0             105.8
                                               ------------    -----------    ------------     ------------
U. S. GAAP REPORTED:
Net income (loss)...........................    $(8.9)          $ 45.1          $19.7           $  97.4
                                               ============    ===========    ============     ============

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Total expenses  represent  corporate  overhead allocated to the Mortgage Banking
segment and do not qualify for discontinued operations treatment.

Income tax  benefits  increased  $0.5  million,  or 17%, to $3.4 million for the
three months  ended June 30, 2004,  from $2.9 million for the three months ended
June 30,  2003.  The  increase  is due to the  increase  in  corporate  overhead
allocated to the Mortgage Banking segment.

As a result of the foregoing factors,  operating loss increased $0.9 million, or
20%, to $5.4 million for the three months ended June 30, 2004, from $4.5 million
for the three months ended June 30, 2003.

                                       65

Net loss  increased  $54.0  million  to $8.9  million  of net loss for the three
months  ended  June 30,  2004,  from  $45.1  million of net income for the three
months  ended June 30,  2003.  Residential  mortgage  loan  production  net loss
increased $142.2 million, which was primarily due to a decrease in mortgage loan
production to $9.7 billion for the three months ended June 30, 2004,  from $17.1
billion for the same period a year ago.  The net loss  increase  was also due to
smaller  margins.  Partially  offsetting the overall  increase in net loss was a
$94.3 million increase in net income from  residential  mortgage loan servicing.
The increase was primarily due to a $160.7 million pre-tax  decrease in the loss
from mortgage servicing rights valuation adjustments net of hedge activity.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Total expenses  represent  corporate  overhead allocated to the Mortgage Banking
segment and do not qualify for discontinued operations treatment.

Income tax benefits increased $1.1 million,  or 21%, to $6.4 million for the six
months ended June 30, 2004,  from $5.3 million for the six months ended June 30,
2003. The increase is due to the increase in corporate overhead allocated to the
Mortgage Banking segment.

As a result of the foregoing factors,  operating loss increased $1.9 million, or
23%, to $10.3 million for the six months ended June 30, 2004,  from $8.4 million
for the six months ended June 30, 2003.

Net income decreased $77.7 million,  or 80%, to $19.7 million for the six months
ended June 30, 2004,  from $97.4 million for the six months ended June 30, 2003.
Residential mortgage loan production net income decreased $228.2 million,  which
was primarily due to a decrease in mortgage loan production to $16.5 billion for
the six months  ended June 30,  2004,  from $32.6  billion for the same period a
year ago. Net income also decreased due to smaller margins. Partially offsetting
the  overall  decrease  was  a  $156.5  million  increase  in  net  income  from
residential mortgage loan servicing.  The increase was primarily due to a $216.6
million pre-tax  decrease in the loss from mortgage  servicing  rights valuation
adjustments net of hedge activity.

CORPORATE AND OTHER SEGMENT

The following  table  presents  certain  summary  financial data relating to the
Corporate and Other segment for the periods indicated:

                                       66

                                                            FOR THE THREE                    FOR THE SIX
                                                             MONTHS ENDED                   MONTHS ENDED
                                                               JUNE 30,                       JUNE 30,
                                                     -----------------------------   ----------------------------
                                                        2004             2003           2004            2003
                                                     ------------    -------------   -----------     ------------
                                                                             (IN MILLIONS)
                                                                                          
OPERATING EARNINGS DATA:
Operating Revenues (1):
  Total operating revenues......................       $  (11.9)       $ (2.0)        $ (10.3)        $  1.0

Expenses:
  Total expenses................................            7.6          14.8            30.1           24.8
                                                     ------------    -------------   ------------    ------------
Pre-tax operating loss..........................          (19.5)        (16.8)          (40.4)         (23.8)
Income taxes benefits...........................          (10.4)         (6.4)          (19.8)          (8.4)
                                                     ------------    -------------   ------------    ------------
Operating loss..................................           (9.1)        (10.4)          (20.6)         (15.4)

Net realized/unrealized capital gains (losses),
  as adjusted...................................          (18.5)         17.1            (6.3)           7.8
Other after-tax adjustments.....................            -             -               -              -
                                                     ------------    -------------   ------------    ------------
U.S. GAAP REPORTED:
Net income (loss)...............................       $  (27.6)       $  6.7         $ (26.9)        $ (7.6)
                                                     ============    =============   ============    ============

- ------------
(1)  Excludes net realized/unrealized capital gains (losses).

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Total operating  revenues decreased $9.9 million to a negative $11.9 million for
the three months ended June 30, 2004, from a negative $2.0 million for the three
months  ended June 30, 2003.  Net  investment  income  decreased  $7.8  million,
primarily  due to a decrease  in average  annualized  investment  yields for the
segment. The decrease in total revenues was also partially due to a $2.2 million
increase  in  inter-segment  eliminations  included in this  segment,  which was
offset by a corresponding change in total expenses.

Total  expenses  decreased  $7.2 million,  or 49%, to $7.6 million for the three
months ended June 30, 2004,  from $14.8  million for the three months ended June
30, 2003.  A decrease of $3.9  million in interest  expense was due to the March
2004  redemption  of our  surplus  notes  due 2024.  Inter-segment  eliminations
included in this  segment  increased  $2.2  million,  resulting in a decrease in
total expenses.

Income tax benefits  increased  $4.0  million,  or 63%, to $10.4 million for the
three months  ended June 30, 2004,  from $6.4 million for the three months ended
June 30, 2003.  The increase was  partially a result of tax credits  received on
our investment in a synthetic fuel production facility as well as an increase in
pre-tax operating loss.

As a result of the foregoing factors,  operating loss decreased $1.3 million, or
13%,  to $9.1  million  for the three  months  ended June 30,  2004,  from $10.4
million for the three months ended June 30, 2003.

Net realized/unrealized capital losses, as adjusted,  increased $35.6 million to
$18.5  million of net  realized/unrealized  capital  losses for the three months
ended June 30, 2004, from $17.1 million of net realized/unrealized capital gains
for the three months ended June 30, 2003.  The increase was primarily due to the
mark to market of certain seed money  investments and the realized  capital loss
related to the sale of a foreign investment.  This increase was partially offset
by higher other than temporary impairments recognized in 2003 compared to 2004.

As a result of the foregoing factors,  net loss increased $34.3 million to $27.6
million of net loss for the three months ended June 30, 2004,  from $6.7 million
of net income for the three months ended June 30, 2003.

                                       67

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Total operating revenues decreased $11.3 million to a negative $10.3 million for
the six months  ended June 30,  2004,  from a positive  $1.0 million for the six
months  ended June 30, 2003.  Net  investment  income  decreased  $9.8  million,
primarily  due to a decrease  in average  annualized  investment  yields for the
segment.

Total  expenses  increased  $5.3  million,  or 21%, to $30.1 million for the six
months ended June 30, 2004, from $24.8 million for the six months ended June 30,
2003. An increase of $7.2 million related to a prepayment  penalty recognized on
redemption of our surplus notes due 2024. The increase was partially offset by a
decrease of $4.3 million in interest  expense from the redemption of our surplus
notes.

Income tax benefits  increased $11.4 million to $19.8 million for the six months
ended June 30,  2004,  from $8.4 million for the six months ended June 30, 2003.
The increase was primarily a result of an increase in pre-tax  operating loss as
well as a tax benefit associated with the sale of a foreign investment.

As a result of the foregoing factors,  operating loss increased $5.2 million, or
34%, to $20.6 million for the six months ended June 30, 2004, from $15.4 million
for the six months ended June 30, 2003.

Net realized/unrealized capital losses, as adjusted,  increased $14.1 million to
$6.3 million of net realized/unrealized  capital losses for the six months ended
June 30, 2004,  from $7.8 million of net  realized/unrealized  capital gains for
the six months ended June 30, 2003.  The increase was  primarily  due to mark to
market of certain seed money  investments and the realized  capital loss related
to the sale of foreign investments. The increases were partially offset by gains
on  sales of  invested  assets  in 2004 and  other  than  temporary  impairments
recognized in 2003.

As a result of the foregoing factors,  net loss increased $19.3 million to $26.9
million for the six months  ended June 30,  2004,  from $7.6 million for the six
months ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Our legal entity  organizational  structure has an impact on our ability to meet
cash flow needs as an  organization.  Following is a  simplified  organizational
structure as of June 30, 2004.

                           Principal Financial Group, Inc.
                                          |
                          Principal Financial Services, Inc.
      |                                   |                        |
 Principal Life                 Principal International          Other
Insurance Company                      Entities               Subsidiaries
    |             |
Principal       Other
Residential   Subsidiaries
Mortgage, Inc.

* Discontinued Operation

SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS

Net cash  provided by  operating  activities  was $992.8  million  and  $1,858.8
million  for the six months  ended  June 30,  2004 and 2003,  respectively.  The
decrease in cash provided by our continuing operations between periods primarily
related to increases in intercompany  borrowings  between our Corporate  segment
and a discontinued segment.  These intercompany  borrowings were settled on July
1, 2004, in addition to the  settlement of all other  intercompany  arrangements
and sales  proceeds  received as a result of the sale of  Principal  Residential

                                       68

Mortgage  to  CitiMortgage  Inc.  Also  contributing  to the  reduction  in cash
provided by  operating  activities  was an  increase in cash paid for  benefits,
claims and settlement expense.

Net cash used in investing  activities was $1,179.2 million and $2,229.6 million
for the six months ended June 30, 2004 and 2003,  respectively.  The decrease in
cash used in investing  activities  between periods was primarily  related to an
increase  in the net  sales and  maturities  of  available-for-sale  securities,
mortgage loans and real estate.  This was slightly offset by an increase in cash
used to purchase  subsidiaries  as well as a decrease in proceeds  received from
the  sale of  subsidiaries.  On May  11,  2004,  we  entered  into a  definitive
agreement for the sale of Principal  Residential  Mortgage to CitiMortgage Inc.,
which was finalized on July 1, 2004.  Excluding the net inflows  resulting  from
the settlement of intercompany  accounts and borrowings,  the after tax proceeds
from this transaction are expected to be approximately  $630.0 million,  subject
to post  closing  adjustments.  We plan to use  proceeds  from  the  transaction
primarily for organic growth of our core business,  strategic acquisitions,  and
share repurchase.

Net cash provided by financing  activities was $469.8 million and $834.5 million
for the six months ended June 30, 2004,  respectively.  The decrease in net cash
provided by  financing  activities  was  primarily  due to the  redemption  of a
surplus  note  in  2004 as well as a  decrease  in net  deposits  of  investment
contracts and bank  deposits.  These items were slightly  offset by a decline in
treasury stock acquired.

Given the historical cash flow of our subsidiaries and the financial  results of
these  subsidiaries,  we believe the cash flow from our  consolidated  operating
activities  over  the  next  year  will  provide  sufficient  liquidity  for our
operations,  as well as satisfy  interest  payments and any payments  related to
debt servicing.

Although  we  generate  adequate  cash  flow to meet  the  needs  of our  normal
operations,  periodically  the need may  arise  to issue  debt to fund  internal
expansion,  acquisitions,  investment  opportunities  and retirement of existing
debt and equity. In December 2003, we filed a shelf registration  statement with
the Securities and Exchange Commission, which became effective on June 30, 2004.
The shelf  registration  totals  $3.0  billion,  with the  ability to issue debt
securities,  preferred stock, common stock,  warrants,  stock purchase contracts
and stock purchase  units of Principal  Financial  Group,  Inc ("PFG") and trust
preferred  securities of three subsidiary  trusts.  If we issue  securities,  we
intend  to use the  proceeds  from the sale of the  securities  offered  by this
prospectus, including the corresponding junior subordinated debentures issued to
the trusts in connection with their investment of all the proceeds from the sale
of preferred  securities,  for general  corporate  purposes,  including  working
capital,  capital  expenditures,  investments in subsidiaries,  acquisitions and
refinancing  of  debt,   including   commercial   paper  and  other   short-term
indebtedness.   Principal  Financial  Services,  Inc.  ("PFSI")  unconditionally
guarantees our obligations with respect to one or more series of debt securities
described in the shelf registration  statement.  As of June 30, 2004, no amounts
have been issued under our shelf registration.

DIVIDENDS FROM PRINCIPAL LIFE

The payment of stockholder  dividends by Principal Life to its parent company is
limited by Iowa laws.  Under Iowa laws,  Principal  Life may pay dividends  only
from the earned  surplus  arising  from its  business and must receive the prior
approval of the Insurance Commissioner of the State of Iowa ("the Commissioner")
to pay a  stockholder  dividend  if such a  stockholder  dividend  would  exceed
certain statutory  limitations.  The current statutory limitation is the greater
of:

o    10% of Principal Life's statutory  policyholder  surplus as of the previous
     year-end; or

o    the statutory net gain from operations from the previous calendar year.

Iowa law gives the Commissioner  discretion to disapprove requests for dividends
in excess of these limits.  Based on this limitation and 2003 statutory results,
Principal Life could pay approximately  $701.2 million in stockholder  dividends
in 2004 without exceeding the statutory limitation.

On May 19, 2004, Principal Life declared a dividend of up to $1.2 billion. Total
stockholder  dividends paid by Principal Life to its parent company through June
30,  2004  were  $494.0  million.

On March 1, 2004, Principal Life redeemed $200.0 million of its surplus notes at
a cost of $207.2 million.  Principal Life and the Commissioner  have agreed that
this $207.2  million  will be applied  against  Principal  Life's 2004  ordinary

                                       69

dividend  capacity.  As a  result,  Principal  Life  may not  pay an  additional
ordinary dividend in 2004.  Principal Life has requested and received permission
from the Commissioner to pay an extraordinary  dividend of $700.0 million,$600.0
million of which was accrued as of June 30,2004.

COMMON STOCK ISSUED AND TREASURY STOCK ACQUIRED

In the last two years, our board of directors has authorized  various repurchase
programs under which we are allowed to purchase shares of our outstanding common
stock.  Shares  repurchased  under these  programs are accounted for as treasury
stock, carried at cost and reflected as a reduction to stockholders' equity.

In May 2004,  our board of directors  authorized  a repurchase  program of up to
$700.0  million of our  outstanding  common stock.  This program began after the
completion of the May 2003 repurchase  program,  which authorized the repurchase
of up to $300.0 million of our outstanding common stock. We acquired 6.3 million
shares in the open market at an aggregate  cost of $222.0 million during the six
months  ended  June  30,  2004.  As of June 30,  2004,  $625.0  million  remains
outstanding under the May 2004 share repurchase authorization.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION OPERATIONS

Prior to 2004,  we have  received  approximately  U.S.  $890.0  million of total
proceeds from our sale of  substantially  all of BT Financial  Group to Westpac.
This amount  includes cash proceeds from Westpac,  expected tax benefits,  and a
gain from  unwinding  the hedged  asset  associated  with our  investment  in BT
Financial Group. An additional future contingent  receipt of approximately  U.S.
$105.0 million may be received in 2004, if Westpac  experiences  growth in their
retail assets under  management.  We do not anticipate  receiving the contingent
proceeds.

Our Brazilian,  Chilean and Mexican operations  produced positive cash flow from
operations  for the six months  ended June 30,  2004 and 2003.  These cash flows
have been  historically  maintained  at the local  country  level for  strategic
expansion purposes and local capital requirements.  In March 2004, our Brazilian
operations  returned $8.2 million and in May 2004 our Indian operations returned
$7.5  million in the form of dividends to our  subsidiary,  Principal  Financial
Services,  Inc. Our international  operations have required infusions of capital
of $4.2 million for the six months ended June 30,  2004,  and $76.8  million for
the six months ended June 30,  2003,  primarily  to fund  acquisitions  and to a
lesser  extent,  to meet the cash  outflow and capital  requirements  of certain
operations.  Our capital  funding of these  operations  is  consistent  with our
long-term  strategy to establish viable companies that can sustain future growth
from internally generated sources.

RATIO OF EARNINGS TO FIXED CHARGES

The ratio of  earnings  to fixed  charges is a measure  of our  ability to cover
fixed costs with current period  earnings.  A high ratio indicates that earnings
are sufficiently  covering committed  expenses.  The following table sets forth,
for the years indicated, our ratios of:

o    earnings to fixed charges before interest credited on investment  products;
     and
o    earnings to fixed charges.

We calculate the ratio of "earnings to fixed charges before interest credited on
investment  products" by dividing the sum of income from  continuing  operations
before  income  taxes (BT),  interest  expense  (I),  interest  factor of rental
expense (IF) less  undistributed  income from equity investees (E) by the sum of
interest  expense (I),  interest  factor of rental expense (IF) and dividends on
majority-owned  subsidiary  redeemable preferred  securities  (non-intercompany)
(D). The formula for this ratio is: (BT+I+IF-E)/(I+IF+D).

                                       70

We calculate  the ratio of  "earnings  to fixed  charges" by dividing the sum of
income from continuing  operations  before income taxes (BT),  interest  expense
(I),  interest  factor of rental  expense  (IF) less  undistributed  income from
equity  investees  (E) and the  addition  of  interest  credited  on  investment
products (IC) by interest  expense (I),  interest factor of rental expense (IF),
dividends  on  majority-owned   subsidiary   redeemable   preferred   securities
(non-intercompany)  (D) and interest  credited on investment  products (IC). The
formula for this calculation is: (BT+I+IF-E+IC)/(I+IF+D+IC).  "Interest credited
on  investment  products"  includes  interest  paid  on  guaranteed   investment
contracts,  funding  agreements  and  other  investment-only  pension  products.
Similar to debt,  these  products have a total fixed return and a fixed maturity
date.

As previously  explained,  the results of  operations  of Principal  Residential
Mortgage  and  Argentina  are  accounted  for  as  discontinued  operations  and
therefore,  their  results of  operations  have been removed from our results of
continuing  operations  for all  periods  presented.  The  reclassifications  to
discontinued  operations  have impacted our ratio of earnings to fixed  charges,
thus we have  presented our  reclassified  ratio of earnings to fixed charges in
the following table:

                                                         FOR THE SIX
                                                         MONTHS ENDED           FOR THE YEAR ENDED
                                                           JUNE 30,                DECEMBER 31,
                                                       ------------------   ----------------------------
                                                        2004      2003       2003       2002      2001
                                                       ------    --------   -------    ------    -------

Ratio of earnings to fixed charges before interest
  credited on investment products....................   7.7       6.8        8.3        4.5       3.2
Ratio of earnings to fixed charges...................   1.9       1.8        2.0        1.4       1.3

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of June 30, 2004,  we had  $1,069.7  million of  long-term  debt  outstanding
compared to $1,374.3  million at  December  31,  2003.  On March 10,  1994,  our
subsidiary,  Principal Life issued $300.0  million of surplus  notes,  including
$200.0  million  due March 1, 2024,  at a 7.875%  annual  interest  rate and the
remaining  $100.0  million  due March 1, 2044,  at an 8% annual  interest  rate.
Subject to the Commissioner  approval, the surplus notes due March 1, 2024, were
optionally redeemable at Principal Life's election on or after March 1, 2004, in
whole  or in part at a  redemption  price of  approximately  103.6%  of par.  We
elected,  with the  Commissioner's  approval,  to redeem on March 1,  2004,  the
entire outstanding $200.0 million principal amount of surplus notes due March 1,
2024,  at a  redemption  price of 103.6%.  Total cash paid for the surplus  note
redemption on March 1, 2004, was $207.2 million.

Long-term  debt  was  also  reduced  due to the  sale of  Principal  Residential
Mortgage and of a foreign investment and its associated long-term debt.

The following  table presents  payments due by period for long-term  contractual
obligations that have experienced significant changes since December 31, 2003.

                                       71

                                                                AS OF JUNE 30, 2004
                          -------------------------------------------------------------------------------------------------
                                            SIX
                                           MONTHS
                                           ENDED                                                                2009 AND
    CONTRACTUAL                           DECEMBER                                                               THERE-
    OBLIGATIONS             TOTAL         31, 2004          2005          2006         2007         2008          AFTER
- ---------------------     -----------    -------------    ---------     ---------    ---------    ---------    ------------
                                                                (IN MILLIONS)

Long-term debt.........    $1,069.7        $ 239.8         $ 39.7        $32.2        $ 109.0      $  78.7       $ 570.3
Long-term debt
   Interest............       319.8           44.7           64.8         61.9           60.7         51.7          36.0
Operating leases:......
     Continuing
         operations....       175.3           25.7           43.8         35.0           23.0         19.2          28.6
     Discontinued
         Operations....         4.8            1.0            1.7          1.0            0.6          0.4           0.1

There  have  been no other  significant  changes  to the  long-term  contractual
obligations since December 31, 2003.

SHORT-TERM DEBT

As of June 30,  2004,  we had $626.2  million  of  short-term  debt  outstanding
compared to $702.8  million at December  31, 2003.  As of June 30, 2004,  we had
credit facilities with various financial  institutions in an aggregate amount of
$2.1 billion. Our credit facilities include a $1.0 billion back-stop facility to
provide 100% support for our commercial  paper  program,  of which there were no
outstanding  balances as of June 30, 2004.  Our credit  facilities  also include
$700.0  million  to finance a  commercial  mortgage-backed  securities  ("CMBS")
pipeline,  $100.0  million to purchase  certain CMBS  securities  for investment
purposes and $300.0 million in various other credit facilities.  Short-term debt
was reduced due to the sale of Principal Residential Mortgage.

OFF-BALANCE SHEET ARRANGEMENTS

SYNTHETIC  FUEL  PRODUCTION  FACILITY.  In June 2004,  we acquired a significant
variable  interest in a coal-based  synthetic fuel production  facility where we
are not the primary beneficiary. Our minority ownership interest was acquired in
exchange for consideration of $37.0 million,  which is primarily  comprised of a
non-recourse note payable for $36.0 million, as well as a commitment to fund our
pro-rata  share  of the  operations.  We have  also  agreed  to make  additional
payments  to the seller  based on our  pro-rata  allocation  of the tax  credits
generated by the facility.  The synthetic fuel produced at the facility  through
2007  qualifies for tax credits  pursuant to Section 29 of the Internal  Revenue
Code  (currently  credits are not available for fuel produced  after 2007).  Our
obligation to support the entity's future operations is,  therefore,  limited to
the tax benefit we expect to receive.

DELINQUENT  RESIDENTIAL  MORTGAGE LOAN FUNDING.  Principal  Residential Mortgage
Funding,  LLC  ("PRMF"),  provides an  off-balance  sheet  source of funding for
qualifying  delinquent mortgage loans. We sell qualifying  delinquent FHA and VA
mortgage loans to PRMF which then  transfers the loans to Principal  Residential
Mortgage EBO Trust  ("Trust"),  an  unaffiliated  Delaware  business trust and a
qualifying  special  purpose  entity.  At June 30, 2004 and 2003, the Trust held
$589.8  million and $557.5  million in  mortgage  loans,  respectively,  and had
outstanding  participation  certificates  of $557.7 million and $528.0  million,
respectively.

We are  retained  as the  servicer  of  the  mortgage  loans  and  also  perform
accounting  and  various  administrative  functions  on behalf  of PRMF,  in our
capacity as the managing member of PRMF. As the servicer, we receive a servicing
fee  pursuant to the  pooling and  servicing  agreement.  We may also  receive a
successful  servicing  fee only after all other  conditions  in the monthly cash
flow  distribution  are met. We  received  $21.6  million  and $15.9  million in

                                       72

servicing and  successful  servicing  fees from PRMF during the six months ended
June 30, 2004 and 2003,  respectively.  At June 30, 2004 and 2003,  our residual
interest in such cash flows was $47.3 million and $44.7  million,  respectively,
and was  recorded in assets from  discontinued  operations  on the  consolidated
statements of financial position.

On May 11,  2004,  we  entered  into a  definitive  agreement  for  the  sale of
Principal Residential Mortgage to CitiMortgage, Inc, which was completed on July
1, 2004.

GUARANTEES AND INDEMNIFICATIONS

In the normal course of business,  we have provided  guarantees to third parties
primarily related to a former subsidiary,  joint ventures and industrial revenue
bonds.  These  agreements  generally  expire from 2004 through 2019. The maximum
exposure under these  agreements as of June 30, 2004, was  approximately  $170.0
million;  however,  we believe the  likelihood is remote that material  payments
will  be  required  and  therefore  have  not  accrued  for a  liability  on our
consolidated statements of financial position.  Should we be required to perform
under these  guarantees,  we generally  could recover a portion of the loss from
third parties  through  recourse  provisions  included in  agreements  with such
parties,  the sale of assets held as  collateral  that can be  liquidated in the
event that  performance  is  required  under the  guarantees  or other  recourse
generally  available to us, minimizing the impact to net income.  The fair value
of such guarantees issued after January 1, 2003, was insignificant.

In connection  with the 2002 sale of BT Financial  Group, we agreed to indemnify
the purchaser,  Westpac Banking Corporation ("Westpac"), for among other things,
the costs  associated  with potential late filings made by BT Financial Group in
New Zealand  prior to Westpac's  ownership,  up to a maximum of A$250.0  million
Australian dollars  (approximately U.S. $175.0 million as of June 30, 2004). New
Zealand   securities   regulations  allow  Australian  issuers  to  issue  their
securities  in New Zealand  provided that certain  documents  are  appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to  constitutions  and compliance plans be filed in
New Zealand.  In April 2003, the New Zealand  Securities  Commission opined that
such late filings would result in certain New Zealand  investors  having a right
to return of their  investment  plus  interest at 10% per annum from the date of
investment.  We view these  potential  late filings as a technical  matter as we
believe  investors  received  the  information  that is  required to be provided
directly to them. This technical  issue affected many in the industry.  On April
15,  2004,  the New Zealand  government  enacted  legislation  that will provide
issuers,  including BT Financial Group,  the opportunity for retroactive  relief
from such late filing  violations.  The law allows issuers to apply for judicial
validation of  non-compliant  issuances  resulting  from late  filings.  The law
further provides that judicial relief is mandatory and  unconditional  unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending.  Although we cannot predict the outcome of this matter or reasonably
estimate  losses,  we do not believe that it would result in a material  adverse
effect on our business or financial position.  It is possible,  however, that it
could have a material  adverse  effect on net income in a particular  quarter or
annual period.

We are also  subject  to various  other  indemnification  obligations  issued in
conjunction with certain transactions,  primarily the sale of BT Financial Group
and other  divestitures,  the sale of  residential  mortgage loans and servicing
rights in our mortgage banking business, acquisitions and financing transactions
whose terms  range in duration  and often are not  explicitly  defined.  Certain
portions of these  indemnifications  may be capped, while other portions are not
subject to such limitations.  Generally,  a maximum obligation is not explicitly
stated;  therefore,  the  overall  maximum  amount of the  obligation  under the
indemnifications cannot be reasonably estimated. While we are unable to estimate
with certainty the ultimate legal and financial  liability with respect to these
indemnifications,  we believe the  likelihood is remote that  material  payments
would   be   required   under   such   indemnifications   and   therefore   such
indemnifications  would not result in a material adverse effect on our business,
financial position or net income. The fair value of such indemnifications issued
after January 1, 2003, was insignificant.

                                       73

INVESTMENTS

We had total  consolidated  assets as of June 30, 2004,  of $111.4  billion,  of
which $52.7 billion were  invested  assets.  The rest of our total  consolidated
assets are comprised  primarily of separate  account  assets for which we do not
bear  investment  risk.  Because we generally do not bear any investment risk on
assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $50.7 billion were held by
our  U.S.   operations   and  the  remaining  $2.0  billion  were  held  by  our
International  Asset  Management and Accumulation  segment.  On May 11, 2004, we
entered  into a  definitive  agreement  for the  sale of  Principal  Residential
Mortgage to CitiMortgage, Inc, which was completed on July 1, 2004. The invested
assets and cash have been reclassified to assets from discontinued operations on
the consolidated statements of financial position.

U.S. INVESTMENT OPERATIONS

Our U.S. invested assets are managed by Principal Global Investors, a subsidiary
of Principal  Life. Our primary  investment  objective is to maximize  after-tax
returns  consistent  with  acceptable  risk  parameters.   We  seek  to  protect
policyholders' benefits by optimizing the risk/return relationship on an ongoing
basis, through asset/liability matching, reducing the credit risk, avoiding high
levels  of  investments  that  may  be  redeemed  by  the  issuer,   maintaining
sufficiently liquid investments and avoiding undue asset concentrations  through
diversification. We are exposed to three primary sources of investment risk:

o    credit risk,  relating to the  uncertainty  associated  with the  continued
     ability  of a given  obligor  to make  timely  payments  of  principal  and
     interest;

o    interest  rate  risk,  relating  to  the  market  price  and/or  cash  flow
     variability associated with changes in market yield curves; and

o    equity risk, relating to adverse fluctuations in a particular common stock.

Our  ability  to  manage  credit  risk  is  essential  to our  business  and our
profitability.  We devote considerable  resources to the credit analysis of each
new investment.  We manage credit risk through industry,  issuer and asset class
diversification.  Our Investment Committee, appointed by our board of directors,
is responsible for establishing all investment policies, reviewing and approving
all  investments.  As of June 30, 2004,  there are ten members on the Investment
Committee,  one of whom is a member of our  board of  directors.  The  remaining
members are senior management members representing various areas of our company.

We also seek to reduce call or prepayment  risk arising from changes in interest
rates in individual  investments.  We limit our exposure to investments that are
prepayable without penalty prior to maturity at the option of the issuer, and we
require  additional  yield on these  investments to compensate for the risk that
the issuer will exercise such option.  We assess option risk in all  investments
we make and, when we take that risk, we price for it accordingly.

Our Fixed Income  Securities  Committee,  consisting of fixed income  securities
senior  management  members,  approves the credit rating for the fixed  maturity
securities we purchase.  Teams of security analysts  organized by industry focus
either  on  the  public  or  private  markets  and  analyze  and  monitor  these
investments.   In  addition,   we  have  teams  who  specialize  in  residential
mortgage-backed  securities,  commercial  mortgage-backed  securities and public
below  investment  grade  securities.  We  establish a credit  reviewed  list of
approved  public issuers to provide an efficient way for our portfolio  managers
to purchase  liquid  bonds for which credit  review has already been  completed.
Issuers  remain on the list for one year  unless  removed by our  analysts.  Our
analysts  monitor issuers on the list on a continuous basis with a formal review
documented annually or more frequently if material events affect the issuer. The
analysis  includes both  fundamental  and  technical  factors.  The  fundamental
analysis encompasses both quantitative and qualitative analysis of the issuer.

The  qualitative   analysis  includes  an  assessment  of  both  accounting  and
management aggressiveness. In addition, technical indicators such as stock price
volatility and credit default swap levels are monitored.

                                       74

Our Fixed Income  Securities  Committee also reviews  private  transactions on a
continuous  basis  to  assess  the  quality  ratings  of  our  privately  placed
investments.  We regularly review our investments to determine whether we should
re-rate them, employing the following criteria:

o    material declines in the issuer's revenues or margins;

o    significant management or organizational changes;

o    significant uncertainty regarding the issuer's industry;

o    debt service coverage or cash flow ratios that fall below industry-specific
     thresholds;

o    violation of financial covenants; and

o    other business factors that relate to the issuer.

A dedicated risk management  team is responsible  for centralized  monitoring of
the commercial mortgage portfolio.  We apply a variety of strategies to minimize
credit risk in our commercial  mortgage loan  portfolio.  When  considering  the
origination  of  new  commercial   mortgage  loans,  we  review  the  cash  flow
fundamentals  of the  property,  make a physical  assessment  of the  underlying
security,  conduct a comprehensive  market analysis and compare against industry
lending  practices.  We use a proprietary  risk rating model to evaluate all new
and a majority of existing  loans within the  portfolio.  The  proprietary  risk
model is designed to stress  projected cash flows under  simulated  economic and
market downturns.  Our lending  guidelines are designed to encourage 75% or less
loan-to-value ratios and a debt service coverage ratio of at least 1.2 times. We
analyze  investments  outside of these  guidelines  based on cash flow  quality,
tenancy  and  other  factors.  The  weighted  average   loan-to-value  ratio  at
origination for brick and mortar  commercial  mortgages in our portfolio was 66%
and the debt service  coverage  ratio at loan inception was 2.2 times as of June
30, 2004.

We have limited  exposure to equity risk in our common stock  portfolio.  Equity
securities  accounted  for only 1% of our U.S.  invested  assets  as of June 30,
2004.

Our investment  decisions and objectives are a function of the underlying  risks
and  product  profiles of each  primary  business  operation.  In  addition,  we
diversify  our product  portfolio  offerings  to include  products  that contain
features  that will protect us against  fluctuations  in interest  rates.  Those
features include adjustable crediting rates, policy surrender charges and market
value adjustments on liquidations.  For further information on our management of
interest rate risk, see Item 3, "Quantitative and Qualitative  Disclosures about
Market Risk".

OVERALL COMPOSITION OF U.S. INVESTED ASSETS

U.S. invested assets as of June 30, 2004, were predominantly of high quality and
broadly  diversified  across  asset  class,   individual  credit,  industry  and
geographic  location.  Asset allocation is determined based on cash flow and the
risk/return  requirements of our products.  As shown in the following table, the
major  categories of U.S.  invested  assets are fixed  maturity  securities  and
commercial  mortgages.  The  remainder is invested in real  estate,  residential
mortgage loans,  equity securities and other assets.  In addition,  policy loans
are included in our  invested  assets.  The  following  discussion  analyzes the
composition  of U.S.  invested  assets,  but  excludes  invested  assets  of the
participating separate accounts.

                                       75

                              U.S. INVESTED ASSETS

                                                              AS OF JUNE 30,           AS OF DECEMBER 31,
                                                          ----------------------     ----------------------
                                                                   2004                      2003
                                                          ----------------------     ----------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                          ------------- --------     ------------  --------
                                                                           ($ IN MILLIONS)
                                                                                         
Fixed maturity securities
  Public..........................................        $  24,179.8        48%     $  24,785.0      48%
  Private.........................................           11,897.0        24         11,343.0      22
Equity securities.................................              649.4         1            657.4       1
Mortgage loans
  Commercial......................................            9,790.7        19          9,630.4      19
  Residential.....................................            1,207.2         2          1,288.1       3
Real estate held for sale ........................              142.8         -            513.0       1
Real estate held for investment...................              895.1         2          1,003.6       2
Policy loans......................................              805.2         2            804.1       2
Other investments ................................            1,093.9         2          1,198.8       2
                                                          ------------- --------     -----------   --------
   Total invested assets..........................           50,661.1       100%        51,223.4     100%
                                                                        ========                   ========
Cash and cash equivalents.........................            1,399.8                    1,121.1
                                                          -------------              -----------
   Total invested assets and cash ................        $  52,060.9                $  52,344.5
                                                          =============              ===========

U.S. INVESTMENT RESULTS

The following  tables  present the yield and  investment  income,  excluding net
realized/unrealized   gains  and  losses  for  our  U.S.  invested  assets.  The
annualized  yield on U.S.  invested assets and on cash and cash  equivalents was
5.6% for the three months  ended June 30,  2004,  compared to 6.1% for the three
months ended June 30, 2003. The annualized yield on U.S.  invested assets and on
cash and cash  equivalents  was 5.7% for the six  months  ended  June 30,  2004,
compared to 5.9% for the six months ended June 30, 2003. We calculate annualized
yields using a simple  average of asset  classes at the beginning and end of the
reporting period.

                                       76

                              U.S. INVESTED ASSETS
                     INVESTMENT INCOME YIELDS BY ASSET TYPE

                                                      FOR THE THREE MONTHS ENDED JUNE 30,
                                           ---------------------------------------------------------
                                                    2004                           2003
                                           --------------------------- -----------------------------
                                               YIELD        AMOUNT          YIELD          AMOUNT
                                           ------------- ------------- ---------------   -----------
                                                                ($ IN MILLIONS)

Fixed maturity securities.............       5.9%          $ 537.5           6.3%         $  556.2
Equity securities.....................       6.3              10.4           7.6               6.9
Mortgage loans - Commercial...........       6.9             167.8           7.1             172.0
Mortgage loans - Residential..........       3.5              10.7           4.7              10.6
Real Estate...........................       7.0              21.6           6.0              20.2
Policy loans..........................       6.3              12.6           6.8              13.7
Cash and cash equivalents.............       1.9               4.8           1.9               4.3
Other investments.....................       4.1              11.1           5.5              13.6
                                                         -------------                   -----------
  Total before investment expenses....       5.9             776.5           6.3             797.5

Investment expenses...................       0.3              36.1           0.2              27.4
                                                         -------------                   -----------
  Net investment income...............       5.6%          $ 740.4           6.1%         $  770.1
                                                         =============                   ===========

                              U.S. INVESTED ASSETS
                     INVESTMENT INCOME YIELDS BY ASSET TYPE

                                                      FOR THE SIX MONTHS ENDED JUNE 30,
                                           ---------------------------------------------------------
                                                    2004                           2003
                                           --------------------------- -----------------------------
                                               YIELD        AMOUNT          YIELD         AMOUNT
                                           ------------- ------------- ---------------   -----------
                                                                ($ IN MILLIONS)

Fixed maturity securities.............       5.9%         $1,073.3           6.1%         $1,101.3
Equity securities.....................       6.7              22.0           5.4              13.7
Mortgage loans - Commercial...........       7.0             337.5           7.1             346.4
Mortgage loans - Residential..........       3.8              23.6           3.7              20.8
Real Estate...........................       8.8              55.9           5.7              41.8
Policy loans..........................       6.3              25.4           6.9              27.7
Cash and cash equivalents.............       1.3               8.3           1.5               8.7
Other investments.....................       2.4              13.5           4.6              25.6
                                                      ----------------                   -----------
  Total before investment expenses....       6.0           1,559.5           6.1           1,586.0

Investment expenses...................       0.3              66.1           0.2              53.5
                                                      ----------------                   -----------
  Net investment income...............       5.7%         $1,493.4           5.9%         $1,532.5
                                                      ================                   ===========

FIXED MATURITY SECURITIES

Fixed maturity  securities  consist of short-term  investments,  publicly traded
debt  securities,  privately  placed debt  securities and  redeemable  preferred
stock, and represented 72% of total U.S. invested assets as of June 30, 2004 and
70% as of  December  31,  2003.  The fixed  maturity  securities  portfolio  was
comprised,  based on carrying  amount,  of 67% in publicly traded fixed maturity
securities and 33% in privately placed fixed maturity  securities as of June 30,
2004 and 69% in publicly  traded fixed maturity  securities and 31% in privately
placed  fixed  maturity  securities  as of December  31,  2003.  Included in the

                                       77

privately  placed category as of June 30, 2004, and December 31, 2003, were $5.1
billion and $4.3 billion,  respectively,  of  securities  eligible for resale to
qualified institutional buyers under Rule 144A under the Securities Act of 1933.
Fixed maturity  securities were diversified by category of issuer as of June 30,
2004, and December 31, 2003, as shown in the following table:

                              U.S. INVESTED ASSETS
                   FIXED MATURITY SECURITIES BY TYPE OF ISSUER

                                                              AS OF JUNE 30,          AS OF DECEMBER 31,
                                                          ----------------------   -----------------------
                                                                   2004                      2003
                                                          ----------------------   -----------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                          -------------  -------   -------------  --------
                                                                          ($ IN MILLIONS)
                                                                                        
U.S. Government and agencies...........................   $     302.1         1%     $    610.9       2%
States and political subdivisions......................         688.9         2           537.0       1
Non-U.S. governments...................................         456.5         1           422.4       1
Corporate - public.....................................      17,799.1        49        18,033.4      50
Corporate - private....................................       9,907.7        28         9,693.1      27
Residential pass-through securities....................       1,477.2         4         2,070.3       6
Commercial MBS.........................................       3,238.6         9         2,917.4       8
Collateral mortgage obligations........................         619.6         2           294.6       1
Asset-backed securities................................       1,587.1         4         1,548.9       4
                                                          -------------  -------   -------------  --------
  Total fixed maturities...............................   $  36,076.8       100%     $ 36,128.0     100%
                                                          =============  =======   =============  ========

We held $6,922.5 million of  mortgage-backed  and asset-backed  securities as of
June 30, 2004, and $6,831.2 million as of December 31, 2003.

We believe that it is desirable to hold residential  mortgage-backed  securities
due to their credit  quality and liquidity as well as portfolio  diversification
characteristics. Our portfolio is comprised of GNMA, FNMA and FHLMC pass-through
securities.

Commercial  mortgage-backed securities provide high levels of credit protection,
diversification,   reduced  event  risk  and  enhanced   liquidity.   Commercial
mortgage-backed  securities  are  predominantly  comprised  of rated  large pool
securitizations that are individually and collectively diverse by property type,
borrower and geographic dispersion.

We purchase  asset-backed  securities  ("ABS") to diversify  the overall  credit
risks of the fixed  maturity  securities  portfolio  and to  provide  attractive
returns. The principal risks in holding  asset-backed  securities are structural
and credit  risks.  Structural  risks  include  the  security's  priority in the
issuer's capital structure, the adequacy of and ability to realize proceeds from
the  collateral  and  the  potential  for  prepayments.   Credit  risks  involve
issuer/servicer risk where collateral values can become impaired in the event of
servicer credit deterioration.

Our ABS  portfolio  is  diversified  both by type of  asset  and by  issuer.  We
actively  monitor  holdings of  asset-backed  securities to ensure that the risk
profile of each security improves or remains consistent. If we are not receiving
an adequate yield for the risk, relative to other investment  opportunities,  we
will attempt to sell the  security.  Prepayments  in the ABS  portfolio  are, in
general,  insensitive  to changes in  interest  rates or are  insulated  to such
changes  by call  protection  features.  In the  event  that we are  subject  to
prepayment  risk, we monitor the factors that impact the level of prepayment and
prepayment  speed for those  asset-backed  securities.  To the extent we believe
that prepayment risk increases, we may attempt to sell the security and reinvest
in another  security that offers better yield relative to the risk. In addition,
we diversify the risks of asset-backed  securities by holding a diverse class of
securities, which limits our exposure to any one security.

The  international  exposure  in our  U.S.  fixed  maturity  securities  totaled
$5,289.4  million,  or 15% of total fixed  maturity  securities,  as of June 30,

                                       78

2004,  comprised of corporate and foreign government fixed maturity  securities.
Of the  $5,289.4  million  as of June 30,  2004,  investments  totaled  $1,538.6
million in the United  Kingdom,  $1,224.5  million in the  continental  European
Union,  $644.8 million in Asia, $439.1 million in South America,  $388.2 million
in Australia  and $10.6  million in Japan.  The  remaining  $1,043.6  million is
invested in 13 other countries. All international fixed maturity securities held
by our U.S.  operations  are  either  denominated  in U.S.  dollars or have been
swapped into U.S. dollar equivalents. Our international investments are analyzed
internally by country and industry credit investment  professionals.  We control
concentrations  using issuer and country level  exposure  benchmarks,  which are
based on the credit quality of the issuer and the country. Our investment policy
limits total international fixed maturity securities investments to 18% of total
statutory general account assets with a 4% limit in emerging  markets.  Exposure
to Canada is not included in our international  exposure due to its treatment by
the NAIC.  As of June 30,  2004,  our  investments  in Canada  totaled  $1,303.5
million.

The  following  tables  present  the  amortized  cost of our  top ten  exposures
including  approved  counterparty  exposure  limits  as of June  30,  2004,  and
December 31, 2003.

                                                          AS OF JUNE 30, 2004
                                                    ----------------------------
                                                             AMORTIZED
                                                               COST
                                                    ----------------------------
                                                           (IN MILLIONS)
HSBC Holdings PLC (1)...............................       $    511.7
American International Group Inc....................            392.6
Bank of America Corp................................            379.3
MBIA Inc. (2).......................................            375.2
General Electric Co.................................            294.0
Morgan Stanley......................................            274.7
Verizon Communications Inc..........................            261.0
Royal Bank of Scotland Group PLC....................            260.4
Citigroup Inc.......................................            257.5
Goldman Sachs Group Inc.............................            250.3
                                                    ----------------------------
  Total Top Ten Exposures...........................       $  3,256.7
                                                    ============================
- ----------------------
(1)  Includes a $238.3 million  investment  classified as an equity security for
     GAAP. The  investment  issuer  engages in managing  investment  grade third
     party bond  investments and HSBC paper. All non-HSBC paper has the ultimate
     benefit of price  support  protection  provided  by HSBC Bank,  PLC.  Since
     Principal Life Insurance  Company has the senior priority in the issuer, we
     believe  many third party bonds could be  liquidated  to satisfy our claim.
     While we calculate our exposure on a gross basis, the value we attribute to
     the underlying collateral is $125 million.

(2)  MBIA  Inc.  exposure  is  predominately   comprised  of  the  guarantee  of
     underlying  securities  that are  rated  "A-"  equivalent  or better by the
     rating  agencies  on  a  stand  alone  basis.   The  MBIA  wrap  guarantees
     performance in the event of default of the underlying  securities  bringing
     the combined rating to AAA.

                                       79

                                                        AS OF DECEMBER 31, 2003
                                                    ----------------------------
                                                              AMORTIZED
                                                                COST
                                                    ----------------------------
                                                           (IN MILLIONS)
HSBC Holdings PLIC (1)..............................       $    518.7
MBIA Inc. (2).......................................            380.6
American International Group Inc....................            363.1
Citigroup Inc.......................................            292.2
Bank of America Corp................................            265.6
Royal Bank of Scotland Group PLC....................            263.3
Verizon Communications Inc..........................            261.9
General Electric Co.................................            249.1
Morgan Stanley......................................            228.8
Bear Stearns Co.....................................            223.9
                                                    ----------------------------
  Total Top Ten Exposures...........................       $  3,047.2
                                                    ============================
- ----------------------
(1)  Includes a $238.3 million  investment  classified as an equity security for
     GAAP. The  investment  issuer  engages in managing  investment  grade third
     party bond  investments and HSBC paper. All non-HSBC paper has the ultimate
     benefit of price  support  protection  provided  by HSBC Bank,  PLC.  Since
     Principal  Life  Insurance  Company has senior  priority in the issuer,  we
     believe  many third party bonds could be  liquidated  to satisfy our claim.
     While we calculate our exposure on a gross basis, the value we attribute to
     the underlying collateral is $125 million.

(2)  MBIA  Inc.  exposure  is  predominately   comprised  of  the  guarantee  of
     underlying  securities  which are rated  "A-"  equivalent  or better by the
     rating  agencies  on  a  stand  alone  basis.   The  MBIA  wrap  guarantees
     performance in the event of a default of the underlying securities bringing
     the combined rating to AAA.

Our top ten  exposures  were  rated an "A"  equivalent  or better by the  rating
agencies  as of June 30, 2004 and  December  31,  2003.  As of June 30, 2004 and
December 31, 2003, no individual  non-government issuer represented more than 1%
of U.S. invested assets.

Valuation  techniques  for  the  fixed  maturity  securities  portfolio  vary by
security  type and the  availability  of market data.  Pricing  models and their
underlying  assumptions  impact the amount  and timing of  unrealized  gains and
losses recognized,  and the use of different pricing models or assumptions could
produce different  financial  results.  Interactive Data Corporation  ("IDC") or
direct  broker  quotes are our sources for external  prices for our public bonds
and those private placement securities that are actively traded in the secondary
market. In cases where quoted market prices are not available,  a matrix pricing
valuation approach is used.  Securities are grouped into pricing categories that
vary by asset class, sector,  rating, and average life. Each pricing category is
assigned a risk  spread  based on studies of  observable  public  market data or
market  clearing  data from the  investment  professionals  assigned to specific
security  classes.  The expected cash flows of the security are then  discounted
back at the current  Treasury curve plus the appropriate  risk spread.  Although
the  matrix  valuation  approach  provides  a fair  valuation  of  each  pricing
category,  the valuation of an individual  security within each pricing category
may actually be impacted by company specific factors. Certain market events that
could impact the valuation of securities include issuer credit ratings, business
climate,  management changes,  litigation,  and government actions among others.
The resulting prices are then reviewed by pricing analysts.  All loans placed on
the "watch  list" are valued  individually  by the  investment  analysts  or the
analysts  that focus on  troubled  securities  ("Workout  group").  Although  we
believe our estimates reasonably reflect the fair value of those securities, the
key assumptions  about risk premiums,  performance of underlying  collateral (if
any) and other factors involve significant assumptions and may not reflect those
of an active  market.  To the  extent  that bonds have  longer  maturity  dates,
management's  estimate of fair value may involve greater subjectivity since they
involve  judgment  about events well into the future.  Every  month,  there is a
comprehensive  review of all impaired  securities  and problem  loans by a group
consisting of the Chief  Investment  Officer,  the Portfolio  Managers,  and the
Workout  Group.  The  valuation  of impaired  bonds for which there is no quoted
price is typically  based on the present value of the future cash flows expected
to be received. If the company is likely to continue operations, the estimate of

                                       80

future cash flows is typically based on the expected operating cash flows of the
company  that are  available  to make  payments of the bonds.  If the company is
likely to  liquidate,  the estimate of future cash flows is based on an estimate
of the liquidation value of its net assets.

The Securities  Valuation Office ("SVO") of the NAIC evaluates most of the fixed
maturity  securities  that we and other U.S.  insurance  companies hold. The SVO
evaluates the bond investments of insurers for regulatory reporting purposes and
assigns  securities to one of six investment  categories.  The NAIC Designations
closely mirror the nationally recognized securities rating organizations' credit
ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered
investment grade by such rating  organizations.  Bonds are considered investment
grade when rated "Baa3" or higher by Moody's,  or "BBB-" or higher by Standard &
Poor's. NAIC Designations 3 through 6 are referred to as below investment grade.
Bonds  are  considered  below  investment  grade  when  rated  "Ba1" or lower by
Moody's,  or "BB+" or lower by  Standard  &  Poor's.  As of June 30,  2004,  the
percentage,  based on  estimated  fair  value,  of  total  publicly  traded  and
privately  placed fixed maturity  securities that were investment  grade with an
NAIC Designation 1 or 2 was 94%.

We also  monitor the credit drift of our  corporate  fixed  maturity  securities
portfolio.  Credit  drift is  defined as the ratio of the  percentage  of rating
downgrades, including defaults, divided by the percentage of rating upgrades. We
measure  credit  drift  once each  fiscal  year,  assessing  the  changes in our
internally developed credit ratings that have occurred during the year. Standard
& Poor's annual credit  ratings drift ratio  measures the credit rating  change,
within a specific year, of companies that have been assigned ratings by Standard
& Poor's.  The annual  internal  credit drift ratio on corporate  fixed maturity
securities  we held in our  general  account  was  2.18  times  compared  to the
Standard & Poor's drift ratio of 2.47 times, as of December 31, 2003.

The  following  table  presents  our total  fixed  maturity  securities  by NAIC
Designation and the equivalent ratings of the nationally  recognized  securities
rating  organizations as of June 30, 2004, and December 31, 2003, as well as the
percentage, based on estimated fair value, that each designation comprises:

                              U.S. INVESTED ASSETS
                   FIXED MATURITY SECURITIES BY CREDIT QUALITY

                                              AS OF JUNE 30, 2004                           AS OF DECEMBER 31, 2003
                                      ------------------------------------------  ---------------------------------------------
                                                                      % OF                                         % OF
                       RATING                                         TOTAL                                         TOTAL
NAIC                   AGENCY           AMORTIZED     CARRYING      CARRYING       AMORTIZED        CARRYING       CARRYING
RATING (1)           EQUIVALENT            COST        AMOUNT        AMOUNT          COST            AMOUNT         AMOUNT
- ---------------   ------------------  -------------  ------------  -------------  -------------  -------------  ---------------
                                                                         ($ IN MILLIONS)

1               Aaa/Aa/A.............  $  17,964.2   $  18,650.7      52%          $  17,299.2    $  18,415.1        51%
2               Baa..................     14,474.1      15,149.2      42              13,579.3       14,657.1        41
3               Ba...................      1,542.7       1,617.4       5               1,998.0        2,123.1         6
4               B....................        422.3         422.6       1                 517.4          514.5         1
5               Caa and lower........         86.7          83.3       -                 230.9          225.4         1
6               In or near default...        147.0         153.6       -                 220.7          192.8         -
                                      -------------  ------------  -------------  -------------  -------------  ---------------
                  Total fixed
                    maturities.......  $  34,637.0   $  36,076.8     100%          $  33,845.5    $  36,128.0       100%
                                      =============  ============  =============  =============  =============  ===============

- -----------------------
(1)  Includes 122 securities with an amortized cost of $1,159.4  million,  gross
     gains of $14.7 million, gross losses of $20.8 million and a carrying amount
     of $1,153.3  million as of June 30, 2004,  that are still  pending a review
     and  assignment  of a rating by the SVO.  Due to the  timing of when  fixed
     maturity  securities  are  purchased,  legal  documents are filed,  and the
     review by the SVO,  there will always be securities  in our portfolio  that
     are unrated over a reporting  period.  In these  instances,  an  equivalent
     rating is assigned based on our fixed income analyst's assessment.

                                       81

We believe  that our  long-term  fixed  maturity  securities  portfolio  is well
diversified  among  industry  types and between  publicly  traded and  privately
placed securities. Each year we direct the majority of our net cash inflows into
investment grade fixed maturity  securities.  Our current policy is to limit the
percentage of cash flow invested in below  investment grade assets to 7% of cash
flow. As of June 30, 2004, we had invested 1.3% of new cash flow for the year in
below investment grade assets. While the general account investment returns have
improved due to the below  investment  grade asset  class,  we manage its growth
strategically  by  limiting  it to 10% of the total  fixed  maturity  securities
portfolios.

We invest in privately  placed fixed maturity  securities to enhance the overall
value of the portfolio,  increase  diversification and obtain higher yields than
are possible  with  comparable  quality  public  market  securities.  Generally,
private   placements   provide   broader   access  to  management   information,
strengthened  negotiated  protective  covenants,  call protection  features and,
where applicable, a higher level of collateral. They are, however, generally not
freely tradable because of restrictions  imposed by federal and state securities
laws and illiquid trading markets.

The following  table shows the carrying  amount of our corporate  fixed maturity
securities by Salomon industry category,  as well as the percentage of the total
corporate portfolio that each Salomon industry category comprises as of June 30,
2004, and December 31, 2003.

                              U.S. INVESTED ASSETS
             CORPORATE FIXED MATURITY SECURITIES BY SALOMON INDUSTRY

                                                             AS OF JUNE 30,            AS OF DECEMBER 31,
                                                                 2004                         2003
                                                     ---------------------------  --------------------------
                                                        CARRYING         % OF        CARRYING       % OF
                                                         AMOUNT          TOTAL        AMOUNT        TOTAL
                                                     --------------  -----------  -------------  -----------
                                                                            ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance - Bank..........................               $  3,116.3          11%     $  3,041.9          11%
Finance - Insurance.....................                  2,126.3           8         1,718.1           6
Finance - Other.........................                  3,385.6          12         3,337.5          12
Industrial - Consumer...................                    863.8           3           879.4           3
Industrial - Energy.....................                  2,624.1           9         2,779.5          10
Industrial - Manufacturing..............                  5,411.3          20         5,729.6          21
Industrial - Other......................                    145.6           1           158.7           1
Industrial - Service....................                  4,382.9          16         4,503.0          16
Industrial - Transport..................                    945.7           3           967.8           4
Utility - Electric......................                  2,923.3          11         2,751.2          10
Utility - Other.........................                     58.8           -            67.4           -
Utility - Telecom.......................                  1,723.1           6         1,792.4           6
                                                     --------------  -----------  -------------  -----------
  Total.................................               $ 27,706.8         100%     $ 27,726.5         100%
                                                     ==============  ===========  =============  ===========

We  monitor  any  decline in the credit  quality  of fixed  maturity  securities
through the designation of "problem securities",  "potential problem securities"
and  "restructured  securities".  We  define  problem  securities  in our  fixed
maturity  portfolio as securities:  (i) as to which  principal  and/or  interest
payments are in default or where default is perceived to be imminent in the near
term,  or (ii) issued by a company that went into  bankruptcy  subsequent to the
acquisition of such securities.  We define potential  problem  securities in our
fixed maturity portfolio as securities  included on an internal "watch list" for
which management has concerns as to the ability of the issuer to comply with the
present  debt  payment  terms and which may  result in the  security  becoming a
problem or being  restructured.  The  decision  whether to classify a performing
fixed maturity security as a potential problem involves  significant  subjective
judgments by our  management as to the likely  future  industry  conditions  and
developments  with respect to the issuer. We define  restructured  securities in
our fixed maturity  portfolio as securities  where a concession has been granted
to the borrower related to the borrower's financial  difficulties that would not
have otherwise been considered.  We determine that restructures  should occur in

                                       82

those  instances  where greater  economic  value will be realized  under the new
terms than through  liquidation or other disposition and may involve a change in
contractual cash flows. If at the time of restructure,  the present value of the
new  future  cash  flows  is less  than  the  current  cost of the  asset  being
restructured,  a realized  capital loss is recorded in net income and a new cost
basis is established.

We have a process in place to identify securities that could potentially have an
impairment that is other than temporary. This process involves monitoring market
events that could impact issuers' credit ratings,  business climate,  management
changes,  litigation and government  actions,  and other similar  factors.  This
process also involves  monitoring late payments,  pricing levels,  downgrades by
rating agencies, key financial ratios,  financial statements,  revenue forecasts
and cash flow projections as indicators of credit issues

Every month, a group of individuals  including the Chief Investment Officer, our
Portfolio  Managers,  members of our Workout  Group,  and  representatives  from
Investment  Accounting  review all  securities  where  market value is less than
seventy-five  percent of amortized cost to determine whether impairments need to
be taken.  The analysis focuses on each issuer's ability to service its debts in
a timely  fashion and the length of time the  security  has been  trading  below
cost.  Formal  documentation  of the  analysis  and the  company's  decision  is
prepared and approved by management.

We  consider  relevant  facts  and  circumstances  in  evaluating   whether  the
impairment  of  a  security  is  other  than   temporary.   Relevant  facts  and
circumstances considered include: (1) the length of time the fair value has been
below  cost;  (2) the  financial  position  and access to capital of the issuer,
including  the current and future  impact of any  specific  events;  and (3) our
ability  and intent to hold the  security  to  maturity  or until it recovers in
value.  To the extent we  determine  that a security  is deemed to be other than
temporarily impaired, the difference between amortized cost and fair value would
be charged to earnings.

There  are a number  of  significant  risks and  uncertainties  inherent  in the
process of monitoring impairments and determining if an impairment is other than
temporary.  These  risks  and  uncertainties  include:  (1) the  risk  that  our
assessment  of an issuer's  ability to meet all of its  contractual  obligations
will change based on changes in the credit  characteristics  of that issuer, (2)
the risk that the economic  outlook will be worse than  expected or have more of
an impact  on the  issuer  than  anticipated,  (3) the risk that our  investment
professionals are making decisions based on fraudulent or misstated  information
in the  financial  statements  provided  by  issuers  and (4) the risk  that new
information  obtained by us or changes in other facts and circumstances  lead us
to change our intent to hold the  security  to  maturity or until it recovers in
value.  Any of these situations could result in a charge to earnings in a future
period.

The  realized  losses  relating  to other than  temporary  impairments  of fixed
maturity  securities  were $36.6 million for the six months ended June 30, 2004.
Following  is a summary  of our  material  impairments  taken for the six months
ended June 30, 2004:

o    $16.7  million on public and private  fixed  maturity  securities of a U.S.
     airline.  The company has  experienced  an  increasing  degree of financial
     duress  due to a high cost  structure,  increasingly  competitive  industry
     landscape  and high fuel prices.  The extent of this  financial  duress has
     pressured the company's liquidity position and increased the probability of
     a Chapter 11 filing in the future.  These  impairments  are based on market
     prices for the public  bonds and  estimated  market  prices for the private
     bonds.

o    $8.8  million  on  private   fixed   maturity   securities   of  a  Chilean
     conglomerate.  The company is in payment  default,  with lenders  currently
     exercising legal remedies for enforcement in Chile.  These  impairments are
     based on estimated recovery values for the private securities.

o    $7.5  million on private  fixed  maturity  securities  of a U.S.  prime and
     sub-prime  auto lending  company.  The company  filed Chapter 11 bankruptcy
     protection  during late 2002 and emerged from bankruptcy  during  September
     2003. As operating data on the restructured  entity has become available it
     was determined that a further  impairment was warranted.  These impairments
     are based on estimated recovery values for the private securities.

                                       83

o    $7.1 million on private fixed  maturity  securities  relating to an Italian
     dairy and bakery  goods  producer.  The  company  filed the  equivalent  of
     Chapter 11  bankruptcy  protection  after  disclosing  massive fraud during
     December 2003. After additional information has become available as part of
     the  bankruptcy  process it was  determined  that a further  impairment was
     warranted. These impairments are based on estimated recovery values for the
     private securities.

For the six months ended June 30, 2004, we realized $19.2 million of losses upon
disposal of bonds excluding hedging adjustments.  Included in this $19.2 million
is $10.4  million  related  to sales  of  thirteen  credit  impaired  names.  We
generally  intend to hold  securities in unrealized  loss  positions  until they
mature or recover. However, we do sell bonds under certain circumstances such as
when  we  have  evidence  of  a  significant   deterioration   in  the  issuer's
creditworthiness,  when  a  change  in  regulatory  requirements  modifies  what
constitutes a permissable investment or the maximum level of investments held or
when there is an increase in capital requirements or a change in risk weights of
debt securities. Sales generate both gains and losses.

The following tables present our fixed maturity securities available-for-sale by
industry  category and the associated  gross  unrealized  gains and losses as of
June 30, 2004, and December 31, 2003.

                              U.S. INVESTED ASSETS
        FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY INDUSTRY CATEGORY

                                                                     AS OF JUNE 30, 2004
                                              --------------------------------------------------------------
                                                                 GROSS           GROSS
                                                AMORTIZED      UNREALIZED      UNREALIZED       CARRYING
                                                  COST           GAINS          LOSSES (1)        AMOUNT
                                              --------------  ------------  ---------------  ---------------
                                                                         (IN MILLIONS)

Finance - Bank..........................       $   3,014.1    $   125.3      $    23.1        $   3,116.3
Finance - Insurance.....................           2,090.6         66.5           30.8            2,126.3
Finance - Other.........................           3,284.5        132.9           31.8            3,385.6
Industrial - Consumer...................             826.4         45.0            7.6              863.8
Industrial - Energy.....................           2,479.9        167.0           22.8            2,624.1
Industrial - Manufacturing..............           5,180.0        259.9           28.6            5,411.3
Industrial - Other......................             139.4          7.4            1.2              145.6
Industrial - Service....................           4,169.1        238.3           24.5            4,382.9
Industrial - Transport..................             902.1         59.9           16.3              945.7
Utility - Electric......................           2,811.0        135.7           23.4            2,923.3
Utility - Other.........................              53.7          5.1            -                 58.8
Utility - Telecom.......................           1,619.7        113.4           10.0            1,723.1
                                              --------------  ------------  ---------------  ---------------
  Total corporate securities............          26,570.5      1,356.4          220.1           27,706.8
U.S. Government and agencies............             297.8          7.3            3.0              302.1
States and political subdivisions.......             666.1         28.5            5.7              688.9
Non-U.S. governments....................             411.3         46.4            1.2              456.5
Mortgage-backed and other
  asset-backed securities...............           6,597.4        280.6           55.8            6,822.2
                                              --------------  ------------  ---------------   --------------
  Total fixed maturity securities,
    available-for-sale..................       $  34,543.1    $ 1,719.2      $   285.8        $  35,976.5
                                              ==============  ============  ===============   ==============

- -----------------------
(1)  Included in the $285.8  million in unrealized  losses is $16.5 million that
     relates to fixed  maturity  securities  that are part of fair value hedging
     relationships  and which have been  recognized  in net income  versus other
     comprehensive income.

                                       84

                              U.S. INVESTED ASSETS
        FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY INDUSTRY CATEGORY

                                                                  AS OF DECEMBER 31, 2003
                                              --------------------------------------------------------------
                                                                 GROSS          GROSS
                                                AMORTIZED      UNREALIZED     UNREALIZED         CARRYING
                                                  COST           GAINS         LOSSES(1)          AMOUNT
                                              --------------  ------------  ---------------   --------------
                                                                    (IN MILLIONS)

Finance - Bank..........................       $   2,870.2    $   183.3      $    11.6        $   3,041.9
Finance - Insurance.....................           1,635.1         95.3           12.3            1,718.1
Finance - Other.........................           3,142.7        205.2           10.4            3,337.5
Industrial - Consumer...................             848.5         56.8           25.9              879.4
Industrial - Energy.....................           2,546.0        245.2           11.7            2,779.5
Industrial - Manufacturing..............           5,363.5        382.0           15.9            5,729.6
Industrial - Other......................             147.9         11.1            0.3              158.7
Industrial - Service....................           4,153.6        355.2            5.8            4,503.0
Industrial - Transport..................             914.2         74.6           21.0              967.8
Utility - Electric......................           2,581.4        179.1            9.3            2,751.2
Utility - Other.........................              61.4          6.8            0.8               67.4
Utility - Telecom.......................           1,623.2        170.5            1.3            1,792.4
                                              --------------  ------------  ---------------   --------------
  Total corporate securities............          25,887.7      1,965.1          126.3           27,726.5
U.S. Government and agencies............             599.0         12.9            1.0              610.9
States and political subdivisions.......             498.7         40.5            2.2              537.0
Non-U.S. governments....................             358.2         64.2            -                422.4
Mortgage-backed and other
  asset-backed securities...............           6,406.9        343.5           22.1            6,728.3
                                              --------------  ------------  ---------------   --------------
  Total fixed maturity securities,
    available-for-sale..................       $  33,750.5    $ 2,426.2      $   151.6        $  36,025.1
                                               =============  ============  ===============   ==============

- -----------------------
(1)  Included in the $151.6  million in unrealized  losses is $24.8 million that
     relates to fixed  maturity  securities  that are part of fair value hedging
     relationships  and which have been  recognized  in net income  versus other
     comprehensive income.

The total unrealized losses on our fixed maturity securities  available-for-sale
were $285.8  million and $151.6  million as of June 30,  2004 and  December  31,
2003, respectively.  Of the $285.8 million in gross unrealized losses as of June
30, 2004, there were $0.1 million in losses  attributed to securities  scheduled
to  mature  in one year or less,  $31.1  million  is  attributed  to  securities
scheduled to mature  between one to five years,  $74.1  million is attributed to
securities  scheduled  to mature  between five to ten years,  $124.7  million is
attributed to securities  scheduled to mature after ten years, and $55.8 million
is  related  to  mortgage-backed  and  other  asset-back  securities.  The gross
unrealized  losses  as  of  June  30,  2004  were   concentrated   primarily  in
Mortgage-backed  and other  asset-backed  security,  Finance - Other,  Finance -
Insurance, and Industrial-Manufacturing  sectors. The gross unrealized losses as
of December 31, 2003 were  concentrated  primarily  in the  Industrial-Consumer,
Mortgage-backed and other asset-backed security, Industrial-Transportation,  and
Industrial-Manufacturing sectors.

The following tables present our fixed maturity securities available-for-sale by
investment  grade and below investment grade and the associated gross unrealized
gains and losses as of June 30, 2004, and December 31, 2003.

                                       85

                              U.S. INVESTED ASSETS
             FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY QUALITY

                                                                 AS OF JUNE 30, 2004
                                              ------------------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED      CARRYING
                                                  COST          GAINS         LOSSES          AMOUNT
                                              -------------  ------------  --------------  ---------------
                                                                       (IN MILLIONS)
                                                                                
Investment Grade:
  Public...................................    $  22,001.3    $ 1,098.0      $   157.3      $  22,942.0
  Private..................................       10,343.1        513.9           99.4         10,757.6
Below Investment Grade:
  Public...................................        1,194.2         51.3            7.7          1,237.8
  Private..................................        1,004.5         56.0           21.4          1,039.1
                                              -------------  ------------  --------------  ---------------
Total fixed maturity securities,
  available-for-sale.......................    $  34,543.1    $ 1,719.2      $   285.8      $  35,976.5
                                              =============  ============  ==============  ===============

                              U.S. INVESTED ASSETS
             FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY QUALITY

                                                                   AS OF DECEMBER 31, 2003
                                              ------------------------------------------------------------
                                                                 GROSS          GROSS
                                                AMORTIZED      UNREALIZED     UNREALIZED       CARRYING
                                                  COST          GAINS          LOSSES           AMOUNT
                                              -------------  ------------  --------------  ---------------
                                                                        (IN MILLIONS)
                                                                                
Investment Grade:
  Public...................................    $  21,733.3    $ 1,590.6      $    36.1      $  23,287.8
  Private..................................        9,050.2        671.7           40.3          9,681.6
Below Investment Grade:
  Public...................................        1,407.6        102.1           12.4          1,497.3
  Private..................................        1,559.4         61.8           62.8          1,558.4
                                               ------------  ------------  --------------  ---------------
Total fixed maturity securities,
  available-for-sale.......................    $  33,750.5    $ 2,426.2      $   151.6      $  36,025.1
                                               ============  ============  ==============  ===============

                                       86

                              U.S. INVESTED ASSETS
         UNREALIZED LOSSES ON INVESTMENT GRADE FIXED MATURITY SECURITIES
                      AVAILABLE-FOR-SALE BY AGING CATEGORY

                                                                        AS OF JUNE 30, 2004
                                        ------------------------------------------------------------------------------------
                                                  PUBLIC                      PRIVATE                       TOTAL
                                        ----------------------------  --------------------------  --------------------------
                                                         GROSS                         GROSS                      GROSS
                                          CARRYING     UNREALIZED      CARRYING      UNREALIZED    CARRYING     UNREALIZED
                                           AMOUNT        LOSSES         AMOUNT         LOSSES       AMOUNT        LOSSES
                                        ------------- --------------  ------------ -------------  ------------ -------------
                                                                           (IN MILLIONS)

Three months or less..................   $   4,887.2   $     115.6    $   2,750.4    $   67.8     $   7,637.6   $  183.4
Greater than three to six months......         265.3          11.9          166.6         6.4           431.9       18.3
Greater than six to nine months.......          52.8           2.4           84.8         5.0           137.6        7.4
Greater than nine to twelve months....          65.4           3.4          146.6        12.9           212.0       16.3
Greater than twelve to twenty-four
  months..............................         156.0          14.0          115.2         7.1           271.2       21.1
Greater than twenty-four to thirty-
  six months..........................          43.4           8.5             -          -              43.4        8.5
Greater than thirty-six months........          25.6           1.5            6.6         0.2            32.2        1.7
                                        ------------- --------------  ------------ -------------  ------------ -------------
  Total fixed maturities, available-
    for-sale..........................   $   5,495.7   $     157.3    $   3,270.2    $   99.4     $   8,765.9   $  256.7
                                        ============= ==============  ============ =============  ============ =============

                              U.S. INVESTED ASSETS
         UNREALIZED LOSSES ON INVESTMENT GRADE FIXED MATURITY SECURITIES
                      AVAILABLE-FOR-SALE BY AGING CATEGORY

                                                                      AS OF DECEMBER 31, 2003
                                        ------------------------------------------------------------------------------------
                                                  PUBLIC                      PRIVATE                       TOTAL
                                        ----------------------------  --------------------------  --------------------------
                                                         GROSS                         GROSS                      GROSS
                                          CARRYING     UNREALIZED      CARRYING      UNREALIZED    CARRYING     UNREALIZED
                                           AMOUNT        LOSSES         AMOUNT         LOSSES       AMOUNT        LOSSES
                                        ------------- --------------  ------------ -------------  ------------ -------------
                                                                              (IN MILLIONS)

Three months or less..................   $   1,157.2   $       7.2    $     574.6    $   14.2     $   1,731.8   $   21.4
Greater than three to six months......         794.3          10.6          464.4        14.9         1,258.7       25.5
Greater than six to nine months.......         417.7          13.4          209.2         8.5           626.9       21.9
Greater than nine to twelve months....          50.8           1.5            5.1         0.3            55.9        1.8
Greater than twelve to twenty-four
  months..............................           -             -             19.1         2.1            19.1        2.1
Greater than twenty-four to thirty-
  six months..........................          21.0           2.4             -          -              21.0        2.4
Greater than thirty-six months........          25.1           1.0           27.3         0.3            52.4        1.3
                                        ------------- --------------  ------------ -------------  ------------ -------------
  Total fixed maturities, available-
    for-sale..........................   $   2,466.1   $      36.1    $   1,299.7    $   40.3     $   3,765.8   $   76.4
                                        ============= ==============  ============ =============  ============ =============

                                       87

                              U.S. INVESTED ASSETS
      UNREALIZED LOSSES ON BELOW INVESTMENT GRADE FIXED MATURITY SECURITIES
                      AVAILABLE-FOR-SALE BY AGING CATEGORY

                                                                        AS OF JUNE 30, 2004
                                        ------------------------------------------------------------------------------------
                                                  PUBLIC                      PRIVATE                       TOTAL
                                        ----------------------------  --------------------------  --------------------------
                                                          GROSS                         GROSS                      GROSS
                                          CARRYING      UNREALIZED      CARRYING      UNREALIZED    CARRYING     UNREALIZED
                                           AMOUNT         LOSSES         AMOUNT         LOSSES       AMOUNT        LOSSES
                                        ------------- --------------  ------------ -------------  ------------ -------------
                                                                              (IN MILLIONS)

Three months or less..................   $     110.4   $       2.7    $      84.3    $    3.2     $     194.7   $    5.9
Greater than three to six months......          49.4           3.6            0.4         0.1            49.8        3.7
Greater than six to nine months.......           -             -             16.2         0.9            16.2        0.9
Greater than nine to twelve months....           4.8           0.5           10.5         1.1            15.3        1.6
Greater than twelve to twenty-four
  months..............................          15.4           0.4           14.2         1.8            29.6        2.2
Greater than twenty-four to thirty-
  six months..........................           5.2           0.5           26.1         3.0            31.3        3.5
Greater than thirty-six months........           -             -             57.8        11.3            57.8       11.3
                                        ------------- --------------  ------------ -------------  ------------ -------------
  Total fixed maturities, available-
    for-sale..........................   $     185.2   $       7.7    $     209.5    $   21.4     $     394.7   $   29.1
                                        ============= ==============  ============ =============  ============ =============

                              U.S. INVESTED ASSETS
      UNREALIZED LOSSES ON BELOW INVESTMENT GRADE FIXED MATURITY SECURITIES
                      AVAILABLE-FOR-SALE BY AGING CATEGORY

                                                                      AS OF DECEMBER 31, 2003
                                        ------------------------------------------------------------------------------------
                                                  PUBLIC                      PRIVATE                       TOTAL
                                        ----------------------------  --------------------------  --------------------------
                                                           GROSS                         GROSS                      GROSS
                                          CARRYING      UNREALIZED      CARRYING      UNREALIZED    CARRYING     UNREALIZED
                                           AMOUNT         LOSSES         AMOUNT         LOSSES       AMOUNT        LOSSES
                                        ------------- --------------  ------------ -------------  ------------ -------------
                                                                                (IN MILLIONS)

Three months or less..................   $      41.1   $       0.6    $      67.9    $   28.8     $     109.0   $   29.4
Greater than three to six months......           5.3           0.8           40.4         6.0            45.7        6.8
Greater than six to nine months.......           3.5           0.1           24.1         0.1            27.6        0.2
Greater than nine to twelve months....           -             -              0.8         0.1             0.8        0.1
Greater than twelve to twenty-four
  months..............................          26.9           0.8           68.6         9.1            95.5        9.9
Greater than twenty-four to thirty-
  six months..........................          64.2           8.8           62.6         8.2           126.8       17.0
Greater than thirty-six months........           9.1           1.3           78.6        10.5            87.7       11.8
                                        ------------- --------------  ------------ -------------  ------------ -------------
  Total fixed maturities, available-
    for-sale...................... ....   $    150.1   $      12.4    $     343.0    $   62.8     $     493.1   $   75.2
                                        ============= ==============  ============ =============  ============ =============

Of total gross  unrealized  losses as of June 30, 2004 and  December  31,  2003,
$256.7  million and $76.4 million were related to investment  grade  securities,
respectively.   Gross  unrealized  losses  related  to  below  investment  grade
securities were $29.1 million and $75.2 million as of June 30, 2004 and December
31, 2003, respectively.

The following tables present the carrying amount and gross unrealized  losses on
fixed maturity securities available-for-sale, where the estimated fair value has
declined and remained  below  amortized cost by 20% or more as of June 30, 2004,
and December 31, 2003.

                                       88

                              U.S. INVESTED ASSETS
      UNREALIZED LOSSES ON FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY
                                 AGING CATEGORY

                                                                             AS OF JUNE 30, 2004
                                       ---------------------------------------------------------------------------------------------
                                          PROBLEM, POTENTIAL
                                            PROBLEM, AND                    ALL OTHER FIXED MATURITY
                                            RESTRUCTURED                         SECURITIES                    TOTAL
                                       --------------------------------   ------------------------------ ---------------------------
                                                             GROSS                            GROSS                        GROSS
                                           CARRYING        UNREALIZED        CARRYING       UNREALIZED       CARRYING    UNREALIZED
                                            AMOUNT           LOSSES           AMOUNT         LOSSES           AMOUNT      LOSSES
                                      ----------------  ---------------   --------------- -------------- -------------- ------------
                                                                                      (IN MILLIONS)

Three months or less..................   $     4.0        $    1.1          $  0.6          $  0.1          $   4.6       $  1.2
Greater than three to six months......         -               -              31.6             8.4             31.6          8.4
Greater than six to nine months.......         -               -               -               -                -            -
Greater than nine to twelve months....         -               -               -               -                -            -
Greater than twelve months............        10.1             2.9             -               -               10.1          2.9
                                      ----------------  ---------------   --------------- -------------- --------------  -----------
  Total fixed maturity securities,
    available-for-sale................   $    14.1       $     4.0          $ 32.2          $  8.5          $  46.3       $ 12.5
                                      ================  ===============   =============== ============== ============== ============

                              U.S. INVESTED ASSETS
      UNREALIZED LOSSES ON FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY
                                 AGING CATEGORY

                                                                             AS OF DECEMBER 31, 2003
                                       ---------------------------------------------------------------------------------------------
                                          PROBLEM, POTENTIAL
                                            PROBLEM, AND                    ALL OTHER FIXED MATURITY
                                            RESTRUCTURED                         SECURITIES                    TOTAL
                                       ---------------------------------   ------------------------------ --------------------------
                                                             GROSS                             GROSS                        GROSS
                                           CARRYING        UNREALIZED        CARRYING        UNREALIZED       CARRYING    UNREALIZED
                                            AMOUNT           LOSSES           AMOUNT          LOSSES           AMOUNT       LOSSES
                                       ----------------  ---------------   --------------- -------------- -------------- -----------
                                                                                                        
Three months or less..................   $      30.9       $  34.6             $   -       $       -         $   30.9     $   34.6
Greater than three to six months......           -             -                   -               -              -            -
Greater than six to nine months.......           -             -                   -               -              -            -
Greater than nine to twelve months....           0.5           0.1                 -               -              0.5          0.1
Greater than twelve months............           3.6           1.5                 7.7             2.2           11.3          3.7
                                       ----------------  ---------------   --------------- -------------  -------------- -----------
  Total fixed maturity securities,
    available-for-sale................   $      35.0       $  36.2             $   7.7     $       2.2       $   42.7     $   38.4
                                       ================  ===============   =============== =============  ============== ===========

Gross  unrealized  losses on fixed maturity  securities where the estimated fair
value has been 20% or more below  amortized  cost were $12.5  million as of June
30, 2004 and $38.4 million as of December 31, 2003. The gross unrealized  losses
attributed to those securities  considered to be "problem",  "potential problem"
or  "restructured"  were $4.0 million and $36.2 million as of June 30, 2004, and
December 31, 2003, respectively.

The following  table  presents the total  carrying  amount of our fixed maturity
portfolio,  as well as its problem,  potential  problem and  restructured  fixed
maturities for the periods indicated:

                                       89

                              U.S. INVESTED ASSETS
 PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES AT CARRYING AMOUNT

                                                                         AS OF JUNE 30,         AS OF DECEMBER 31,
                                                                        --------------------  ---------------------
                                                                               2004                   2003
                                                                        --------------------  ---------------------
                                                                                        ($ IN MILLIONS)

Total fixed maturity securities (public and private)............            $   36,076.8            $  36,128.0
                                                                        ====================  =====================
Problem fixed maturity securities...............................            $      106.5            $     152.5
Potential problem fixed maturity securities.....................                   130.1                  230.1
Restructured fixed maturity securities..........................                    19.9                   39.9
                                                                        --------------------  ---------------------
  Total problem, potential problem and restructured fixed
    maturity securities.........................................            $      256.5            $     422.5
                                                                        ====================  =====================
  Total problem, potential problem and restructured fixed
    maturity securities as a percent of total fixed maturity
    securities..................................................                     1%                     1%

MORTGAGE LOANS

Mortgage loans  comprised 21% and 22% of total U.S.  invested  assets as of June
30,  2004,  and  December  31, 2003,  respectively.  Mortgage  loans  consist of
commercial and residential loans.  Commercial  mortgage loans comprised $9,790.7
million as of June 30, 2004,  and $9,630.4  million as of December 31, 2003,  or
89%  and 88% of  total  mortgage  loan  investments,  respectively.  Residential
mortgages comprised $1,207.2 million as of June 30, 2004 and $1,288.1 million as
of  December  31,  2003,  or 11% and 12% of  total  mortgage  loan  investments,
respectively.  Principal Bank holds the majority of residential  loans to comply
with federal thrift charter requirements.

COMMERCIAL  MORTGAGE LOANS.  Commercial  mortgages play an important role in our
investment strategy by:

o    providing  strong  risk  adjusted  relative  value in  comparison  to other
     investment alternatives;

o    enhancing total returns; and

o    providing strategic portfolio diversification.

As a result,  we have focused on constructing a solid, high quality portfolio of
mortgages.  Our portfolio is generally  comprised of mortgages with conservative
loan-to-value  ratios,  high debt service coverages and general purpose property
types with a strong credit tenancy.

Our commercial  loan portfolio  consists of primarily  non-recourse,  fixed rate
mortgages on fully or near fully leased  properties.  The mortgage  portfolio is
comprised  of  general-purpose   industrial  properties,   manufacturing  office
properties and credit oriented retail properties.

California  accounted for 20% of our  commercial  mortgage loan  portfolio as of
June 30, 2004. We are, therefore, exposed to potential losses resulting from the
risk of  catastrophes,  such as  earthquakes,  that may affect the region.  Like
other lenders,  we generally do not require earthquake  insurance for properties
on  which  we  make  commercial  mortgage  loans.  With  respect  to  California
properties,  however, we obtain an engineering report specific to each property.
The report assesses the building's  design  specifications,  whether it has been
upgraded to meet seismic  building  codes and the maximum loss that is likely to
result from a variety of different  seismic events. We also obtain a report that
assesses  by  building  and  geographic  fault  lines  the  amount  of loss  our
commercial  mortgage  loan  portfolio  might  suffer  under a variety of seismic
events.

                                       90

Our commercial loan portfolio is highly diversified by borrower.  As of June 30,
2004,  36% of the U.S.  commercial  mortgage  loan  portfolio  was  comprised of
mortgage  loans with principal  balances of less than $10.0  million.  The total
number of commercial mortgage loans outstanding as of June 30, 2004 and December
31,  2003 was  1,349  and  1,447,  respectively.  The  average  loan size of our
commercial mortgage portfolio was $7.3 million as of June 30, 2004.

We  actively  monitor  and  manage  our  commercial   mortgage  loan  portfolio.
Substantially all loans within the portfolio are analyzed regularly,  based on a
proprietary  risk  rating cash flow  model,  in order to monitor  the  financial
quality of these assets and are internally rated.  Based on ongoing  monitoring,
mortgage  loans with a likelihood  of becoming  delinquent  are  identified  and
placed on an internal  "watch  list".  Among  criteria  which  would  indicate a
potential  problem are:  imbalances in ratios of loan to value or contract rents
to debt service,  major tenant vacancies or bankruptcies,  borrower  sponsorship
problems,  late  payments,   delinquent  taxes  and  loan   relief/restructuring
requests.

We state commercial  mortgage loans at their unpaid principal  balances,  net of
discount accrual and premium amortization,  valuation allowances and write downs
for impairment.  We provide a valuation  allowance for commercial mortgage loans
based on past loan loss  experience  and for  specific  loans  considered  to be
impaired.  Mortgage  loans  are  considered  impaired  when,  based  on  current
information  and events,  it is probable  that all amounts due  according to the
contractual terms of the loan agreement may not be collected.  When we determine
that a loan is impaired, we either establish a valuation allowance or adjust the
cost basis of that loan and record a loss for the excess of the  carrying  value
of the mortgage  loan over its  estimated  fair value.  Estimated  fair value is
based on either the present  value of expected  future cash flows  discounted at
the loan's original  effective interest rate, the loan's observable market price
or the fair  value of the  collateral.  We record  increases  in such  valuation
allowances as realized investment losses and, accordingly, we reflect the losses
in our  consolidated  results  of  operations.  Such  increases  (decreases)  in
valuation  allowances  aggregated $7.4 million for the six months ended June 30,
2004 and $(34.0) million for the year ended December 31, 2003.

We review our  mortgage  loan  portfolio  and  analyze  the need for a valuation
allowance  for any loan which is  delinquent  for 60 days or more, in process of
foreclosure,  restructured,  on the  "watch  list",  or  which  currently  has a
valuation allowance. We categorize loans, which are delinquent, loans in process
of  foreclosure,  and loans to  borrowers  in  bankruptcy  as  "problem"  loans.
Potential  problem loans are loans placed on an internal  "watch list" for which
management  has  concerns as to the  ability of the  borrower to comply with the
present loan payment  terms and which may result in the loan  becoming a problem
or being  restructured.  The decision whether to classify a performing loan as a
potential problem involves significant  subjective judgments by management as to
the likely  future  economic  conditions  and  developments  with respect to the
borrower. We categorize loans for which the original terms of the mortgages have
been modified or for which interest or principal  payments have been deferred as
"restructured"  loans.  We also consider  matured  loans that are  refinanced at
below market rates as restructured.

We charge  mortgage loans deemed to be  uncollectible  against the allowance for
losses and credit subsequent recoveries to the allowance for losses. We maintain
the allowance for losses at a level management believes to be adequate to absorb
estimated  probable credit losses.  Management bases its periodic  evaluation of
the  adequacy of the  allowance  for losses on known and  inherent  risks in the
portfolio,  adverse  situations that may affect the borrower's ability to repay,
the  estimated  value  of the  underlying  collateral,  composition  of the loan
portfolio,   current  economic  conditions  and  other  relevant  factors.   The
evaluation is inherently  subjective as it requires  estimating  the amounts and
timing of future cash flows  expected to be received on impaired  loans that may
change.  As a result of a change in estimates,  we evaluated the adequacy of our
commercial  mortgage  loan  allowance at December  31, 2003 and  released  $23.9
million from the allowance.

                                       91

The following table represents our commercial  mortgage valuation  allowance for
the periods indicated:

                              U.S. INVESTED ASSETS
                     COMMERCIAL MORTGAGE VALUATION ALLOWANCE

                                                                    AS OF JUNE 30,          AS OF DECEMBER 31,
                                                                  --------------------   -----------------------
                                                                         2004                      2003
                                                                  --------------------   -----------------------
                                                                                    ($ IN MILLIONS)

Beginning balance..........................................          $          49.6           $          83.6
Provision..................................................                     21.2                       1.3
Release....................................................                    (13.8)                    (35.3)
                                                                  --------------------   -----------------------
Ending balance.............................................          $          57.0           $          49.6
                                                                  ====================   =======================
Valuation allowance as % of carrying value before reserves.                      1%                        1%

The following table presents the carrying amounts of problem,  potential problem
and  restructured  commercial  mortgages  relative to the carrying amount of all
commercial mortgages for the periods indicated:

                              U.S. INVESTED ASSETS
       PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT
                                CARRYING AMOUNT

                                                                     AS OF JUNE 30,          AS OF DECEMBER 31,
                                                                  --------------------   -----------------------
                                                                          2004                      2003
                                                                  --------------------   -----------------------
                                                                                    ($ IN MILLIONS)

Total commercial mortgages ................................            $   9,790.7           $        9,630.4
                                                                  ====================   =======================
Problem commercial mortgages(1)............................            $      45.7           $           45.9
Potential problem commercial mortgages ....................                   68.6                       99.3
Restructured commercial mortgages .........................                   61.8                       65.3
                                                                  --------------------   -----------------------
  Total problem, potential problem and
    restructured commercial mortgages......................            $     176.1           $          210.5
                                                                  ====================   =======================
  Total problem, potential problem and restructured
    commercial mortgages as a percent of total commercial
    mortgages..............................................                    2%                         2%

- --------------------
(1)  Problem commercial mortgages include no mortgage loans in foreclosure as of
     June 30, 2004 and December 31, 2003.

EQUITY REAL ESTATE

We hold commercial equity real estate as part of our investment portfolio. As of
June 30, 2004, and December 31, 2003, the carrying  amount of equity real estate
investment  was  $1,037.9  million and $1,516.6  million,  or 2% and 3%, of U.S.
invested  assets,  respectively.  We own real estate,  real estate acquired upon
foreclosure of commercial mortgage loans and interests,  both majority owned and
non-majority owned, in real estate joint ventures.

Equity real estate is categorized as either "real estate held for investment" or
"real  estate held for sale".  Real estate held for  investment  totaled  $895.1
million as of June 30, 2004,  and $1,003.6  million as of December 31, 2003. The
carrying  value of real estate held for  investment  is  generally  adjusted for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and accordingly, are reflected in our
consolidated  results of  operations.  For the  periods  ended June 30, 2004 and
December 31, 2003, there were no such impairment adjustments.

                                       92

The  carrying  amount  of real  estate  held for sale as of June 30,  2004,  and
December  31,  2003,  was $142.8  million and $513.0  million,  net of valuation
allowances of $8.1 million and $19.1 million,  respectively.  Once we identify a
real estate  property to be sold and commence a plan for marketing the property,
we classify  the property as held for sale.  We establish a valuation  allowance
subject to periodical revisions,  if necessary,  to adjust the carrying value of
the  property  to reflect the lower of its  current  carrying  value or the fair
value, less associated selling costs.

We use research,  both internal and external,  to recommend  appropriate product
and geographic  allocations and changes to the equity real estate portfolio.  We
monitor product, geographic and industry diversification separately and together
to determine the most appropriate mix.

Equity real estate is distributed  across geographic regions of the country with
larger  concentrations  in the South  Atlantic,  West South  Central and Pacific
regions of the United States as of June 30, 2004. By property  type,  there is a
concentration  in office  buildings that  represented  approximately  42% of the
equity real estate portfolio as of June 30, 2004.

OTHER INVESTMENTS

Our other investments  totaled $1,093.9 million as of June 30, 2004, compared to
$1,198.8  million as of December  31,  2003.  Derivatives  accounted  for $552.3
million in other investments as of June 30, 2004. The remaining  invested assets
include  minority  interests in  unconsolidated  entities and  properties  owned
jointly with venture partners and operated by the partners.

INTERNATIONAL INVESTMENT OPERATIONS

As of June 30, 2004,  our  international  investment  operations  consist of the
investments  of  Principal  International  comprised of $2.0 billion in invested
assets.  Principal  Global  Investors  works with each  Principal  International
affiliate to develop investment policies and strategies that are consistent with
the products they offer. Due to the regulatory constraints in each country, each
company maintains its own investment  policies,  which are approved by Principal
Global  Investors.   Each  international  affiliate  is  required  to  submit  a
compliance  report  relative to its  strategy  to  Principal  Global  Investors.
Principal Global Investors employees and international  affiliate company credit
analysts jointly review each corporate credit annually.

OVERALL COMPOSITION OF INTERNATIONAL INVESTED ASSETS

As shown in the following table, the major categories of international  invested
assets  as of June  30,  2004,  and  December  31,  2003,  were  fixed  maturity
securities and residential mortgage loans:

                                       93

                          INTERNATIONAL INVESTED ASSETS

                                                              AS OF JUNE 30,           AS OF DECEMBER 31,
                                                           ---------------------  -------------------------
                                                                   2004                      2003
                                                           ---------------------  -------------------------
                                                            CARRYING       % OF      CARRYING      % OF
                                                             AMOUNT        TOTAL      AMOUNT       TOTAL
                                                           ------------  -------  -------------  ----------
                                                                             ($ IN MILLIONS)
                                                                                       
Fixed maturity securities
  Public..........................................         $  1,474.5        72%    $  1,312.3      66%
  Private.........................................                -           -           81.0       4
Equity securities.................................               38.5         2           41.8       2
Mortgage loans
  Residential.....................................              329.7        16          333.1      17
Real estate held for investment...................                8.8         1            9.5       1
Other investments ................................              188.9         9          213.3      10
                                                           ------------  -------  -------------  ----------
   Total invested assets..........................            2,040.4       100%       1,991.0     100%
                                                                         =======                 ==========
Cash and cash equivalents.........................               76.1                     71.4
                                                           ------------           -------------
   Total invested assets and cash ................         $  2,116.5               $  2,062.4
                                                           ============           =============

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK EXPOSURES AND RISK MANAGEMENT

Market risk is the risk that we will incur losses due to adverse fluctuations in
market  rates and  prices.  Our primary  market  risk  exposure is to changes in
interest rates,  although we also have exposures to changes in equity prices and
foreign currency exchange rates.

The active  management of market risk is an integral part of our operations.  We
manage our overall market risk exposure within established risk tolerance ranges
by using the following approaches:

o    rebalance our existing asset or liability portfolios;

o    control the risk structure of newly acquired assets and liabilities; or

o    use  derivative  instruments to modify the market risk  characteristics  of
     existing assets or liabilities or assets expected to be purchased.

INTEREST RATE RISK

Interest rate risk is the risk that we will incur economic losses due to adverse
changes in interest rates. Our exposure to interest rate risk stems largely from
our substantial  holdings of guaranteed fixed rate liabilities in our U.S. Asset
Management and Accumulation segment.

We manage the interest rate risk inherent in our assets relative to the interest
rate risk  inherent in our  liabilities.  One of the measures we use to quantify
this exposure is duration. To calculate duration, we project asset and liability
cashflows.  These  cashflows are discounted to a net present value basis using a
spot  yield  curve,  which is a blend of the spot  yield  curves for each of the
asset types in the  portfolio.  Duration is calculated by  re-calculating  these
cashflows  and  redetermining  the net present  value based upon an  alternative
level of interest rates, and determining the percentage change in fair value.

As of June 30, 2004, the difference between the asset and liability durations on
our primary  duration  managed  portfolio was +.04.  This duration gap indicates
that as of this date the sensitivity of the fair value of our assets to interest

                                       94

rate  movements is greater than that of the fair value of our  liabilities.  Our
goal is to minimize the duration gap.  Currently,  our guidelines  indicate that
total duration gaps between the asset and liability  portfolios should be within
+/-0.25.  The value of the assets in this portfolio was $30,206.3  million as of
June 30, 2004.

For products such as whole life  insurance and term life insurance that are less
sensitive  to interest  rate risk,  and for other  products  such as  individual
single  premium  deferred  annuities,  we manage  interest  rate risk based on a
modeling process that considers the target average life,  maturities,  crediting
rates  and  assumptions  of  policyholder  behavior.  As of June 30,  2004,  the
weighted-average  difference between the asset and liability  durations on these
portfolios  was  +.39.  This  duration  gap  indicates  that as of this date the
sensitivity  of the fair  value of our  assets to  interest  rate  movements  is
greater  than that of the fair value of our  liabilities.  We attempt to monitor
this duration gap consistent with our overall risk/reward tolerances.  The value
of the assets in these portfolios was $13,474.9 million as of June 30, 2004.

We also have a block of  participating  general  account  pension  business that
passes the actual  investment  performance  of the assets to the  customer.  The
investment  strategy  of this  block is to  maximize  investment  return  to the
customer on a "best efforts" basis,  and there is little or no attempt to manage
the duration of this  portfolio  since there is little or no interest rate risk.
The value of the assets in these  portfolios was $1,783.6 million as of June 30,
2004.

Using the assumptions and data in effect as of June 30, 2004, we estimate that a
100 basis point immediate, parallel increase in interest rates decreases the net
fair value of our portfolio by approximately $65.2 million.  The following table
details the estimated changes by risk management strategy.  The table also gives
the weighted-average  duration of the asset portfolio for each category, and the
net duration gap (i.e.  the weighted  average  difference  between the asset and
liability durations).

                                           AS OF
                                       JUNE 30, 2004                                           NET FAIR
        RISK MANAGEMENT               VALUE OF TOTAL         DURATION           NET             VALUE
           STRATEGY                       ASSETS             OF ASSETS      DURATION GAP        CHANGE
- ----------------------------------  --------------------  ---------------  ---------------  --------------
                                                                                                 (IN
                                         (IN MILLIONS)                                          MILLIONS)

Primary duration-managed..........      $30,206.3             3.97             .04           $    (12.1)
Duration-monitored................       13,474.9             4.97             .39                (53.1)
Non duration-managed..............        1,783.6             5.61             N/A                  N/A
                                    --------------------                                    --------------
  Total...........................      $45,464.8                                            $    (65.2)
                                    ====================                                    ==============

Our selection of a 100 basis point immediate,  parallel  increase or decrease in
interest rates is a hypothetical  rate scenario we use to demonstrate  potential
risk.  While a 100 basis point immediate,  parallel  increase does not represent
our  view of  future  market  changes,  it is a near  term  reasonably  possible
hypothetical change that illustrates the potential impact of such events.  While
these  fair  value  measurements  provide  a  representation  of  interest  rate
sensitivity,  they are based on our  portfolio  exposures at a point in time and
may not be representative of future market results.  These exposures will change
as a result of ongoing  portfolio  transactions  in  response  to new  business,
management's  assessment of changing market conditions and available  investment
opportunities.

We were also exposed to interest rate risk in our Mortgage Banking business.  On
May 11, 2004,  we entered into a definitive  agreement for the sale of Principal
Residential Mortgage to CitiMortgage, Inc, which was completed on July 1, 2004.

CASH FLOW VOLATILITY

Cash flow volatility arises as a result of several factors.  One is the inherent
difficulty in perfectly matching the cash flows of new asset purchases with that
of new liabilities.  Another factor is the inherent cash flow volatility of some

                                       95

classes of assets and liabilities. In order to minimize cash flow volatility, we
manage  differences  between  expected  asset and  liability  cash flows  within
pre-established guidelines.

We also seek to minimize  cash flow  volatility  by  restricting  the portion of
securities with redemption features held in our invested asset portfolio.  These
asset  securities  include  redeemable  corporate  securities,   mortgage-backed
securities  or other assets with options  that,  if  exercised,  could alter the
expected  future cash  inflows.  In addition,  we limit sales  liabilities  with
features  such as puts or other options that may change the cash flow profile of
the liability portfolio.

DERIVATIVES

We use  various  derivative  financial  instruments  to manage our  exposure  to
fluctuations in interest rates,  including  interest rate swaps,  principal-only
swaps,  interest rate floors,  swaptions,  U.S. Treasury futures,  Treasury rate
guarantees,  interest rate lock  commitments  and  mortgage-backed  forwards and
options. We use interest rate futures contracts and mortgage-backed  forwards to
hedge  changes in interest  rates  subsequent  to the  issuance of an  insurance
liability,  such as a guaranteed investment contract,  but prior to the purchase
of a supporting  asset,  or during periods of holding assets in  anticipation of
near term liability sales. We use interest rate swaps and  principal-only  swaps
primarily to more closely match the interest rate  characteristics of assets and
liabilities.  They can be used to change the sensitivity to the interest rate of
specific assets and liabilities as well as an entire portfolio. Occasionally, we
will sell a callable  liability or a liability with attributes similar to a call
option.  In these cases, we will use interest rate swaptions or similar products
to hedge the risk of early liability  payment thereby  transforming the callable
liability into a fixed term liability.

We also seek to reduce call or prepayment  risk arising from changes in interest
rates in individual  investments.  We limit our exposure to investments that are
prepayable without penalty prior to maturity at the option of the issuer, and we
require  additional  yield on these  investments to compensate for the risk that
the issuer will  exercise  such  option.  An example of an  investment  we limit
because of the option risk is residential  mortgage-backed securities. We assess
option risk in all investments we make and, when we assume such risk, we seek to
price for it accordingly to achieve an appropriate return on our investments.

We have increased our credit exposure  through credit default swaps by investing
in subordinated  tranches of a synthetic  collateralized  debt  obligation.  The
outstanding  notional amount as of June 30, 2004 was $500.0 million and the mark
to market value was $10.6  million.  We also  invested in credit  default  swaps
creating  replicated assets with a notional of $398.3 million and mark to market
value of $5.1 million as of June 30, 2004.

We  also  offer  a  guaranteed  fund  as an  investment  option  in our  defined
contribution  plans in Hong Kong. This fund contains an embedded option that has
been  bifurcated  and accounted for separately in realized  gains  (losses).  We
recognized a $0.2 million pre-tax gain for the six months ended June 30, 2004.

The  obligation to deliver the  underlying  securities  of certain  consolidated
grantor  trusts to various  unrelated  trust  certificate  holders  contains  an
embedded  derivative of the  forecasted  transaction  to deliver the  underlying
securities.

In conjunction with our use of derivatives, we are exposed to counterparty risk,
or the risk that  counterparty  fails to  perform  the  terms of the  derivative
contract. We actively manage this risk by:

o    establishing  exposure  limits  which  take  into  account   non-derivative
     exposure we have with the counterparty as well as derivative exposure;

o    performing  similar credit  analysis prior to approval on each  derivatives
     counterparty that we do when lending money on a long-term basis;

o    diversifying our risk across numerous approved counterparties;

                                       96

o    limiting exposure to A+ credit or better;

o    conducting  stress-test  analysis to determine the maximum exposure created
     during the life of a prospective transaction;

o    implementing  credit support annex  (collateral)  agreements  with selected
     counterparties to further limit counterparty exposures; and

o    daily monitoring of counterparty credit ratings.

All new derivative  counterparties are approved by the Investment Committee.  We
believe the risk of incurring losses due to nonperformance by our counterparties
is manageable.

The  notional  amounts  used to express  the extent of our  involvement  in swap
transactions  represent  a  standard  measurement  of the  volume  of  our  swap
business.  Notional amount is not a quantification of market risk or credit risk
and it may not  necessarily be recorded on the balance sheet.  Notional  amounts
represent those amounts used to calculate  contractual flows to be exchanged and
are not paid or received,  except for contracts such as currency  swaps.  Actual
credit exposure  represents the amount owed to us under derivative  contracts as
of the valuation date. The following  tables present our position in, and credit
exposure to, derivative financial  instruments as of June 30, 2004, and December
31, 2003:

               DERIVATIVE FINANCIAL INSTRUMENTS - NOTIONAL AMOUNTS

                                                               AS OF JUNE 30,             AS OF DECEMBER 31,
                                                         ---------------------------  ------------------------
                                                                    2004                        2003
                                                         ---------------------------  ------------------------
                                                             NOTIONAL        % OF        NOTIONAL        % OF
                                                              AMOUNT         TOTAL        AMOUNT        TOTAL
                                                         ----------------  ---------  --------------  --------
                                                                              ($ IN MILLIONS)

Interest rate swaps.............................         $    5,303.9         52%     $   5,025.0         49%
Foreign currency swaps..........................              2,571.8         25          2,823.4         27
Credit default swaps ...........................                898.3          9            863.2          8
Bond forwards...................................                511.0          5            467.2          5
Swaptions.......................................                458.8          5            315.0          3
Currency forwards...............................                301.3          3            282.0          3
MBS forwards....................................                158.5          1            522.1          5
Call options....................................                 30.0          -             30.0          -
Put options.....................................                 21.0          -              -            -
Bond options....................................                 17.5          -             17.5          -
U.S. Treasury futures...........................                  8.0          -             27.8          -
Other...........................................                  1.5          -              1.5          -
                                                         ----------------  ---------  --------------  --------
  Total.........................................         $   10,281.6         100%    $  10,374.7        100%
                                                         ================  =========  ==============  ========

                                       97

               DERIVATIVE FINANCIAL INSTRUMENTS - CREDIT EXPOSURES

                                                               AS OF JUNE 30,             AS OF DECEMBER 31,
                                                         ---------------------------  ------------------------
                                                                    2004                         2003
                                                         ---------------------------  ------------------------
                                                              CREDIT         % OF         CREDIT         % OF
                                                             EXPOSURE        TOTAL       EXPOSURE        TOTAL
                                                         ----------------  ---------  --------------  --------
                                                                               ($ IN MILLIONS)

Foreign currency swaps..........................            $     407.9         71%      $   637.1        78%
Interest rate swaps.............................                   84.7         15            69.0         9
Bond forwards...................................                   46.6          8            52.1         6
Credit default swaps............................                   17.9          3            45.9         6
Call options....................................                    7.5          2             6.6         1
Swaptions ......................................                    6.6          1             1.8         -
Currency forwards...............................                    1.9          -             0.3         -
                                                         ----------------  ---------  --------------  --------
  Total.........................................            $     573.1        100%      $   812.8       100%
                                                         ================  =========  ==============  ========

The  following  table shows the interest  rate  sensitivity  of our  derivatives
measured  in terms of fair  value.  These  exposures  will change as a result of
ongoing portfolio and risk management activities.

                                                                       AS OF JUNE 30, 2004
                                        --------------------------------------------------------------------------------------------
                                                                                FAIR VALUE (NO ACCRUED INTEREST)
                                                                                ----------------------------------------------------
                                                                WEIGHTED
                                                                AVERAGE         -100 BASIS                         +100 BASIS
                                           NOTIONAL             TERM              POINT                               POINT
                                            AMOUNT               (YEARS)          CHANGE        NO CHANGE             CHANGE
                                        --------------------  ----------------  ------------  -------------   ----------------------
                                                                           ($ IN MILLIONS)

Interest rate swaps..................      $  5,303.9            5.94(1)         $ (104.1)      $   39.8         $   168.4
Bond forwards........................           511.0            2.24(5)             77.2           46.6              17.9
Swaptions............................           458.8            1.47(4)            (17.4)          (7.7)             (3.6)
Mortgage-backed forwards and options.           158.5            0.04(5)              0.9           (0.4)             (1.6)
Bond options.........................            17.5            2.29(5)             (1.6)          (0.5)              -
Put options..........................            21.0            4.98(5)              0.4            0.8               1.3
U.S. Treasury futures................             8.0            0.23(3)             (0.5)           -                 0.4
                                        --------------------                    ------------  -------------   ----------------------
   Total.............................      $  6,478.7                            $  (45.1)      $   78.6         $   182.8
                                        ====================                    ============  =============   ======================

- --------------------
(1)  Based on maturity date of swap.
(2)  Based on maturity date of floor.
(3)  Based on maturity date.
(4)  Based on option date of swaption.
(5)  Based on settlement date.
(6)  Based on expiration date.

We use U.S. Treasury futures to manage our over/under  commitment position,  and
our position in these contracts changes daily.

                                       98

DEBT ISSUED AND OUTSTANDING

As of June 30, 2004,  the  aggregate  fair value of long-term  debt was $1,196.0
million. A 100 basis point, immediate, parallel decrease in interest rates would
increase the fair value of debt by approximately $45.6 million.

                                                                                 AS OF JUNE 30, 2004
                                                          --------------------------------------------------------------
                                                                           FAIR VALUE (NO ACCRUED INTEREST)
                                                          --------------------------------------------------------------
                                                             -100 BASIS                                 +100 BASIS
                                                            POINT CHANGE           NO CHANGE           POINT CHANGE
                                                          -------------------   -----------------   --------------------
                                                                                 (IN MILLIONS)

7.95% notes payable, due 2004......................        $      205.0          $     204.2          $      203.4
8.2% notes payable, due 2009.......................               588.3                562.1                 537.4
8% surplus notes payable, due 2044.................               121.8                110.1                  99.0
Non-recourse mortgages and notes payable...........               265.4                259.3                 253.4
Other mortgages and notes payable..................                61.1                 60.3                  59.5
                                                          -------------------   -----------------   --------------------
  Total long-term debt.............................        $    1,241.6          $   1,196.0          $    1,152.7
                                                          ===================   =================   ====================

- ----------------------

EQUITY RISK

Equity  risk is the risk  that we will  incur  economic  losses  due to  adverse
fluctuations  in a particular  common stock. As of June 30, 2004, the fair value
of our equity  securities was $687.9 million.  A 10% decline in the value of the
equity  securities  would result in an unrealized  loss of $68.8 million.  As of
June 30, 2004, a 10% immediate and sustained decline in the equity markets would
result in a decrease of asset-based  fee revenues of $20.5 million over the next
six months.  The  selection of a 10%  unfavorable  change in the equity  markets
should not be construed  as a  prediction  by us of future  market  events,  but
rather as an illustration of the potential impact of such an event.

FOREIGN CURRENCY RISK

Foreign  currency  risk is the risk that we will  incur  economic  losses due to
adverse  fluctuations in foreign currency  exchange rates. This risk arises from
our international operations and foreign currency-denominated funding agreements
issued to non-qualified institutional investors in the international market. The
notional   amount   of   our   currency   swap   agreements    associated   with
foreign-denominated  liabilities as of June 30, 2004, was $2,326.2  million.  We
also have fixed maturity  securities that are denominated in foreign currencies.
However,  we use  derivatives to hedge the foreign  currency risk, both interest
payments  and the  final  maturity  payment,  of these  funding  agreements  and
securities.  As of June  30,  2004,  the  fair  value  of our  foreign  currency
denominated fixed maturity  securities was $299.2 million.  We use currency swap
agreements  of the same  currency to hedge the foreign  currency  exchange  risk
related  to  these  investments.  The  notional  amount  of  our  currency  swap
agreements associated with  foreign-denominated  fixed maturity securities as of
June 30, 2004, was $242.7 million. With regard to our international  operations,
we attempt to do as much of our business as possible in the functional  currency
of the country of operation.  At times,  however, we are unable to do so, and in
these cases, we use foreign  exchange  derivatives to hedge the resulting risks.
Additionally,  we may take measures to hedge our net equity  investments  in our
foreign  subsidiaries from currency risks. As of June 30, 2004, we used currency
forwards  to  hedge  a  portion  of our net  equity  investment  in our  Mexican
operations from currency  fluctuations.  The outstanding  notional amount of the
currency forwards relating to these operations was $30.5 million  (approximately
$350 million  Mexican  pesos) and we  recognized a $0.9 million  pre-tax gain in
other comprehensive income for the six months ended June 30, 2004.

We estimate that as of June 30, 2004, a 10% immediate unfavorable change in each
of the foreign  currency  exchange rates to which we are exposed would result in
no  material  change to the net fair value of our foreign  currency  denominated
instruments  identified  above,  including  the currency  swap  agreements.  The

                                       99

selection of a 10% immediate  unfavorable  change in all currency exchange rates
should not be construed  as a  prediction  by us of future  market  events,  but
rather as an illustration of the potential impact of such an event.

EFFECTS OF INFLATION

We do not believe that inflation, in the United States or in the other countries
in which we operate,  has had a material effect on our  consolidated  operations
over  the past  five  years.  In the  future,  however,  we may be  affected  by
inflation to the extent it causes interest rates to rise.

ITEM 4.  CONTROLS AND PROCEDURES

In order to ensure  that the  information  that we must  disclose in our filings
with the SEC is recorded, processed,  summarized and reported on a timely basis,
we have adopted disclosure controls and procedures. Our Chief Executive Officer,
J. Barry Griswell,  and our Chief  Financial  Officer,  Michael H. Gersie,  have
reviewed and evaluated  our  disclosure  controls and  procedures as of June 30,
2004,  and have  concluded  that our  disclosure  controls  and  procedures  are
effective.

There was no change in our internal control over financial  reporting during our
last fiscal quarter that has  materially  affected,  or is reasonably  likely to
materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are regularly involved in litigation,  both as a defendant and as a plaintiff
but  primarily as a defendant.  Litigation  naming us as a defendant  ordinarily
arises out of our  business  operations  as a provider of asset  management  and
accumulation  products and services,  life, health and disability  insurance and
mortgage banking.  Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages.  In addition,  regulatory bodies, such
as state insurance departments,  the SEC, the National Association of Securities
Dealers,  Inc., the Department of Labor and other  regulatory  bodies  regularly
make  inquiries  and  conduct  examinations  or  investigations  concerning  our
compliance with, among other things,  insurance laws, securities laws, ERISA and
laws governing the activities of broker-dealers.

While the  outcome of any  pending  or future  litigation  cannot be  predicted,
management  does not believe  that any pending  litigation  will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.

                                      100

ITEM 2. CHANGES IN  SECURITIES,  USE OF PROCEEDS AND ISSUER  PURCHASES OF EQUITY
SECURITIES

The following  table presents the amount of our share purchase  activity for the
periods indicated:

                      ISSUER PURCHASES OF EQUITY SECURITIES
                                                                                                          MAXIMUM
                                                                                                         NUMBER (OR
                                                                                                        APPROXIMATE
                                                                                                      DOLLAR VALUE) OF
                                                                                TOTAL NUMBER OF      SHARES (OR UNITS)
                                               TOTAL NUMBER                    SHARES (OR UNITS)      THAT MAY YET BE
                                                  OF            AVERAGE        PURCHASED AS PART        PURCHASED UNDER
                                               SHARES (OR      PRICE PAID       OF PUBLICLY           THE PLANS OR
                                                 UNITS)        PER SHARE         ANNOUNCED             PROGRAMS (IN
                  PERIOD                       PURCHASED       (OR UNIT)      PLANS OR PROGRAMS           MILLIONS)
- -------------------------------------------- ----------------- ------------- ---------------------- ---------------------
                                                                                            
January 1, 2004 - January 31, 2004......            644(3)      $ 33.07                   -             $147.0 (1)
February 1, 2004 - February 29, 2004....              -            -                      -             $147.0 (1)
March 1, 2004 - March 31, 2004..........          9,600(4)      $ 36.37                   -             $147.0 (1)
April 1, 2004 - April 30, 2004..........      2,237,500         $ 35.48           2,237,500             $ 67.6 (1)
May 1, 2004 - May 31, 2004..............      2,104,811         $ 34.77           2,104,811             $694.4 (1),(2)
June 1, 2004 - June 30, 2004............      1,964,600         $ 35.32           1,964,600             $625.0 (2)
                                             -----------------               ----------------------
Total...................................      6,317,155         $ 35.19           6,306,911             $625.0 (2)
                                             =================               ======================

- ---------------------------
(1)  In May 2003, our board of directors  authorized a repurchase  program of up
     to $300.0 million of our outstanding common stock. This program began after
     the completion of the November 2002 repurchase  program,  which  authorized
     the repurchase of up to $300.0 million of our outstanding  common stock. On
     May 26, 2004, the program that was announced in May 2003 was completed.

(2)  In May 2004, our board of directors  authorized a repurchase  program of up
     to $700.0 million of our  outstanding  common stock.  Our first purchase on
     this program was on May 28, 2004, which was after the completion of the May
     2003 repurchase  program,  which  authorized the repurchase of up to $300.0
     million of our  outstanding  common stock.  There is no expiration date for
     the program that was announced in May 2004.

(3)  Principal  Financial  Services,  Inc., a subsidiary of Principal  Financial
     Group, Inc.,  purchased J.F. Molloy and Associates,  Inc. effective January
     2, 2004.  At the time of  acquisition,  644  shares of the common  stock of
     Principal  Financial  Group,  Inc.,  which  were  granted  as  part  of our
     demutualization, were held in the name of J.F. Molloy and Associates, Inc.

(4)  This  activity  represents  the portion of common stock issued and acquired
     for a stock incentive award that was utilized to execute the award.

                                      101

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At  the  Company's   annual  meeting  of  stockholders  on  May  18,  2004,  the
stockholders  elected four Class III  directors  each for a term expiring at the
Company's 2007 annual meeting. The voting results are as follows:

                                   VOTES FOR                VOTES WITHHELD

David J. Drury                    186,730,726                  4,041,892
C. Daniel Gelatt                  179,497,836                 11,274,782
Sandra L. Helton                  184,183,623                  6,588,995
Federico F. Pena                  186,340,222                  4,432,396

The directors  whose terms of office  continued and the years their terms expire
are as follows:

CLASS I DIRECTORS - TERM EXPIRES IN 2005

Betsy J. Bernard
Jocelyn Carter-Miller
Gary E. Costley
William T. Kerr

CLASS II DIRECTORS - TERM EXPIRES IN 2006

J. Barry Griswell
Charles S. Johnson
Richard L. Keyser
Arjun K. Mathrani
Elizabeth E. Tallett

Further,  the stockholders  ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for 2004. The voting results are as follows:

           FOR                      AGAINST                     ABSTAIN

       182,121,543                 5,269,318                   3,381,757

The  stockholders  also voted to approve the  Principal  Financial  Group,  Inc.
Annual Incentive Plan pursuant to the following vote:

           FOR                      AGAINST                     ABSTAIN

       157,671,896                 28,125,859                  4,974,863

                                      102

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
   A.    EXHIBITS

         EXHIBIT
         NUMBER     Description
          2.5       Stock Purchase  Agreement  dated as of May 11, 2004 by and
                    between  Principal  Holding Company and CitiMortgage, Inc.
          10.8      Employment  Agreement dated as of April 1, 2004 by and
                    between  Principal  Financial Group,  Inc., Principal
                    Financial Services, Inc., Principal Life Insurance Company
                    and J. Barry Griswell
          10.9      Change-of-Control  Supplement and Amendment to Employment
                    Agreement  dated as of April 1, 2004 by and between
                    Principal Financial Group, Inc.,  Principal Financial
                    Services,  Inc.,  Principal Life Insurance Company and
                    J. Barry Griswell
          12        Statement Regarding Computation of Ratio of Earnings to
                    Fixed Charges
          31.1      Certification of J. Barry Griswell
          31.2      Certification of Michael H. Gersie
          32.1      Certification Pursuant to Section 1350 of Chapter 63 of
                    Title 18 of the United States Code - J. Barry Griswell
          32.2      Certification Pursuant to Section 1350 of Chapter 63 of
                    Title 18 of the United States Code - Michael H. Gersie

   B.    REPORTS ON FORM 8-K

         Current Report on Form 8-K dated March 31, 2004, and filed May 4, 2004.

         Current Report on Form 8-K dated and filed May 12, 2004.

         Current Report on Form 8-K dated and filed May 19, 2004.

         Current Report on Form 8-K dated June 7, 2004, and filed June 15, 2004.

                                      103

                                    SIGNATURE

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                          PRINCIPAL FINANCIAL GROUP, INC.
Dated:  August 4, 2004                    By   /S/ MICHAEL H. GERSIE
                                              ----------------------------------
                                              Michael H. Gersie
                                              Executive Vice President and
                                              Chief Financial Officer

                                              Duly Authorized Officer,
                                              Principal Financial Officer, and
                                              Chief Accounting Officer

                                      104

   EXHIBIT INDEX

    EXHIBIT
    NUMBER                   DESCRIPTION                               PAGE
      2.5        Stock Purchase Agreement dated as of May 11, 2004
                 by and between Principal Holding Company and
                 CitiMortgage, Inc...................................   106
     10.8        Employment  Agreement dated as of April 1, 2004 by
                 and between Principal Financial Group, Inc.,
                 Principal Financial Services,  Inc., Principal Life
                 Insurance Company and J. Barry Griswell.............   171
     10.9        Change-of-Control Supplement and Amendment to
                 Employment Agreement dated as of April 1, 2004 by
                 and between Principal Financial Group, Inc.,
                 Principal Financial Services, Inc., Principal Life
                 Insurance Company and J. Barry Griswell.............   189
      12         Statement Regarding Computation of Ratio of
                 Earnings to Fixed Charges...........................   226
     31.1        Certification of J. Barry Griswell..................   227
     31.2        Certification of Michael H. Gersie..................   228
     32.1        Certification Pursuant to Section 1350 of Chapter
                 63 of Title 18 of the United States Code -
                 J. Barry Griswell...................................   229
     32.2        Certification Pursuant to Section 1350 of
                 Chapter 63 of Title 18 of the United States Code -
                 Michael H. Gersie...................................   230

                                      105

                                                                     EXHIBIT 2.5

                             STOCK PURCHASE AGREEMENT

                                   dated as of

                                  May 11, 2004

                                 by and between

                            Principal Holding Company

                                       and

                               CitiMortgage, Inc.

                                      106

ARTICLE 1 DEFINITIONS
         1.1      DEFINED TERMS
         1.2      OTHER DEFINED TERMS

ARTICLE 2 PURCHASE AND SALE OF STOCK
         2.1      TRANSFER OF STOCK
         2.2      CONSIDERATION FOR STOCK
         2.3      PRE-CLOSING DELIVERIES
         2.4      SETTLEMENT DATE
         2.5      CLOSING DATE BALANCE SHEET
         2.6      PURCHASE PRICE ALLOCATION

ARTICLE 3 CLOSING
         3.1      TIME AND PLACE OF CLOSING
         3.2      DELIVERIES BY SELLER
         3.3      DELIVERIES BY BUYER
         3.4      SETTLEMENT OF INTERCOMPANY ACCOUNTS AND BORROWINGS AND
                    TAX AMOUNTS
         3.5      SETTLEMENT DATE PAYMENTS
         3.6      CONFIRMATION AND ADJUSTMENT OF FINAL PURCHASE PRICE
                    AND SETTLEMENT AMOUNT

ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER
         4.1      ORGANIZATION OF SELLER
         4.2      ORGANIZATION OF THE COMPANY
         4.3      CAPITAL STOCK
         4.4      AUTHORIZATION
         4.5      SUBSIDIARIES
         4.6      FINANCIAL STATEMENTS; MINUTE BOOKS
         4.7      PROPERTIES AND INSURANCE
         4.8      CONTRACTS AND COMMITMENTS
         4.9      ABSENCE OF UNDISCLOSED LIABILITIES
         4.10     NO CONFLICT OR VIOLATION
         4.11     CONSENTS AND APPROVALS
         4.12     LITIGATION.
         4.13     COMPLIANCE WITH LAW: PERMITS AND LICENSES
         4.14     NO BROKERS
         4.15     INTELLECTUAL PROPERTY AND TECHNOLOGY
         4.16     TAXES
         4.17     EMPLOYEE BENEFIT PLANS
         4.18     ENVIRONMENTAL LIABILITY
         4.19     ADVANCES/RECEIVABLES
         4.20     NO RECOURSE
         4.21     LOAN REPRESENTATIONS AND WARRANTIES
         4.22     SECURITIZATION TRANSACTIONS
         4.23     ABSENCE OF CERTAIN CHANGES OR EVENTS
         4.24     LABOR MATTERS
         4.25     TRANSACTIONS WITH AFFILIATES
         4.26     SUFFICIENCY OF ASSETS
         4.27     INTEREST RATE RISK MANAGEMENT INSTRUMENTS
         4.28     NO REGULATORY IMPEDIMENT
         4.29     MASTER SERVICING
         4.30     DILIGENCE MATERIALS

ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER
         5.1      ORGANIZATION OF BUYER
         5.2      AUTHORIZATION
         5.3      CONSENTS AND APPROVALS

                                      107

         5.4      NO BROKERS
         5.5      NO CONFLICT OR VIOLATION
         5.6      FINANCIAL ABILITY
         5.7      ACQUISITION OF STOCK AND OTHER PURCHASED ASSETS
         5.8      NO REGULATORY IMPEDIMENT
         5.9      GAAP

ARTICLE 6 ACTIONS BY SELLER AND BUYER PRIOR TO THE CLOSING
         6.1      MAINTENANCE OF BUSINESS
         6.2      CERTAIN PROHIBITED TRANSACTIONS
         6.3      ACCESS
         6.4      REGULATORY APPROVALS
         6.5      EFFORTS TO CLOSE
         6.6      AGENCIES
         6.7      CONSENTS AND WAIVERS OF THIRD PARTIES
         6.8      MONTHLY FINANCIAL INFORMATION
         6.9      PRECLOSING TRANSACTIONS

ARTICLE 7 CONDITIONS TO SELLER'S OBLIGATIONS.
         7.1      REPRESENTATIONS, WARRANTIES AND COVENANTS
         7.2      CONSENTS
         7.3      NO GOVERNMENTAL ORDERS
         7.4      CERTIFICATES
         7.5      CORPORATE AUTHORITY

ARTICLE 8 CONDITIONS TO BUYER'S OBLIGATIONS
         8.1      REPRESENTATIONS, WARRANTIES AND COVENANTS
         8.2      CONSENTS
         8.3      NO GOVERNMENTAL ORDERS
         8.4      CERTIFICATES
         8.5      CORPORATE AUTHORITY

ARTICLE 9 ACTIONS BY SELLER AND BUYER AFTER THE CLOSING
         9.1      BOOKS AND RECORDS
         9.2      FURTHER ASSURANCES
         9.3      NAME CHANGE AND LIMITED USE OF MARK
         9.4      EMPLOYEE BENEFIT PLANS
         9.5      NONCOMPETITION AND NONSOLICITATION
         9.6      ANCILLARY AGREEMENTS
         9.7      CUSTODIAL ACCOUNT BALANCES
         9.8      POST-CLOSING COOPERATION AND RETENTION OF RECORDS

ARTICLE 10 INDEMNIFICATION
         10.1     INDEMNIFICATION BY SELLER
         10.2     INDEMNIFICATION BY BUYER
         10.3     COORDINATION WITH TAX INDEMNITY
         10.4     INDEMNIFICATION PROCEDURE
         10.5     INDEMNIFICATION AS EXCLUSIVE REMEDY
         10.6     DISTRIBUTION OF EXCESS HOLDBACK AMOUNT
         10.7     GUARANTEE

ARTICLE 11 TAXES
         11.1     ELECTION UNDER CODE SECTION 338(H)(10)
         11.2     TRANSFER TAXES
         11.3     INDEMNIFICATION FOR TAXES

                                      108

         11.4     PAYMENTS
         11.5     TAX RETURNS
         11.6     CONTEST PROVISIONS
         11.7     TAX SHARING AGREEMENTS
         11.8     ASSISTANCE AND COOPERATION
         11.9     RETENTION OF RECORDS
         11.10    SELLER NOT A FOREIGN PERSON
         11.11    OTHER

ARTICLE 12 MISCELLANEOUS
         12.1     TERMINATION
         12.2     EFFECT OF TERMINATION
         12.3     ASSIGNMENT
         12.4     NOTICES
         12.5     CHOICE OF LAW; JURISDICTION AND FORUM; WAIVER OF JURY
                    TRIAL
         12.6     ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS
         12.7     COUNTERPARTS
         12.8     INVALIDITY
         12.9     HEADINGS
         12.10    EXPENSES
         12.11    PUBLICITY
         12.12    DISCLOSURE SCHEDULES1
         12.13    CONSTRUCTION OF AGREEMENT
         12.14    DISCLAIMER OF WARRANTIES

                                      109

LIST OF SCHEDULES AND EXHIBITS *

SCHEDULES
1.2                        Mortgage Loan Schedule
1.3                        Reserve Schedule
1.4                        Terms of Transition Agreement
2.2                        Calculation of Purchase Price
2.2-I                      Servicing Value Schedule
2.5(a)                     Closing Date Balance Sheet
3.4                        Intercompany Accounts and Tax Amounts
4.3                        Capital Stock
4.5                        Subsidiaries
4.7(a)                     Real Property (other than REO)
4.7(b)                     Certain Leases
4.7(c)                     Insurance Policies
4.8(a)                     Certain Contracts
4.8(b)                     Invalid or Breached Contracts
4.8(c)                     Mortgage Servicing Portfolio
4.9                        Undisclosed Liabilities
4.11                       Consents and Approvals
4.12                       Litigation
4.13(a)                    Regulatory Matters
4.13(c)                    Administrative Investigations
4.13(d)                    Regulatory Documents
4.15(a)(1)                 Company Intellectual Property
4.15(a)(2)                 Company Information Technology
4.15(a)(3)                 Excluded IT
4.15(a)(4)                 Third Party IT
4.15(b)                    IT Exclusions
4.16                       Tax Matters
4.16(j)                    Securitization Entities
4.16(q)                    338(h)(10) Election
4.17                       Mortgage Group Plans
4.17(a)                    PRMI Employee Benefit Plans
4.17(d)                    PRMI Qualified Plans
4.17(e)                    Value of Benefits
4.17(i)                    Retention Agreements
4.17(j)                    Medical Benefits
4.19(a)                    Advances, Defaulted or Delinquent Loans
4.20                       Recourse
4.21(a)                    Exceptions to Loan Representations and Warranties
4.21(e)                    Servicing Agreements
4.21(f)                    Uncertified Mortgage Pools
4.21(g)                    Past Due Payments
4.21(h)                    Government Sanctions
4.21(j)                    Title Insurance Claims
4.21(l)                    High Cost Loans
4.21(m)                    Payments Relating to Certain Mortgages
4.21(n)                    Loan Proceed Disbursements
4.22(a)                    Securitized Transactions
4.23                       Absence of Certain Changes or Events
4.25                       Transactions with Affiliates
4.30(a)-(b)                Due Diligence Materials
6.2(c)                     Certain Prohibited Transactions
6.2(f)                     Disposition of Assets
6.2(g)                     Servicing Payments

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6.2(h)                     Indebtedness
6.9(a)                     Preclosing Transactions
9.3(b)                     Internet Domain Names

EXHIBITS

A                          Servicing Rights Age Adjustment
B                          Servicing Rights Rate Adjustment
C                          Servicing Rights Volatility Adjustment
D                          Pipeline Loan Servicing Value
E                          Warehouse Loan Servicing Value
F                          Debt Mark
G                          List of Marks
H                          Policies on Use of Licensed Marks

*    Principal Financial Group, Inc. agrees to furnish  supplementally a copy of
     any omitted schedule to the Commission upon request.

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                            STOCK PURCHASE AGREEMENT

         This Stock  Purchase  Agreement,  dated as of May 11,  2004,  is by and
between Principal Holding Company, an Iowa corporation ("SELLER"), CitiMortgage,
Inc., a Delaware corporation ("BUYER"), and, solely for purposes of SECTION 10.7
hereof, Principal Financial Services, Inc ("GUARANTOR").

                                    RECITALS

         A. Seller  owns all of the issued and  outstanding  capital  stock (the
"STOCK") of Principal Residential Mortgage, Inc., an Iowa corporation ("PRMI" or
"COMPANY").

         B. The Company is engaged in a mortgage banking business conducted on a
nationwide basis.

         C. The Company  conducts  various of its  mortgage  banking and related
financing activities through wholly owned Subsidiaries.

         D. The Buyer  desires to purchase  from Seller,  and Seller  desires to
sell to Buyer,  all of the Stock of the  Company  and  thereby  to  acquire  the
Company  and the  Subsidiaries,  subject  to the  terms and  conditions  of this
Agreement.

         NOW,  THEREFORE,  in consideration of the mutual covenants and promises
contained herein and for other good and valuable  consideration  the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:

                                   ARTICLE 1
                                   DEFINITIONS

1.1  DEFINED TERMS.

         As used herein, the terms below shall have the following meanings:

         "ADVANCES" means, with respect to the Company or any Subsidiary and the
Servicing  Agreements,  the moneys that have been advanced by the Company or any
Subsidiary on or before the Closing Date from its funds in  connection  with its
servicing of the Loans in accordance with Applicable Requirements.

         "AFFILIATE"  means a Person that directly or indirectly  through one or
more intermediaries  controls,  is controlled by or is under common control with
the Person  specified.  For  purposes  of this  definition,  the term  "control"
(including the terms  "controlling,"  "controlled  by" and "under common control
with") of a Person means the possession, direct or indirect, of the power to (i)
vote 50% or more of the voting  securities  or  interests of such Person or (ii)
direct or cause the  direction  of the  management  and policies of such Person,
whether by contract or otherwise.

         "AGENCY OR AGENCIES" means FHA, VA, HUD, a State Agency, FNMA, FHLMC or
GNMA, as applicable.

         "AGGREGATE  OUTSTANDING  LOAN  BALANCE"  means the aggregate sum of the
principal balances of the mortgage loans held by the Securitization Entity.

         "AGREEMENT"  means this Stock  Purchase  Agreement,  together  with all
schedules (including the Disclosure Schedules) and exhibits referenced herein.

         "APPLICABLE  REQUIREMENTS"  means  and  includes,  as of  the  time  of
reference,  with  respect  to the  origination  of the  Pipeline  Loans,  or the
origination,  purchase,  sale,  servicing and  securitization  of the Loans,  or
handling  of REO,  the  Servicing  Agreements,  Securitization  Instruments  and
Securitization   Transactions,   all  of  the  following:  (i)  all  contractual
obligations of the Company or any Subsidiary or any  Originator,  Securitization
Entity or Prior  Servicer  with  respect to any  Securitization  Transaction  or

                                      112

Servicing under any Servicing  Agreement,  Securitization  Instrument,  Mortgage
Note,  Mortgage and other  Mortgage  Loan  Document or any  commitment  or other
contractual  obligation  relating  to  a  Pipeline  Loan,  (ii)  all  applicable
underwriting  and  servicing  guidelines  of the  Company or any  Subsidiary  as
incorporated in the Seller and Servicing Guides, (iii) all Law applicable to the
Company or any  Subsidiary  or any  Originator,  Securitization  Entity or Prior
Servicer,  (iv)  all  other  applicable  requirements  and  guidelines  of  each
governmental agency, board,  commission,  instrumentality and other governmental
or  quasi-governmental  body or office having jurisdiction,  including,  without
limitation,  those of any Investor and any Insurer and (v) all other  applicable
judicial and administrative judgments, orders,  stipulations,  awards, writs and
injunctions.

         "AVERAGE  AGGREGATE  OUTSTANDING  LOAN BALANCE" means,  for any taxable
period,  the average daily  Aggregate  Outstanding  Loan Balance of the relevant
Securitization Entity during such relevant taxable period.

         "BALANCE SHEET" means the unaudited  consolidated balance sheet for the
Company dated February 29, 2004 and delivered to Buyer,  which shall be prepared
in accordance with GAAP  consistently  applied and the policies,  procedures and
methodologies  employed  by the  Company  in the  preparation  of the  Financial
Statements.

         "BUSINESS  DAY" means any day except a Saturday  or Sunday or other day
on which  commercial  banks in New York,  New York are required or authorized by
law or executive order to close.

         "BUYER EMPLOYEE  BENEFIT PLAN" means an Employee Benefit Plan sponsored
by Buyer or any of its subsidiaries for the benefit of Continuing Employees.

         "CERCLA" means the Comprehensive  Environmental Response,  Compensation
and  Liability  Act of 1980,  46 United  States Code  Section  96.1 et seq.,  as
amended.

         "CERTIFICATE  INSURER" means a provider of an insurance policy insuring
against certain  specified losses or shortfalls with respect to  mortgage-backed
securities.

         "CLOSING  DATE" means the date on which the Closing shall occur,  which
shall be the first calendar day in the month immediately  following the month in
which all  consents,  approvals  and  waivers  required  to have  been  obtained
pursuant to  SECTIONS  7.2 and 8.2 hereof have been  obtained  and any  required
waiting periods have expired.

         "CLOSING DATE BALANCE SHEET" means the unaudited  consolidated  balance
sheet for the  Company  as of the  Cut-Off  Time,  which  shall be  prepared  in
accordance  with  GAAP and on the same  basis as the  Balance  Sheet,  using the
policies,   procedures  and  methodologies   employed  by  the  Company  in  the
preparation  of the  Financial  Statements  and  delivered  by Buyer  to  Seller
pursuant to SECTION 2.5 hereof.

         "CLOSING  DATE TAX  AMOUNTS"  means  the net  amount  reflected  on the
Closing Date Balance Sheet relating to federal,  state,  local or foreign income
or  franchise  Taxes,  or Taxes  measured  by or based  on net  income  (for the
avoidance of doubt, such amounts shall include, without limitation, any deferred
tax  assets  and  deferred  tax   liabilities),   of  the  Company   and/or  its
Subsidiaries;  for purposes of SECTION  3.4,  such net amount shall be an amount
payable  by Buyer to Seller if such net amount is a  liability,  and shall be an
amount payable by Seller to Buyer if such net amount is an asset.

         "CLOSING  NET BOOK VALUE"  means an amount  equal to the  stockholder's
equity of the Company reflected on the Closing Date Balance Sheet.

         "CODE"  means the Internal  Revenue Code of 1986,  as it may be amended
from time to time.

         "COLLATERAL" means the property securing a Loan.

         "COLLATERAL  CERTIFICATE"  means a  security  based on and  backed by a
Mortgage  Pool,  which  security has been pledged,  granted or sold to secure or
support  payments  on specific  asset-backed  securities  that are  administered
pursuant to a Servicing Agreement.

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         "COLLATERAL  CERTIFICATE POOL" means a group of Collateral Certificates
that have  been  pledged,  granted  or sold to secure  or  support  payments  on
specific  asset-backed  securities which are administered pursuant to a specific
Servicing Agreement.

         "CONTINUING  EMPLOYEES" means any employee of PRMI or any Subsidiary on
the Closing Date,  except for any  employees  whom Buyer and Seller agree may be
retained by Seller.

         "CONTRACTS"   means  all   agreements,   contracts,   commitments   and
undertakings,  written  or oral,  to which the  Company or any  Subsidiary  is a
party, an obligor or a beneficiary,  or by which any of their respective  assets
or properties is bound.

         "CUSTODIAL  ACCOUNT" means all funds held or directly controlled by the
Company  or  any  Subsidiary   with  respect  to  any  Loan  or  any  Collateral
Certificate, including, but not limited to, all principal and interest funds and
any other funds due Investors,  buydown  funds,  suspense  funds,  funds for the
payment of taxes,  assessments,  insurance  premiums,  ground  rents and similar
charges,  funds from hazard  insurance loss drafts and other mortgage escrow and
impound amounts  (including  interest thereon for the benefit of Mortgagors,  if
applicable).

         "CUSTODIAL  FILE" means,  with respect to a Loan,  all of the documents
that must be maintained on file with a document custodian,  Investor, trustee or
other designated agent under Applicable Requirements.

         "CUT-OFF  TIME"  means  11:59 p.m.  Central  Time on the  calendar  day
immediately preceding the Closing Date.

         "DEBT MARK" means an amount determined pursuant to EXHIBIT F hereto.

         "DISCLOSURE   SCHEDULES"  means  the  schedules   attached  hereto  and
delivered by Seller to Buyer as of the date hereof. Information disclosed in any
section of the Disclosure  Schedule shall be deemed to be disclosed with respect
to other  sections of this  Agreement  or the  Disclosure  Schedule  only to the
extent  such  disclosure  would  be  reasonably  apparent  in the  light  of the
substance  of the  disclosure  made or to the extent  there is a specific  cross
reference.

         "EARLY  FUNDED  LOANS"  means  Loans as to  which  the  Company  or the
applicable  Subsidiary  elects  an  early  funding  settlement  option  with the
applicable Investor when it delivers a pool purchase transaction, such as FNMA's
"As Soon As Pooled" options.

         "EBO TRUST"  means The  Principal  Residential  Mortgage  EBO Trust,  a
Delaware business trust.

         "EMPLOYEE  BENEFIT PLAN" means any (i)  "employee  benefit plan" within
the  meaning  of  Section  3(3) of ERISA,  (ii) stock  option,  stock  purchase,
restricted stock, equity compensation,  deferred compensation,  bonus, incentive
compensation, fringe benefit, sick leave, vacation, paid or unpaid leave, profit
sharing, pension, retirement, deferred compensation,  medical, life, disability,
accident, salary continuation,  retention,  supplemental retirement,  severance,
termination pay,  change-of-control  and unemployment benefit plans, programs or
agreements (whether or not insured), or (iii) employment agreement.

         "ENCUMBRANCES" means any lien, charge,  adverse right, claim, mortgage,
security interest or encumbrance in favor of any party.

         "ENVIRONMENTAL  LAWS" means all  federal,  state,  district,  and local
laws, and all rules or  regulations  promulgated  thereunder,  applicable to the
Company  and the  Subsidiaries  relating to  pollution,  the  protection  of the
environment  or human health or relating to the release,  threatened  release or
handling of any hazardous,  toxic,  radioactive or dangerous  materials or other
materials  regulated  under any  Environmental  Law.  Environmental  Laws  shall
include without limitation CERCLA, the Toxic Substances Control Act, as amended,
the  Hazardous   Materials   Transportation   Act,  as  amended,   the  Resource
Conservation and Recovery Act, as amended,  the Clean Water Act, as amended, the
Safe Drinking Water Act, as amended,  the Clean Air Act, as amended,  the Atomic
Energy Act of 1954,  as  amended,  the  Occupational  Safety and Health  Act, as

                                      114

amended,  and all  analogous  laws  promulgated  or issued by any state or other
governmental authority.

         "ERISA" means the Employee  Retirement  Income Security Act of 1974, as
amended.

         "ERISA  AFFILIATE"  with  respect  to any  Person,  means  any trade or
business that is a member of the same  controlled  group of corporations as such
Person,  within the meaning of Section 414(b) of the Code,  that is under common
control with such Person, within the meaning of Section 414(c) of the Code, that
is a member of the same  affiliated  service  group as such  Person,  within the
meaning of  Section  414(m) of the Code,  or that is  otherwise  required  to be
aggregated with such Person pursuant to Section 414(o) of the Code.

         "ESTIMATED  PURCHASE  PRICE"  means an amount  determined  pursuant  to
SCHEDULE 2.2.

         "FED FUNDS RATE" means, for any date, the weighted average of the rates
set  forth  in the  weekly  statistical  release  H.15(519)  (or  any  successor
publication)  published by the Board of Governors of the Federal  Reserve System
opposite the caption "Federal Funds (Effective)."

         "FHA" means the Federal Housing  Administration of HUD or any successor
thereto.

         "FHLMC"  means  the  Federal  Home  Loan  Mortgage  Corporation  or any
successor thereto.

         "FINAL PURCHASE PRICE" means an amount determined  pursuant to SCHEDULE
2.2.

         "FNMA" means the Federal National Mortgage Association or any successor
thereto.

         "FORECLOSURE" means the process culminating in the acquisition of title
to a  Mortgaged  Property  in a  foreclosure  sale  or  by a  deed  in  lieu  of
foreclosure  or  pursuant  to  any  other  comparable  procedure  allowed  under
Applicable Requirements.

         "GAAP" means  generally  accepted  accounting  principles in the United
States which, unless otherwise indicated, are applied on a consistent basis.

         "GNMA"  means  the  Government  National  Mortgage  Association  or any
successor thereto.

         "HAZARDOUS MATERIALS" means any materials or wastes,  defined,  listed,
classified  or regulated as hazardous,  toxic,  a pollutant,  a  contaminant  or
dangerous in or under any  Environmental  Laws,  including  without  limitation,
petroleum,  petroleum  products,  friable asbestos,  molds,  urea  formaldehyde,
radioactive materials and polychlorinated biphenyls.

         "HOLDBACK AMOUNT" means the amount disclosed on SCHEDULE 2.2 hereof.

         "HUD"  means  the  United  States   Department  of  Housing  and  Urban
Development or any successor thereto.

         "INFORMATION   TECHNOLOGY"  means  (i)  computer  software,   including
application  software,  compilers and tool kits in object (or  executable)  code
and/or (human readable) source code, and related documentation; (ii) proprietary
computer programming  languages and related  documentation and materials;  (iii)
data feeds and  databases;  (iv) voice and data circuits,  including,  by way of
example but not of limitation,  hubs and routers; (v) telecommunications systems
and services; and (vi) computer hardware and operating systems.

         "INSURANCE CONTRACT" means any of the insurance policies,  Contracts of
insurance or  reinsurance,  policy  endorsements  and  certificates of insurance
pertaining to the insurance products or coverages underwritten by the Company or
any of the Subsidiaries.

         "INSURER"  means a Person  who (i)  insures  or  guarantees  all or any
portion  of the risk of loss on any Loan,  including,  without  limitation,  any
Agency  and  any  provider  of  private  mortgage  insurance,   standard  hazard

                                      115

insurance, flood insurance, earthquake insurance or title insurance with respect
to any Loan or related  Mortgaged  Property,  (ii)  provides any fidelity  bond,
direct surety bond,  letter of credit,  other credit  enhancement  instrument or
errors and omissions policy or (iii) is a Certificate Insurer.

         "INTELLECTUAL  PROPERTY"  means (i)  patents  and patent  applications,
including   reissuances,   continuations,   continuations-in-part,    revisions,
extensions,  and  reexaminations of such patents and patent  applications;  (ii)
registered and unregistered trademarks, service marks, trade dress, logos, trade
names and corporate  names, or other  identifying  marks,  indicators or labels,
together  with the  goodwill  associated  with them and  applications  for,  and
renewals of, each of them;  (iii)  registered  and  unregistered  copyrights and
applications  for, and renewals of,  copyrights;  (iv) trade  secrets;  and (vi)
Internet domain names and Web site content.

         "INTERCOMPANY  ACCOUNTS AND BORROWINGS"  means, for purposes of SECTION
3.4,  the  accounts  and  borrowings  reflected  on  SCHEDULE  3.4  relating  to
receivables and payables of the Company and  Subsidiaries  with respect to other
members of The Principal Financial Group, Inc. affiliated group. For purposes of
SECTION 3.4, if the net amount of Intercompany Accounts and Borrowings reflected
on the relevant  Pre-Closing  Balance  Sheet or Closing Date Balance  Sheet is a
liability,  such net amount  shall be an amount  payable by Buyer to the Seller,
and if the net amount of Intercompany  Accounts and Borrowings is an asset, such
net amount shall be an amount payable by Seller to Buyer.

         "INVESTMENT  COMMITMENT" means the optional or mandatory  commitment of
the Company or any  Subsidiary  to sell to any Person,  and a Person to purchase
from the  Company or such  Subsidiary,  a  Warehouse  Loan or an  interest  in a
Warehouse Loan owned or to be acquired by the Company or such Subsidiary.

         "INVESTOR"  means,  with respect to the Mortgage  Servicing  Portfolio,
FHLMC, FNMA, GNMA, a State Agency, a state mortgage revenue bond agency,  Seller
or any  Affiliate  thereof,  or any other  Person who owns or holds Loans master
serviced, serviced or subserviced by the Company or any Subsidiary,  pursuant to
a Servicing Agreement but shall not mean a holder of mortgage-backed securities,
mortgage  pass-through  certificates,   participation  certificates  or  similar
securities,  including  any  Securitization  Trustee  acting  on  behalf of such
holder.

         "KNOWLEDGE OF SELLER" means the actual knowledge of Paul Bognanno,  Jon
Baymiller,  Tracy Jackson, Stephen Gallaher,  Loraine Hardin, Charlotte Catalfo,
John  Ievalts  and  John  Schmidt  as to  matters  within  his  or her  area  of
responsibility after reasonable investigation.

         "LAW" means any order, writ, injunction, decree, judgment, ruling, law,
decision,  opinion,  statute, rule or regulation of any governmental,  judicial,
legislative,  executive,  administrative  or regulatory  authority of the United
States, or of any state, local or foreign government or any subdivision thereof,
or of any governmental agency (including an Agency or State Agency),  including,
without limitation, any federal, state or local fair lending laws.

         "LITIGATION" means any action, suit, proceeding,  claim, administrative
or regulatory action, governmental investigation or arbitration proceeding.

         "LOANS" means Warehouse Loans and Serviced Loans.

         "LOSSES"  means,  in respect of any  obligation to indemnify any Person
pursuant  to the terms of this  Agreement,  any and all  actual  direct,  out of
pocket  losses,  damages,  indemnities,   liabilities,  obligations,  judgments,
settlements,  awards,  deficiencies,  offsets,  fines and  penalties  (together,
"DAMAGES"),   reasonable  out-of-pocket  costs,  expenses  and  attorneys'  fees
relating to Damages or to any proceedings,  counterclaims or defenses that could
reasonably  result  in  incurring  or  avoiding  Damages   (including  any  such
reasonable  out-of-pocket  costs,  expenses  and  attorneys'  fees  incurred  in
enforcing such right of  indemnification  against any indemnitor or with respect
to any appeal), but shall not include (i) any such amounts for which the Company
or any  Subsidiary  had recorded a reserve or  allowance  reserve in the Closing
Date  Balance  Sheet to protect  against the type of Loss giving rise to a claim
for  indemnification  under SECTION 10.1 hereof or (ii) loss of profits or other
consequential  damages and punitive or other  exemplary  damages,  except to the
extent  that  such  damages  have  been  awarded  to a third  party  against  an
Indemnified  Party.  SCHEDULE 1.3 hereof  lists all of the Company  reserves and
allowance reserves as of March 31, 2004 and April 30, 2004 (to be updated on the

                                      116

Closing  Date) by account  number and indicates  which  accounts are and are not
eligible  to be  credited  against  Losses  with  respect to breaches of SECTION
4.21(A).

         "LTV" means the ratio that results when the initial  principal  balance
of a Loan at origination is divided by the lesser of the appraised value and the
purchase price of the Mortgaged Property as of the origination date.

         "MARKS" means collectively,  any registered or unregistered  trademark,
service mark, trade dress, or other identifying symbol, indicator, or label that
is used in any manner to create brand  recognition of and to market Seller's and
its  subsidiaries'  and Affiliates'  products and services,  including,  without
limitation, The Principal, Principal Bank, Principal Life Insurance Company, the
Principal  Financial Group, and any trademarks,  service marks,  trade dress, or
other  identifying  marks,  indicators,  or labels  that are used in  connection
therewith, consisting of those listed on EXHIBIT G hereto.

         "MASTER  SERVICING"  means  master  servicing  services  in  respect of
Collateral  Certificate Pools or Loans,  consisting principally of the following
functions  (or a portion  thereof):  (i) the  supervision  and  oversight of the
performance by servicers of their  obligations under servicing  agreements,  but
not otherwise having the contractual  responsibility  to the Investor to collect
payments  from  or  enforce  the  Mortgage  Loan  Documents  against  individual
Mortgagors, except perhaps in the event the servicer is terminated; (ii) causing
Loans to be serviced in the event a servicer is  terminated  until a replacement
servicer  is  retained;  (iii)  the  calculation  of  payments  due to owners of
mortgage-backed securities, asset-backed securities,  participation certificates
or other similar  securities or Loans;  (iv) the transmittal of payments related
to Loans or Collateral  Certificates  to the Investor;  (v) the  transmittal  or
payment  of  Advances;  (vi)  the  preparation  of  reports  to  Investors,  tax
authorities and the Securities and Exchange Commission; and (vii) if applicable,
the compliance  with REMIC or other relevant Tax  requirements.  For purposes of
this  Agreement,  Master  Servicing does not include  Servicing where the master
servicer  either  delegates  its duties to a  subservicer  or  servicer  and has
responsibility  to the  Investor  for the  acts,  errors  or  omissions  of such
subservicer or servicer or otherwise has  responsibility to the Investor for the
primary servicing of the Loans with respect to the Mortgagors.

         "MASTER SERVICING  AGREEMENT" means an agreement  pursuant to which the
Company  or  any  Subsidiary  provides  Master  Servicing  (including,   without
limitation, any rights to master servicing fees).

         "MATERIAL  ADVERSE  EFFECT" means,  with respect to the Company and the
Subsidiaries,  (I) any change,  event or effect that has  resulted in or had, or
will,  within thirty (30) days, result in or have, a material adverse change in,
or a material  adverse effect upon,  the business,  results of operations or the
financial  condition  of the  Mortgage  Group  taken as a whole,  excluding  any
change, event or effect attributable to or resulting from (1) adverse changes in
the  economy  or the  financial  markets  in  general;  (2)  adverse  changes in
economic, business or financial conditions,  including interest rate conditions,
affecting  companies  engaged in the mortgage banking  business;  (3) changes in
laws,  regulations,  interpretations of laws or regulations,  GAAP or regulatory
accounting  requirements  applicable generally or to mortgage banking companies;
or  (4)  this  Agreement  or  the  transactions   contemplated   hereby  or  the
announcement  thereof;  (5)  actions  or  omissions,  or  effects  of actions or
omissions,  taken with the prior written consent, or at the direction, of Buyer;
or (6) any  action  not taken or  omission  made  because  the  consent of Buyer
thereto  reasonably  requested by the Seller or the Company and required by this
Agreement was denied or not acted upon in a timely  manner by the Buyer,  to the
extent,  in the  case of  clauses  (2) and  (3),  such  changes  have  not had a
materially adverse  disproportionate  effect on the Mortgage Group (exclusive of
the effect, if any, of changes in factors already taken into account by Buyer in
valuing the Servicing and  calculating  the Final  Purchase  Price)  relative to
other similarly situated entities operating in the mortgage banking business, or
(II) a material  impairment of the Seller's or the Company's or any Subsidiary's
ability to perform any of its material  obligations  under this  Agreement or to
consummate the transactions  contemplated hereby in accordance with the terms of
this Agreement.

         "MORTGAGE"  means with respect to a Loan, a mortgage,  deed of trust or
other security  instrument  creating an  Encumbrance  upon real property and any
other property  described  therein which secures a Mortgage Note,  together with
any assignment, reinstatement, extension, endorsement or modification thereof.

         "MORTGAGE  GROUP"  means the  Company and the  Subsidiaries  taken as a
whole.

                                      117

         "MORTGAGE  LOAN  DOCUMENTS"  means  the  Custodial  File and all  other
documents  relating  to Loans  required  to  document  and  service the Loans by
Applicable  Requirements,  whether on hard copy, microfiche or its equivalent or
in electronic  format and, to the extent  required by  Applicable  Requirements,
credit and closing packages and disclosures.

         "MORTGAGE LOAN SCHEDULE" means a report delivered as a computer tape in
a format  reasonably  acceptable to Buyer that  identifies  with respect to each
Loan  owned  by  Company  and  the  Subsidiaries,  each  Serviced  Loan  and any
Subserviced  Loan, the information as of the Preliminary  Cut-Off Time specified
on SCHEDULE 1.2.

         "MORTGAGE  NOTE" means,  with  respect to a Loan, a promissory  note or
notes, or other evidence of indebtedness, with respect to such Loan secured by a
Mortgage or Mortgages, together with any assignment,  reinstatement,  extension,
endorsement or modification thereof.

         "MORTGAGE POOL" means a group of mortgage loans that have been pledged,
granted  or sold to secure  or  support  payments  on  specific  mortgage-backed
securities  or  specific   participation   certificates,   including  Collateral
Certificates.

         "MORTGAGE  SERVICING  PORTFOLIO"  means the  portfolio of Loans and the
Collateral  Certificate  Pools serviced or master  serviced or to be serviced or
master  serviced  by  the  Company  or  any  Subsidiary  pursuant  to  Servicing
Agreements.

         "MORTGAGED  PROPERTY"  means the real  property and  improvements  that
secure a Mortgage Note and that are subject to a Mortgage.

         "MORTGAGOR" means the obligor(s) on a Mortgage Note.

         "ORIGINATOR"  means,  with respect to any Loan,  the entity or entities
that (i) took the relevant  Mortgagor's  loan  application,  (ii)  processed the
relevant Mortgagor's loan application or (iii) closed and/or funded such Loan.

         "PERMITS" means all licenses,  permits,  franchises,  orders, consents,
approvals,  registrations,  authorizations,   qualifications,  certificates  and
filings  with  and  under  all  federal,   state,  local  or  foreign  laws  and
governmental  or  regulatory  bodies and all  industry or other  nongovernmental
self-regulatory organizations.

         "PERSON"  means  an  individual,  a  partnership,  a joint  venture,  a
corporation,  a trust,  an  unincorporated  organization,  a  limited  liability
entity, a government or any department or agency thereof or any other entity.

         "PERSONNEL"  means any  officers  or  employees  of the  Company or any
Subsidiary.

         "PIPELINE  LOANS" shall mean  applications  in process for  residential
mortgage loans to be made by Company and its Subsidiaries which (x) for purposes
of calculating Pipeline Loans Servicing Value, Estimated Purchase Price or Final
Purchase  Price as defined in SCHEDULE 2.2, have been  registered and designated
as price protected on Company's residential mortgage loan origination system and
(y)  for  purposes  of  ARTICLES  4, 6 and  10,  whether  or not  registered  or
designated  as  price  protected  on the  Company's  residential  mortgage  loan
origination  system and, in either  case,  which have not closed or funded as of
the Closing Date.

         "PRE-CLOSING  BALANCE SHEET" means the unaudited  consolidated  balance
sheet for the Company dated as of the Preliminary  Cut-Off Time and delivered by
Seller to Buyer  pursuant  to SECTION  2.3  hereof,  which  shall be prepared in
accordance  with  GAAP and on the same  basis as the  Balance  Sheet,  using the
policies,   procedures  and  methodologies   employed  by  the  Company  in  the
preparation of the Financial Statements.

         "PRE-CLOSING  TAX  AMOUNTS"  means  the  net  amount  reflected  on the
Pre-Closing Balance Sheet relating to federal, state, local or foreign income or
franchise  Taxes, or Taxes measured by or based on net income (for the avoidance
of doubt,  such amounts  shall  include,  without  limitation,  any deferred tax
assets and deferred tax  liabilities),  of the Company and/or its  Subsidiaries;
for purposes of SECTION 3.4, such net amount shall be an amount payable by Buyer
to Seller if such net amount is a liability,  and shall be an amount  payable by
Seller to Buyer if such net amount is an asset.

                                      118

         "PRE-CLOSING   NET  BOOK   VALUE"   means  the  amount   equal  to  the
stockholder's equity of the Company reflected on the Pre-Closing Balance Sheet.

         "PRELIMINARY  CUT-OFF  TIME" means 11:59 p.m.  Central Time on the last
Business Day of the second  calendar  month  immediately  preceding the month in
which the Closing Date occurs.

         "PRIOR SERVICER" means any party that was a master  servicer,  servicer
or  subservicer  of any Loan before the Company or any Subsidiary or the current
Servicer, as applicable,  became the master servicer, servicer or subservicer of
such Loan.

         "PRIVATE  INVESTORS" means Seller,  any of its Affiliates or any Person
other than the Agencies who owns Loans master serviced,  serviced or subserviced
by the Company or any  Subsidiary  pursuant to a Master  Servicing  Agreement or
Servicing  Agreement,   including  Securitization  Trustees  and  Securitization
Entities.

         "PRMI DEFINED  BENEFIT PLAN" means any PRMI Employee  Benefit Plan that
is subject to Section 302 or Title IV of ERISA.

         "PRMI EMPLOYEE  BENEFIT PLAN" means any Employee  Benefit Plan (i) that
has been  established  or is  maintained  or sponsored by PRMI, or to which PRMI
contributes or is required to contribute, or into which PRMI has entered or (ii)
that has been established or is maintained or sponsored by an ERISA Affiliate of
PRMI, or to which an ERISA  Affiliate of PRMI has  contributed or is required to
contribute,  or into which an ERISA Affiliate of PRMI has entered, in each case,
for  the  benefit  of any  active,  retired  or  former  employee,  director  or
consultant  of PRMI or any  Subsidiary;  provided  that the term "PRMI  Employee
Benefit  Plan" shall not include any Employee  Benefit  Plan that is  maintained
under applicable law by a governmental body.

         "PRMI  QUALIFIED  PLAN" means any PRMI  Employee  Benefit  Plan that is
intended to be qualified under Section 401(a) of the Code.

         "RECOURSE"  means any arrangement  pursuant to which the Company or any
Subsidiary  bears the risk to a third party Investor of any part of the ultimate
credit losses  incurred in connection  with a default under or  Foreclosure of a
Loan not owned by the Company or such Subsidiary, except insofar as such risk of
loss is based upon (i) a breach by the Company or any such  Subsidiary of any of
their contractual representations,  warranties or covenants, (ii) expenses, such
as legal fees, in excess of the  reimbursement  limits, if any, set forth in the
Applicable Requirements or (iii) an early payment default based on a delinquency
or default  under the Loan within the first year after the Closing of such Loan.
The parties hereto acknowledge that no Recourse results from or arises under (x)
the Applicable Requirements pertaining to GNMA or (y) with respect to any Master
Servicing  Agreement,  losses as to which the responsibility or liability of the
Company or any Subsidiary is limited to customary special hazard, bankruptcy and
fraud  coverages,  the amount of which  coverages is  established  by nationally
recognized   rating  agencies  in  connection  with  rated  series  of  mortgage
pass-through   certificates,   participation   certificates,   mortgage   backed
securities or other similar securities.

         "REMIC" means a "real estate  mortgage  investment  conduit" within the
meaning of Section 860D of the Code.

         "REO"  means  any  property  owned  by the  Company  or any  Subsidiary
acquired  in the  conduct  of its  mortgage  servicing  business  as a result of
Foreclosure or any other method in satisfaction of indebtedness (whether for its
own account or on behalf of an Investor or Insurer).

         "RETENTION   AGREEMENTS"  means  those  certain  agreements  listed  on
SCHEDULE 4.17(I) hereto.

         "SAP"  means  the  statutory   accounting   principles   and  practices
prescribed or permitted by the Vermont Department of Insurance.

         "SECURITIES  LAWS" means the  Securities  Act of 1933, as amended;  the
Securities Exchange Act of 1934, as amended; the Investment Company Act of 1940,
as amended; the Investment Advisers Act of 1940, as amended; the Trust Indenture

                                      119

Act of 1939, as amended;  and the rules and  regulations  of the  Securities and
Exchange Commission promulgated thereunder.

         "SECURITIZATION ENTITY" means The EBO Trust.

         "SECURITIZATION  ISSUER" means (i) the Company or any Subsidiary or any
Affiliate  of the  Company or any  Subsidiary  depositor  in any  Securitization
Transaction  or (ii) any  trust,  corporation,  partnership,  limited  liability
entity or special  purpose  entity that is the issuer of  mortgage  pass-through
certificates,  participation  certificates,  mortgage-backed securities or other
similar securities in any Securitization Transaction.

         "SECURITIZATION  TRANSACTION"  means any  transaction,  however  named,
involving the Company or any  Subsidiary and any one or more  purchasers  and/or
Investors  (other  than an Agency)  which  provides  for the  monetization  of a
discrete  pool or pools of (i)  mortgage  loans  and/or  mortgage  notes or (ii)
Collateral Certificates through debt securities or ownership interests issued by
a Securitization Issuer or Securitization Entity supported or backed by mortgage
loans  and/or  mortgage  notes  or  Collateral   Certificates   that  have  been
transferred to a Securitization Issuer by the Company or such Subsidiary.

         "SECURITIZATION  TRUSTEE"  means any entity  that is a trustee  for any
Securitization  Transaction  acting  for the  benefit  of  holders  of  mortgage
pass-through certificates, pass-through certificates or other similar securities
issued in connection with such Securitization Transaction.

         "SELLER AND SERVICING  GUIDES" means the (i) seller and servicer guides
utilized  by  the  Agencies  and  other  Investors  to  which  the  Company  and
Subsidiaries  have sold  residential  mortgage  loans and for which the  Company
services  residential  mortgage loans or (ii) the Correspondent Seller Guide and
the  Wholesale  Lender  Broker  Guide  utilized  by the  Company  to govern  its
relationships with correspondent and wholesale sellers of loans.

         "SERVICED  LOAN" means any Loan  (including  Early  Funded  Loans) with
respect to which the Company or any Subsidiary owns the Servicing  pursuant to a
Servicing Agreement.

         "SERVICER"  means the  Person  responsible  for  performing  the master
servicing,  servicing or  subservicing  functions in connection  with a Serviced
Loan.

         "SERVICING"  means  mortgage  loan  servicing  rights  and  obligations
including,  without  limitation,  one or more of the  following  functions (or a
portion  thereof):  (i) the  administration  and  collection of payments for the
reduction of principal  and/or the  application  of interest on a mortgage loan;
(ii) the  collection  of payments on account of taxes and  insurance;  (iii) the
remittance of appropriate portions of collected payments;  (iv) the provision of
full  escrow  administration;  (v) the  pursuit  of  foreclosure  and  alternate
remedies  against a related  Mortgaged  Property;  (vi) the  administration  and
liquidation  of REO; (vii) the right to receive the Servicing  Compensation  and
any ancillary fees arising from or connected to the Serviced Loans,  earnings on
and other  benefits  of the related  Custodial  Accounts  and any other  related
accounts  maintained  by the Company or any  Subsidiary  pursuant to  Applicable
Requirements;  (viii) any other  obligation  relating to  servicing  of mortgage
loans  required  under any Servicing  Agreement  not otherwise  described in the
foregoing  clauses;  (ix) the right to  exercise  any  clean up  calls;  (x) the
performance of administrative  functions  relating to any of the foregoing;  and
(xi) the provision of Master Servicing and, in each case, all rights, powers and
privileges incident to any of the foregoing,  and expressly includes the related
Custodial  Accounts,  the Mortgage  Loan  Documents  and the right to enter into
arrangements  with third parties that generate  ancillary fees and benefits with
respect to the Serviced Loans.

         "SERVICING  AGREEMENTS"  mean  agreements,  including  Master Servicing
Agreements,  pursuant to which the Company or any Subsidiary  provides Servicing
in connection with Serviced Loans.

         "SERVICING  COMPENSATION"  means  any  servicing  fees  and any  excess
servicing  compensation  which the  Company or any  Subsidiary  is  entitled  to
receive pursuant to any Servicing Agreement or Master Servicing Agreement.

         "STATE  AGENCY"  means any  state  agency or other  state  entity  with
authority  to regulate  the  mortgage-related  activities  of the Company or any
Subsidiary or to determine the investment or servicing  requirements with regard

                                      120

to  mortgage  loan  origination,  purchasing,  servicing,  master  servicing  or
certificate administration performed by the Company and such Subsidiary.

         "STRADDLE PERIOD" means any taxable year or period beginning before and
ending after the Closing Date.

         "STOCK"  shall  have the  meaning  set  forth in the  recitals  to this
Agreement.

         "SUBSERVICED LOAN" means any residential  mortgage loan subserviced by,
or to be subserviced by, the Company or any Subsidiary.

         "SUBSIDIARIES" means Principal  Residential Mortgage Capital Resources,
LLC,  a  Delaware  limited  liability  entity;  Principal  Residential  Mortgage
Servicing,  LLC, a Delaware  limited  liability  entity;  Principal  Residential
Mortgage Funding,  LLC, a Delaware limited liability entity;  Principal Mortgage
Reinsurance  Company,  a Vermont  organized  insurance  company;  and  Principal
Wholesale Mortgage, Inc., an Iowa corporation.

         "TAX" or "TAXES" means any net income,  alternative  or add-on  minimum
tax, gross income, gross receipts, sales, use, ad valorem,  franchise,  capital,
profits, license,  withholding,  payroll, employment,  excise, severance, stamp,
occupation,  premium, property, custom duty, transfer, documentary or other tax,
governmental  fee or other  like  assessment  or charge of any kind  whatsoever,
together with any interest or any penalty,  addition to tax or additional amount
imposed by any governmental authority responsible for the imposition of any such
tax.

         "TAX  AMOUNTS"  means,  for  purposes of SCHEDULE  3.4 hereof,  the net
amount reflected on the unaudited  consolidated  balance sheet of the Company as
of March 31,  2004  relating  to  federal,  state,  local or  foreign  income or
franchise  Taxes, or Taxes measured by or based on net income (for the avoidance
of doubt,  such amounts  shall  include,  without  limitation,  any deferred tax
assets and deferred tax liabilities),  of the Company or its  Subsidiaries;  for
purposes of SECTION 3.4, such net amount shall be an amount  payable by Buyer to
Seller if such net  amount is a  liability,  and shall be an amount  payable  by
Seller to Buyer if such net amount is an asset.

         "TAX RETURN" means any return,  report,  declaration,  form,  claim for
refund,  or  information  return or statement  required or permitted to be filed
with any Tax  authority  relating to Taxes,  including  estimated  tax  returns,
income tax returns,  information returns,  withholding  returns,  employment tax
returns, and any schedule or attachment thereto or any amendment thereto.

         "TRANSITION  SERVICES AGREEMENT" means an agreement executed by, and in
form and  substance  satisfactory  to, the Seller and Buyer for the provision of
transition services after Closing,  containing substantially the terms set forth
in SCHEDULE 1.4.

         "TREASURY  REGULATIONS"  means the  regulations  promulgated  under the
Code.

         "VA" means the United States Department of Veteran's  Administration or
any successor thereto.

         "VA LOANS" means  mortgage loans that are guaranteed or are eligible to
be guaranteed by the VA.

         "WAREHOUSE LOAN" means a mortgage loan evidenced by a Mortgage Note and
secured  by a  Mortgage  owned by the  Company or any  Subsidiary,  including  a
mortgage loan that has closed but not funded, but excluding Early Funded Loans.

1.2  OTHER DEFINED TERMS.  The following  terms shall have the meanings  defined
     for such terms in the Sections set forth below:

TERM                                                            SECTION
- ----                                                            -------
Benefits Continuation Period                                    ss. 9.4(a)
Buyer Indemnified Parties                                       ss. 10.1
Claim Notice                                                    ss. 10.4(a)
Closing                                                         ss. 3.1

                                      121

Confidentiality Agreement                                       ss. 6.3
Company Intellectual Property                                   ss. 4.15(a)(1)
Company Information Technology                                  ss. 4.15(a)(2)
Company Owned Intellectual Property                             ss. 4.15(a)(1)
Company Owned Information Technology                            ss. 4.15(a)(2)
Competing Business                                              ss. 9.5
Damages                                                         ss. 1.1 (Losses)
Estimated Purchase Price                                        ss. 2.4
Evaluation Material                                             ss. 6.3
Excluded IT                                                     ss. 4.15(a)(3)
Final Section 3.4 Amount                                        ss. 3.5
Financial Statements                                            ss. 4.6(a)
Franchise Premium                                               ss. 2.3
Indemnified Party                                               ss.10.4(a)
Indemnifying Party                                              ss.10.4
Indemnity Cap                                                   ss.10.1(b)
Leases                                                          ss. 4.7(b)
Licensed Marks                                                  ss. 9.3(b)
Policies                                                        ss. 4.7(c)
PMRC                                                            ss. 4.6(b)
Pre-Closing Section 3.4 Amount                                  ss. 3.4
Representatives                                                 ss. 6.2(n)
Securitization Instruments                                      ss. 4.22(a)
Seller Indemnified Parties                                      ss. 10.2
Settlement Date                                                 ss. 2.7
Tape                                                            ss. 4.29
Third Party                                                     ss. 4.15(a)(4)
Third Party IT                                                  ss. 4.15(a)(4)
Tax Package                                                     ss. 11.5(f)
Transition Team                                                 ss. 6.3

                                    ARTICLE 2
                           PURCHASE AND SALE OF STOCK

2.1  TRANSFER OF STOCK.  Upon the terms and subject to the conditions  contained
     herein,  Seller  will sell,  transfer  and convey to Buyer,  and Buyer will
     purchase from Seller,  all of the Stock, free and clear of all Encumbrances
     at the Closing.

2.2  CONSIDERATION FOR STOCK. The consideration for the Stock shall be the Final
     Purchase Price. At the Closing, in accordance with SECTION 3.3, Buyer shall
     pay to Seller the Estimated Purchase Price.

2.3  PRE-CLOSING  DELIVERIES.  No later than the 10th  Business Day of the month
     immediately  preceding  the month in which the Closing  will occur,  Seller
     shall deliver the following to Buyer: (i) the Mortgage Loan Schedule;  (ii)
     the  Pre-Closing   Balance  Sheet;  (iii)  a  schedule  setting  forth  the
     Pre-Closing Section 3.4 Amount in the form of SCHEDULE 3.4; (iv) a schedule
     in the form of SCHEDULE 2.5(A) setting forth the Estimated  Purchase Price;
     (v) a  schedule  detailing  Advances  and  accounts  receivable  as of  the
     Preliminary  Cut-Off  Time;  and (vi)  wire  instructions  designating  the
     account or accounts to which to wire the Estimated  Purchase  Price and the
     Pre-Closing Section 3.4 Amount on the Closing Date.

2.4  SETTLEMENT DATE.  Except as otherwise  provided in SECTION 3.6 hereof, on a
     date  ("SETTLEMENT  DATE")  within 90 days after the  Closing  Date or such
     later date as agreement may be reached pursuant to SECTION 2.5 hereof,  the
     Buyer and Seller shall  determine  the Final  Purchase  Price and the Final
     Section 3.4 Amount in  accordance  with the  provisions of SECTIONS 2.5 and
     3.4 hereof.  On the Settlement Date,  Buyer or Seller,  as the case may be,

                                      122

     shall be entitled to the net  difference  between (i) the amount paid under
     SECTION  3.3(A),  and (ii) the sum of (x) the Final Purchase Price PLUS (y)
     the Final  Section 3.4 Amount  (or, if such amount is an amount  payable by
     Seller to Buyer, minus the Final Section 3.4 Amount) MINUS (z) the Holdback
     Amount,  together  with  interest  thereon  at the Fed Funds  Rate from and
     including  the  Closing  Date to but  excluding  the date of payment  (such
     amount, including interest, the "SETTLEMENT AMOUNT"), payable in accordance
     with SECTION 3.5.

2.5  CLOSING DATE BALANCE SHEET

(a)  Not later than 60 days after the Closing Date, Buyer shall prepare or cause
     to be prepared  and deliver or cause to be  delivered to Seller the Closing
     Date  Balance  Sheet  and  the  Final  Purchase  Price   calculation.   For
     illustrative  purposes only,  SCHEDULE  2.5(A)  discloses an example of the
     Estimated  Purchase Price and Final Purchase  Price  calculations  assuming
     that the Closing Date is May 1, 2004.

(b)  Buyer  shall  permit  Seller to have  reasonable  access to the records and
     Personnel of the Company and the Subsidiaries used in preparing the Closing
     Date Balance Sheet in order to verify amounts set forth thereon. Seller may
     dispute items reflected on the Closing Date Balance Sheet only on the basis
     of (1) mathematical or factual errors,  (2) noncompliance with this SECTION
     2.5 (including all defined terms and  cross-references) or (3) inconsistent
     application  of  accounting  methods,  principles,  practices,  procedures,
     policies  and  estimation  methodologies  used  in the  preparation  of the
     Balance   Sheet,   except  where   preparation   on  that  basis  would  be
     inappropriate  due to prior errors or changes in  circumstances  that would
     render such basis  inconsistent with GAAP in any material  respect.  Unless
     Seller delivers written notice (a "DISPUTE Notice") to Buyer on or prior to
     the 30th day after  Seller's  receipt of the  Closing  Date  Balance  Sheet
     specifying  in  reasonable  detail  the  amount,  nature  and  basis of all
     disputed  items,  Seller shall be deemed to have accepted and agreed to the
     Closing Date Balance  Sheet,  and such Closing Date Balance  Sheet shall be
     deemed conclusive for purposes of determining the Final Purchase Price.

(c)  In the event that Buyer and Seller are unable to agree with  respect to the
     Closing  Date  Balance  Sheet,  then  within  seven days of delivery of the
     Dispute  Notice,  Buyer and Seller shall  mutually  agree to an independent
     public accounting firm that is not the independent auditor for either Buyer
     or  Seller;  provided  if  Buyer  and  Seller  are  unable  to  agree on an
     independent  public  accounting  firm,  either  may  request  the  American
     Arbitration  Association  (New York City Office) to appoint an  independent
     accounting  firm  meeting  such   requirements.   The  independent   public
     accounting firm selected  pursuant to this SECTION 2.5(C) shall be referred
     to as the "ACCOUNTANT."  The Accountant shall make a determination  only of
     such disputed  items  identified  in the Dispute  Notice (and not as to any
     other  matters)  based solely upon  submissions/presentations  by Buyer and
     Seller and the provisions of this Agreement (and not by independent review)
     and shall deliver to Buyer and Seller,  as promptly as  practicable  and no
     more than 45 days after its appointment, a written report setting forth the
     resolution of each disputed  item.  The findings of the  Accountant,  which
     shall not  exceed in amount the  amount  claimed by either  party as to any
     item in dispute,  shall be conclusive and binding upon Buyer and Seller for
     purposes  of this  Agreement.  Each of Buyer and Seller  shall bear all the
     fees and costs incurred by it in connection with the  arbitration  referred
     to in this SECTION 2.5, except that the fees and expenses of the Accountant
     shall be borne 50% by Seller  and 50% by Buyer (and shall not be accrued in
     the Closing Date Balance  Sheet).  The  provisions  in this SECTION  2.5(C)
     relating to  resolutions  of disputes by the Accountant are not intended to
     and shall not be  interpreted  to require that the parties  refer to such a
     firm (i) any  dispute  arising out of a breach by one of the parties of its
     obligations  under the Agreement;  (ii) any dispute the resolution of which
     requires the construction or interpretation of this Agreement; or (iii) any
     other  dispute  other  than (in the case of this  clause  (iii)) a  dispute
     related to the  mathematical  calculation of the Closing Date Balance Sheet
     or the Final  Purchase  Price or the  accounting  treatment of any asset or
     liability,  or item of income or expense,  that affects the  calculation of
     the Closing Date Balance Sheet.

2.6  PURCHASE  PRICE  ALLOCATION.  In  connection  with the  Section  338(h)(10)
     Election, Buyer and Seller agree that the "Aggregate Deemed Sale Price" (as
     defined in  Treasury  Regulations  Section  1.338-4)  for the Stock will be
     allocated  among  the  assets  of  the  Company  and,  if  applicable,  the
     Subsidiaries,  for all purposes  (including  Tax and  financial  accounting
     purposes) in a manner  consistent  with Code  Sections 338 and 1060 and the
     Treasury  Regulations  thereunder.  If  Buyer  and  Seller  agree  on  such
     allocation  within one hundred  twenty  (120) days after the  Closing  Date

                                      123

     (which shall be evidenced by an allocation schedule signed by each of Buyer
     and Seller), Buyer, Seller, the Company and the Subsidiaries shall file all
     Tax Returns and information reports in a manner consistent with such agreed
     allocation and shall take no position inconsistent  therewith. In the event
     that Buyer and Seller  are  unable to agree on such  allocation  within one
     hundred  twenty (120) days after the Closing  Date,  neither  Buyer (or the
     Company or the  Subsidiaries  with respect to periods  beginning  after the
     Closing Date) nor Seller (or the Company or the  Subsidiaries  with respect
     to  periods  ending on or  before  the  Closing  Date)  shall be  required,
     pursuant  hereto,  to file  any  Tax  Returns  or  information  reports  or
     otherwise  take any positions  consistent  with the allocation of the other
     party.

                                    ARTICLE 3
                                     CLOSING

3.1  TIME  AND  PLACE OF  CLOSING.  Subject  to the  receipt  of the  deliveries
     specified  in SECTIONS 3.2 and 3.3 below,  the closing of the  transactions
     contemplated herein (the "CLOSING") shall be held as of 12:01 a.m. (Central
     Standard  Time) on the  Closing  Date at such place and time as the parties
     may agree.

3.2  DELIVERIES BY SELLER. At the Closing,  Seller shall deliver, or cause to be
     delivered, the following to Buyer:

(a)  The stock certificates representing the shares of Stock, together with duly
     executed stock powers;

(b)  The certificate(s) contemplated by Article 8 hereof;

(c)  The Transition  Services  Agreement and, subject to SECTION 9.6 hereof, the
     Loan Servicing Agreement, duly executed;

(d)  The  resignation  letters of all Persons who are officers of the Company or
     any of the Subsidiaries whose principal employment is not as an employee of
     such entity or who are directors of the Company or any of the Subsidiaries;

(e)  A duly executed certificate of non-foreign status (a "FIRPTA  CERTIFICATE")
     from Seller in the form and manner that  complies  with Section 1445 of the
     Code and the Treasury Regulations promulgated thereunder; and

(f)  All other documents,  instruments and writings  required to be delivered by
     Seller at or prior to the Closing Date pursuant to this Agreement.

3.3  DELIVERIES BY BUYER.  At the Closing,  Buyer shall deliver the following to
     Seller:

(a)  The sum of (i) the  Estimated  Purchase  Price  PLUS  (ii) the  Pre-Closing
     Section 3.4 Amount (or, if such amount is payable by Seller to Buyer, minus
     the  Pre-Closing  Section 3.4 Amount) MINUS (iii) the Holdback  Amount,  by
     wire  transfer in  immediately  federal  funds to an account  designated by
     Seller pursuant to SECTION 2.3;

(b)  The certificate(s) contemplated by ARTICLE 7 hereof;

(c)  The Transition  Services  Agreement and, subject to SECTION 9.6 hereof, the
     Loan Servicing Agreement, duly executed; and

(d)  All other documents,  instruments and writings  required to be delivered by
     Buyer at or prior to the Closing Date pursuant to this Agreement.

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3.4  SETTLEMENT OF  INTERCOMPANY  ACCOUNTS AND  BORROWINGS  AND TAX AMOUNTS.  In
     accordance  with  SECTION  2.3, no later than the 10th  Business Day of the
     month  immediately  preceding  the month in which the  Closing  will occur,
     Seller  shall  deliver  to Buyer a  schedule  in the form of  SCHEDULE  3.4
     setting  forth the  balance of each of the (i)  Intercompany  Accounts  and
     Borrowings  as of the date of, and reflected  in, the  Pre-Closing  Balance
     Sheet and (ii) the Pre-Closing Tax Amounts, and the net amount necessary to
     settle such  Intercompany  Accounts and Borrowings and the  Pre-Closing Tax
     Amounts ("PRE-CLOSING SECTION 3.4 AMOUNT"). Not more than 60 days after the
     Closing  Date,  Buyer  shall  deliver to Seller a  schedule  in the form of
     SCHEDULE  3.4  setting  forth the  balance of each of (i) the  Intercompany
     Accounts and  Borrowings,  as of the date of, and reflected in, the Closing
     Date  Balance  Sheet and (ii) the  Closing  Date Tax  Amounts,  and the net
     amount  necessary to settle such  Intercompany  Accounts and Borrowings and
     Closing Date Tax Amounts ("FINAL  SECTION 3.4 AMOUNT").  The procedures and
     principles set forth in SECTIONS 2.5(B) and 2.5(C) shall apply to access to
     records  and  Personnel,  disputes  and  expenses  in  connection  with the
     determination  of the Final  Section  3.4  Amount.  Buyer shall cause to be
     released  on the  Closing  Date the  guarantees,  swaps and other  forms of
     credit enhancement provided by Seller or its Affiliates to third parties to
     support the debt obligation of Company to such third parties,  as listed on
     SCHEDULE  3.4.  Seller  shall cause to be released on the Closing  Date all
     security  interests on assets of the Company and any of its Subsidiaries in
     connection  with any  intercompany  borrowing  upon the  repayment  of such
     borrowings by Buyer or its Affiliates.

3.5  SETTLEMENT  DATE PAYMENTS.  On the Settlement  Date, the following  actions
     shall be taken:

(a)  Buyer or Seller,  as the case may be,  shall pay the  Settlement  Amount by
     wire transfer in immediately  available  funds to an account  designated by
     the recipient thereof.

(b)  Each party  shall take such other  actions,  and shall  execute and deliver
     such other  instruments  or  documents,  as shall be required in connection
     with the  determination  and  payment of the Final  Purchase  Price and the
     Final Section 3.4 Amount.

3.6  CONFIRMATION AND ADJUSTMENT OF FINAL PURCHASE PRICE AND SETTLEMENT  AMOUNT.
     The determination of the Final Purchase Price and the Settlement Amount and
     the payment thereof shall be subject to further confirmation and adjustment
     as provided for in SCHEDULE 2.2 and EXHIBIT D.

                                   ARTICLE 4
                    REPRESENTATIONS AND WARRANTIES OF SELLER

Seller hereby represents and warrants to Buyer as follows:

4.1  ORGANIZATION OF SELLER.  Seller is duly organized and validly existing as a
     corporation  in  good  standing  under  the  laws  of its  jurisdiction  of
     organization  and has full  corporate  power and  authority  to conduct its
     business as it is presently being conducted.

4.2  ORGANIZATION  OF THE  COMPANY.  The  Company  and each  Subsidiary  is duly
     organized and validly existing as a corporation or limited liability entity
     in  good  standing  under  the  laws of the  jurisdiction  in  which  it is
     organized  and has full  corporate or entity power and authority to conduct
     its business and to own, lease and operate its  properties and assets.  The
     Company and each  Subsidiary is duly  qualified or otherwise  authorized in
     all material respects as a foreign  corporation or limited liability entity
     to conduct its business and is in good standing in each jurisdiction  where
     such  authorization  or  qualification  is required  for the conduct of its
     business or the ownership of its assets.  True, complete and correct copies
     of the  organizational  documents of the Company and each  Subsidiary as of
     the date of this Agreement have been previously made available to Buyer.

4.3  CAPITAL STOCK.  SCHEDULE 4.3 sets forth a complete and accurate list of the
     Company's  authorized  shares of common  stock and the  number of shares of
     common stock which are issued and outstanding. No shares of any other class
     or  series  of  capital  stock of the  Company  are  authorized,  issued or
     outstanding.  All of the  shares  of the Stock  have been duly and  validly
     authorized and issued, and are fully paid and nonassessable. Seller owns of
     record  and   beneficially   all  of  the  Stock  free  and  clear  of  all
     Encumbrances, including without limitation, any agreement, understanding or
     restriction  affecting  the voting  rights or other  incidents of record or

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     beneficial  ownership  pertaining to the Stock. There are no subscriptions,
     options, warrants, calls, commitments, preemptive rights or other rights of
     any kind outstanding for the purchase of, or any securities  convertible or
     exchangeable  for,  any  equity  interests  of the  Company.  There  are no
     restrictions  upon the  voting  or  transfer  of any  shares  of the  Stock
     pursuant to the charter or bylaws of the Company or any  agreement or other
     instrument  to which the  Company,  Seller or any  Affiliate of Seller is a
     party or by which the Company,  Seller or any Affiliate of Seller is bound.
     Upon consummation of the transactions contemplated by this Agreement, Buyer
     will be the owner of the Stock,  free and clear of all  Encumbrances  other
     than any Encumbrances arising as a result of action by Buyer.

4.4  AUTHORIZATION. Seller has full corporate power and authority to execute and
     deliver this  Agreement and to  consummate  the  transactions  contemplated
     hereby. The execution, delivery and performance of this Agreement by Seller
     have been duly authorized by all necessary corporate action. This Agreement
     has been duly  executed  and  delivered  by Seller  and,  assuming  the due
     execution of this Agreement by Buyer, is a valid and binding  obligation of
     Seller,  enforceable  against Seller in accordance  with its terms,  except
     that  such   enforcement   may  be  limited  by   bankruptcy,   insolvency,
     reorganization, moratorium or other similar laws now or hereafter in effect
     relating to or  affecting  the rights or remedies of  creditors  or general
     principles  of equity  (whether  considered  in a  proceeding  at law or in
     equity)  and the  discretion  of the  court  before  which  any  proceeding
     therefor may be brought.

4.5  SUBSIDIARIES.  SCHEDULE 4.5 sets forth a complete and accurate  list of all
     of the Subsidiaries, all of which are directly wholly owned by the Company.
     SCHEDULE  4.5  also  sets  forth  the   jurisdiction  of  incorporation  or
     organization  of each of the  Subsidiaries  and the  number of  issued  and
     outstanding  shares of capital stock or interests of each  Subsidiary.  All
     outstanding  shares of capital stock or interests of the Subsidiaries  have
     been  duly and  validly  authorized  and  issued,  and are  fully  paid and
     nonassessable.  All such  outstanding  shares or interests are owned by the
     Company free and clear of any Encumbrances,  including, without limitation,
     any agreement,  understanding or restriction affecting the voting rights or
     other  incidents  of  record or  beneficial  ownership  pertaining  to such
     shares. There are no subscriptions,  options, warrants, calls, commitments,
     preemptive  rights or other rights of any kind outstanding for the purchase
     of, nor any securities  convertible  into or  exchangeable  for, any equity
     interests  of any of  the  Subsidiaries.  Each  of  the  Subsidiaries  is a
     corporation or limited  liability  entity duly organized,  validly existing
     and in good standing in all material respects under the jurisdiction of its
     organization,  with full corporate or entity power, right and authority and
     all necessary Federal, state and local authorizations to own its properties
     and conduct its business as now being  conducted and is duly  qualified and
     in good  standing in all  material  respects  to transact  business in each
     jurisdiction  where such authorization or qualification is required for the
     conduct  of  its  business  or the  ownership  of its  assets.  Except  for
     ownership of the  Subsidiaries or as disclosed in SCHEDULE 4.5, neither the
     Company nor any of the Subsidiaries beneficially owns or controls, directly
     or  indirectly,  any  shares  of  stock  or other  equity  interest  in any
     corporation, firm, partnership, joint venture or other Person.

4.6  FINANCIAL STATEMENTS; MINUTE BOOKS.

(a)  The  audited  consolidated  balance  sheets  and the  related  consolidated
     statements  of  operations  and   comprehensive   income,   of  changes  in
     stockholder's  equity and of cash flows of the Company at December 31, 2003
     and  December  31,  2002 and for the  periods  then  ended,  including  the
     footnotes thereto (the "FINANCIAL STATEMENTS"),  and the Balance Sheet have
     been delivered to Buyer by Seller. The Financial Statements and the Balance
     Sheet  are  based  on  the  books  and  records  of  the  Company  and  its
     Subsidiaries,  and fairly present, in all material respects,  the financial
     position and results of operations of the Company and its Subsidiaries,  as
     of the date of or for the period  indicated  therein,  in  accordance  with
     GAAP. The Monthly  Unaudited  Balance Sheets delivered by Buyer pursuant to
     SECTION 6.8, when  prepared,  will be based on the books and records of the
     Company and its  Subsidiaries  and will  fairly  present,  in all  material
     respects,  the financial  position and results of operations of the Company
     and  the  Subsidiaries,  as of the  date  of or for  the  period  indicated
     therein,  in accordance with GAAP. The books and records of the Company and
     each  Subsidiary  have been,  and are  being,  maintained  in all  material
     respects  in  accordance  with  GAAP and any  other  applicable  legal  and
     accounting  requirements.   The  minute  books  of  the  Company  and  each
     Subsidiary,  which  have been made  available  to Buyer,  contain  accurate
     records  in  all  material  respects  of all  corporate  actions  of  their
     respective shareholders and Boards of Directors.

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(b)  The audited balance sheet of Principal Mortgage Reinsurance  Company,  Inc.
     ("PMRC") and the related audited statements of operations and comprehensive
     income and cash flows at December 31, 2002 and for the year then ended, and
     the  unaudited  balance  sheet as of December 31, 2003 and interim  balance
     sheet as of March 31, 2004 and the related unaudited interim  statements of
     operations  and  comprehensive  income  and cash  flows for the year  ended
     December 31, 2003,  and the three (3) months ended March 31, 2004,  and its
     annual statements for the fiscal years ended December 31, 2003 and December
     31, 2002,  as filed with the  insurance  regulatory  authorities  (or other
     comparable state regulatory agencies),  copies of which have been delivered
     to  Buyer  prior  to the  date  hereof,  fairly  present,  in all  material
     respects,  PMRC's statutory financial condition as of the dates thereof and
     its  results of  operations  and cash flows for the  periods  then ended in
     conformity with SAP consistently  applied. The other information  contained
     in such annual statements fairly presents,  in all material  respects,  the
     information  required  to be  contained  therein  in  conformity  with  SAP
     consistently  applied.  PMRC is the only Subsidiary of the Company required
     by Law to prepare  financial  statements for filing with, or submission to,
     insurance  regulatory  authorities (or other  comparable  state  regulatory
     agencies).  The aggregate reserves held with respect to Insurance Contracts
     of PMRC, as  established  and reflected in its December 31, 2003  financial
     statements  and annual report meet all  requirements  of applicable Law and
     SAP in all material respects.

4.7  PROPERTIES AND INSURANCE.

(a)  SCHEDULE  4.7(A)  sets forth the address or other  description  of all real
     property owned by the Company or any Subsidiary  other than REO. Except (i)
     as may be  reflected  in the  Financial  Statements,  (ii) for any lien for
     current  taxes not yet  payable,  (iii)  for such  other  Encumbrances  and
     imperfections of title that do not materially  affect the value of personal
     or real property  reflected in the Financial  Statements or acquired  since
     the date of such Financial Statements and that do not materially affect the
     value of or materially  interfere  with or impair the present and continued
     use of such property and (iv) as it relates to any REO, the Company and its
     Subsidiaries  have good and marketable  indefeasible fee simple title, free
     and  clear  of  Encumbrances,  to all of the  personal  and  real  property
     reflected in the Financial  Statements,  and all personal and real property
     acquired since the date of the Financial  Statements,  except such personal
     and real  property  as has  been  disposed  of in the  ordinary  course  of
     business for adequate  consideration or that is being held on behalf of the
     applicable  Investor  or Insurer or except for liens,  security  interests,
     claims,   charges,   or  other  such  other   Encumbrances   as  have  been
     appropriately  reserved  for  in the  Financial  Statements.  There  are no
     outstanding options, rights of first offer, rights of reverter or rights of
     first refusal to purchase the real property described on SCHEDULE 4.7(A) or
     any  portion  thereof  or  interest  therein.  Other  than as a  result  of
     Foreclosure,  the  Company  and  each  Subsidiary  is  not a  party  to any
     agreement or option to purchase any real property or interest therein.

(b)  SCHEDULE 4.7(B) sets forth a true, correct and complete list of the address
     or  other  description,  as of the  date  hereof,  of each  lease  for real
     property to which the Company or any Subsidiary is a party (including,  the
     date, if available, and name of the parties to such lease). With respect to
     all material leases of real property to which the Company or any Subsidiary
     is a party other than leases related to REO  (collectively,  the "LEASES"),
     except as set forth on SCHEDULE 4.7(B), (i) each Lease is valid and binding
     on the Company or relevant  Subsidiary  and in full force and effect in all
     material  respects and, to the Knowledge of Seller, is valid and binding on
     the other parties thereto, (ii) the Company or such Subsidiary (and, to the
     Knowledge  of  Seller,  any  counterparty  thereto)  has  performed  in all
     material  respects all  obligations  required to be performed by it to date
     under each Lease; (iii) neither the Company nor any Subsidiary has received
     a notice of default or termination with respect to any such Lease; (iv) the
     transactions  contemplated  by this Agreement do not require the consent of
     any other party to any such Lease  (except  for those lease  consents to be
     obtained by the Company or each Subsidiary pursuant to SECTION 4.11 of this
     Agreement);  (v) no  security  deposit or portion  thereof  deposited  with
     respect  to any such  Lease  has been  applied  in  respect  of a breach or
     default under such Lease which has not been  redeposited in full; (vi) none
     of the  Company  or any  Subsidiary  owe,  nor  will any of them owe in the
     future, any brokerage commissions or finder's fees with respect to any such
     Lease;  (vii) the other party to any such Lease is not an Affiliate of, and
     otherwise  does not have any  economic  interest  in,  the  Company or each
     Subsidiary;  (viii) the Company  and each  Subsidiary  have not  subleased,
     licensed  or  otherwise  granted  any person the right to use or occupy the

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     estate or interest created by any such Lease or any portion  thereof;  (ix)
     the Company and each  Subsidiary has not  collaterally  assigned or granted
     any other security interest in any such Lease or any interest therein;  and
     (x) there are no Encumbrances on the estate or interest created by any such
     Lease. The Company and each Subsidiary  quietly enjoy the premises provided
     for in any such Lease in all material respects.

(c)  SCHEDULE  4.7(C) sets forth a summary of all insurance  policies and bonds,
     other than mortgage loan insurance policies and policies that fund a Seller
     Plan,  pursuant to which the Company or any  Subsidiary is an insured party
     ("POLICIES").  The Company and each  Subsidiary  is in material  compliance
     with the  Policies and is not in default  under any of the  material  terms
     thereof.  Each Policy is  outstanding  and in full force and effect and all
     premiums and other  payments due under any Policy have been paid in due and
     timely  fashion.  Except as set  forth in Part 1 of  SCHEDULE  4.7(C),  the
     Company and each  Subsidiary  will be cancelled as insured parties (but not
     as to coverage in respect of pre-Closing occurrences) under the Policies as
     of the Closing Date.

(d)  With  the  exception  of  leased  property,  each  of the  Company  and the
     Subsidiaries has good, valid and marketable title to all tangible  personal
     property  owned by the Company and/or the  Subsidiaries,  free and clear of
     all Encumbrances. With respect to personal property used in the business of
     the Company or the Subsidiaries  that is leased rather than owned,  neither
     the Company nor any Subsidiary is in default in any material  respect under
     the terms of any such lease.

4.8  CONTRACTS AND COMMITMENTS.

(a)  Except as set forth in SCHEDULE  4.8(A) and in the Mortgage Loan  Schedule,
     neither  the  Company  nor any  Subsidiary  is a party  to,  is bound by or
     receives  benefits under (i) any material Contract not made in the ordinary
     course of business (other than Contracts pursuant to which the Company or a
     Subsidiary  receives  funding,  employee  benefits or other  services  from
     Seller or an  Affiliate,  enterprise-wide  arrangements  with  Seller or an
     Affiliate  and  Contracts  made  available  by Seller to  Buyer);  (ii) any
     Contract relating to the borrowing of money by it or the guarantee by it of
     any such obligation  (other than Contracts for intercompany  obligations to
     be settled in accordance with SECTION 3.4 hereof);  (iii) any Contract that
     by its  terms  limits  the  payment  of  dividends  by the  Company  or any
     Subsidiary  or  that  by its  terms  either  requires  the  Company  or any
     Subsidiary to do business with the contract party on an exclusive  basis or
     restricts or limits the Company or any Subsidiary from owning,  managing or
     operating  any  business  or  in  any  geographical   location   (including
     non-competition   agreements);   (iv)  any  joint  venture  or  partnership
     agreement;  (vi) any  agreement  that grants any right of first  refusal or
     right of first  offer or similar  right to third  parties or that limits or
     purports to limit the ability of the Company or any of the  Subsidiaries in
     any material respect to pledge,  sell, transfer or otherwise dispose of any
     material  amount of assets  or  business  (other  than in  connection  with
     Securitization  Transactions  or  Contracts  entered  into in the  ordinary
     course of business that require that the particular  transactions  that are
     the subject thereof to be conducted with the counterparty or counterparties
     to the  Contract);  (vii) any Contract  providing  for any material  future
     payments that are conditioned,  in whole or in part, on a change of control
     with respect to the Company;  (viii) any material Insurance Contract;  (ix)
     any material  agency,  broker,  sale  representative,  marketing or similar
     Contract;  (x) any Contract that contains a "most  favored  nation"  clause
     obligating  the Company or any  Subsidiary to change the material terms and
     conditions of such Contract based on better terms or conditions provided to
     other  parties in similar  contracts;  (xi) any  Contract  relating  to any
     merger or business combination  concerning the Company or any Subsidiary or
     the  acquisition or disposition of any assets or any Person during the last
     five years;  (xii) any Contract  with any  director,  officer,  employee or
     Affiliate of the Company or any  Subsidiary;  and (xiii) any other Contract
     involving aggregate expenditures or revenues in excess of $500,000 or which
     is otherwise  material to the Company or any  Subsidiary  (the contracts of
     the type covered in clauses (i) through (xiii), the "MATERIAL CONTRACTS").

(b)  Except as set forth in SCHEDULE 4.8(B), (i) each Material Contract is valid
     and  binding on the Company or  relevant  Subsidiary  and in full force and
     effect and, to the  Knowledge of Seller,  is valid and binding on the other
     parties thereto; (ii) the Company or such Subsidiary (and, to the Knowledge
     of Seller, any counterparty thereto) has performed in all material respects

                                      128

     all obligations  required to be performed by it to date under each Material
     Contract.  Neither the Company nor any  Subsidiary  is in material  default
     under  any  material  order,  writ,  judgment,  decree,  Contract  or other
     instrument  to which it is a party or by which it or any of its  assets  or
     properties  is  bound,  whether  entered  into in the  ordinary  course  of
     business  or  otherwise  and  whether  written  or oral,  and there has not
     occurred  any  event  that,  with the  lapse of time or giving of notice or
     both, would constitute such a default.

(c)  Seller has delivered to Buyer the Mortgage Loan Schedule.  The  information
     contained in the Mortgage Loan Schedule is true and correct in all material
     respects. SCHEDULE 4.8(C) sets forth a list of (i) each Investor with which
     the Company or a  Subsidiary  had, as of the date of the Balance  Sheet,  a
     Servicing Agreement,  together with the aggregate principal amount of Loans
     or Collateral Certificate Pools subject to each such Servicing Agreement as
     of such date, and (ii) the aggregate  balance of all Custodial  Accounts as
     of such date.  Seller has previously  made available to Buyer copies of all
     Servicing  Agreements which were in effect on the date of the Balance Sheet
     and which were in Seller's or the Company's possession.  All such Servicing
     Agreements are in full force and effect at the date hereof,  without notice
     by the applicable Investor of termination thereof.

4.9  ABSENCE OF UNDISCLOSED LIABILITIES.  Neither the Company nor any Subsidiary
     has any material liability  (contingent or otherwise),  except as disclosed
     in the  Financial  Statements,  the Balance  Sheet or on SCHEDULE  4.9, and
     except  for  liabilities  incurred  in  the  ordinary  course  of  business
     consistent  with past  practice  since the date of the  Balance  Sheet,  or
     liabilities  not within the Knowledge of Seller that are not required to be
     disclosed under GAAP.

4.10 NO CONFLICT OR VIOLATION.  Except as provided for in SECTION 4.11,  neither
     the execution and delivery of this  Agreement nor the  consummation  of the
     transactions  contemplated hereby will in any material respect (i) conflict
     with or result in any breach  which  would  constitute  a default (or which
     would give rise to any right of consent, acceleration or termination or the
     loss of any  benefit)  under any term or provision of any Contract to which
     Seller,  the Company,  any Subsidiary or any of their Affiliates is a party
     or is  subject  or by  which  any  assets  of  the  Company  or  any of the
     Subsidiaries  are  bound,  or  interfere  with the  ability  of  Seller  to
     consummate the transactions  contemplated by this Agreement, (ii) result in
     the creation or  imposition  of any  Encumbrance  on any of the property or
     assets of the Company or any  Subsidiary,  (iii) result in any violation of
     the provisions of the charter or bylaws or similar organizational  document
     of Seller,  the Company or any Subsidiary,  (iv) result in any violation by
     Seller,  the  Company  or any  Subsidiary  of any Law or (v)  result in the
     creation or imposition of any Encumbrance on any shares of the Stock.

4.11 CONSENTS  AND  APPROVALS.  No  consent,  approval or  authorization  of, or
     declaration,  notice,  filing or  registration  with, any  governmental  or
     regulatory authority, or material consent, approval or authorization of any
     other Person, is required to be made or obtained by Seller,  the Company or
     any  Subsidiary  on or prior to the  Closing  Date in  connection  with the
     execution,  delivery and performance of this Agreement and the consummation
     of the transactions contemplated by this Agreement, except (i) as set forth
     in SCHEDULE  4.11,  and (ii) the filing of premerger  notification  reports
     under the Hart Scott-Rodino Antitrust Improvements Act of 1976, as amended.

4.12 LITIGATION.  Except as set forth in  SCHEDULE  4.12,  there is no  material
     Litigation instituted,  pending or, to the Knowledge of Seller,  threatened
     against the  Company or any  Subsidiary  or against any asset,  interest or
     right of the  Company  or any  Subsidiary.  There is no  actual  or, to the
     Knowledge  of  Seller,  threatened  Litigation  that  presents  a claim  to
     restrain, delay, condition or prohibit the transactions contemplated herein
     or to impose upon Buyer, Seller, the Company or any Subsidiary any material
     costs, conditions or obligations in connection therewith.

4.13 COMPLIANCE WITH LAW: PERMITS AND LICENSES.

(a)  The  Company  and the  Subsidiaries  are  operating  in  compliance  in all
     material  respects with all  applicable  Laws.  Neither the Company nor any
     Subsidiary has received any  notification  from any agency or department of
     Federal,  state or local government,  (i) asserting a material violation of
     any Law, (ii)  threatening to revoke any material  Permit or (iii) limiting
     its  operations  in any material  respect.  Except as set forth in SCHEDULE
     4.13(A),  neither  the  Company  nor  any  Subsidiary  is  subject  to  any
     regulatory or  supervisory  cease and desist order,  agreement,  directive,
     memorandum of understanding or commitment that currently  restricts or will

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     in the future restrict in any material respect the conduct of its business,
     its credit policies,  its management or its business,  and none of them has
     received  any  communication  requesting  that they  enter  into any of the
     foregoing.

(b)  The Company and the Subsidiaries  hold all material  Permits  necessary for
     the  ownership  and conduct of their  respective  businesses in each of the
     jurisdictions in which the Company and such Subsidiaries conduct or operate
     their  respective  businesses  in the manner now conducted and such Permits
     are in full  force and  effect.  Without  limiting  the  generality  of the
     foregoing,  PRMI or the applicable Subsidiary is approved by and is in good
     standing: (i) as a non-supervised mortgagee by HUD to originate and service
     Title II FHA mortgage loans;  (ii) as a GNMA I and II Issuer by GNMA; (iii)
     by the VA to originate VA loans; and (iv) as a seller/servicer  by FNMA and
     FHLMC to originate and service  conventional  residential  mortgage  loans.
     Except  as  provided  for  in  SECTION  4.11,  the   consummation   of  the
     transactions  contemplated  by  this  Agreement  will  not  result  in  any
     revocation,  cancellation or suspension of any such Permit, and there is no
     pending or, to the Knowledge of Seller, threatened material Litigation with
     respect to revocation,  cancellation,  suspension or nonrenewal thereof and
     there has occurred no event which  (whether with notice or lapse of time or
     both)  will  result  in  such a  revocation,  cancellation,  suspension  or
     nonrenewal thereof.

(c)  Except  for normal  examinations  conducted  by any  court,  administrative
     agency or commission or other governmental  authority or instrumentality or
     self-regulatory  organization  in the regular course of the business of the
     Company and the Subsidiaries or as set forth in SCHEDULE 4.13(C), no court,
     administrative  agency or  commission  or other  governmental  authority or
     instrumentality or self-regulatory  organization has initiated any material
     proceeding   or,  to  the  Knowledge  of  Seller,   threatened  a  material
     investigation  into  the  business  or  operations  of the  Company  or any
     Subsidiaries  that is ongoing or  pending.  Except as set forth in SCHEDULE
     4.13(C),   there  is  no  material  unresolved   violation  by  any  court,
     administrative  agency or  commission  or other  governmental  authority or
     instrumentality or self-regulatory  organization with respect to any report
     or  statement   relating  to  any   examinations  of  the  Company  or  the
     Subsidiaries.

(d)  Except as set forth in SCHEDULE  4.13(D),  the Company and each  Subsidiary
     has timely filed all regulatory reports,  schedules,  forms,  registrations
     and other documents,  together with any amendments required to be made with
     respect thereto,  that each was required to file since January 1, 2001 with
     any governmental  authority (the "REGULATORY  DOCUMENTS"),  and have timely
     paid all fees and  assessments  due and  payable in  connection  therewith,
     except  where the failure to make such  payments  and filings  would not be
     material.  There is no material unresolved  violation or exception asserted
     by any such  governmental  authority  with respect to any of the Regulatory
     Documents.  As of their respective dates, the Regulatory Documents complied
     in all material  respects  with all  requirements  of Law.  Seller has made
     available to Buyer true and complete copies of all Regulatory Documents.

(e)  All Insurance Contracts issued by PMRC are reinsurance  contracts issued in
     compliance with applicable Law in all material  respects and were issued on
     forms  approved  by  appropriate   governmental  authorities  or  otherwise
     permitted under applicable Law. All premium rates,  rating plans and policy
     terms  established  or used by PMRC that are  required  to be filed with or
     approved  by  applicable  governmental  authorities  have  been so filed or
     approved  and  comply in all  material  respects  with the  insurance  Laws
     applicable thereto.

4.14 NO  BROKERS.  Except for the  services of Lehman  Brothers,  which has been
     employed by Seller,  neither  Seller nor the Company nor any Subsidiary has
     employed,  or is  subject  to any  valid  claim  of,  any  broker,  finder,
     consultant  or other  intermediary  in  connection  with  the  transactions
     contemplated  by this  Agreement.  Seller  is  solely  responsible  for any
     payment, fee or commission that may be due to Lehman Brothers in connection
     with the transactions contemplated hereby.

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4.15 INTELLECTUAL PROPERTY AND TECHNOLOGY.
(a)

(1)  All of the  Intellectual  Property that Company or any of the  Subsidiaries
     owns (the "COMPANY OWNED INTELLECTUAL PROPERTY"), licenses or otherwise has
     acquired the right to use as of the date of this  Agreement  (collectively,
     the "COMPANY INTELLECTUAL PROPERTY"),  to the extent material, is set forth
     on SCHEDULE 4.15(A)(1),  which specifies, as applicable,  (A) the nature of
     such Company Intellectual  Property,  (B) whether such Company Intellectual
     Property is owned or  licensed  by the Company or any of the  Subsidiaries,
     (C) if provided  under a license,  the licensor  and (D) if owned,  (i) any
     applications  or  registrations   relating  to  such  Company  Intellectual
     Property, together with the application(s) or registration(s) number(s) and
     (ii) any  termination  or  expiration  dates for such Company  Intellectual
     Property.

(2)  All of the Information  Technology that Company or any of the  Subsidiaries
     owns (the "COMPANY OWNED  INFORMATION  TECHNOLOGY"),  licenses or otherwise
     has  acquired  the  right  to  use  as  of  the  date  of  this   Agreement
     (collectively,   the  "COMPANY  INFORMATION  TECHNOLOGY"),  to  the  extent
     material,  is  set  forth  on  SCHEDULE  4.15(A)(2),  which  specifies,  as
     applicable,  (A) whether such Company  Information  Technology  is provided
     under a  service  contract  or is  owned  or  licensed  by  Company  or the
     Subsidiaries,  (B) if  provided  under  a  service  contract,  the  service
     provider,  if  licensed,  the  licensor,  and if  owned,  the owner of such
     Company Information  Technology,  (C) the scope of such Company Information
     Technology,  including, by way of example, but not of limitation, the range
     of services provided and number of licenses and (D) the expiration dates of
     service contracts and licenses.

(3)  All  Intellectual  Property and  Information  Technology that Seller or any
     Seller Affiliate (other than the Company or any of the Subsidiaries)  owns,
     licenses or has otherwise  acquired the right to use as of the date of this
     Agreement  that is used in or reasonably  necessary to the Company's or any
     of the Subsidiaries' day-to-day business operations,  but that Seller shall
     not assign and transfer to Company at the Closing (the  "EXCLUDED  IT"), to
     the extent material, is set forth on SCHEDULE 4.15(A)(3).

(4)  All  Intellectual  Property and  Information  Technology that Seller or any
     Seller  Affiliate  (other  than  the  Company  or any of the  Subsidiaries)
     licenses or  otherwise  has acquired the right to use from a third party as
     of the date of this Agreement,  that is used in or reasonably  necessary to
     the Company's or any of the Subsidiaries'  day-to-day business  operations,
     but that,  due to license  limitations  or other  causes,  Seller shall not
     license to Company or use on Company's or any of the  Subsidiaries'  behalf
     following the closing (the "THIRD PARTY IT"),  to the extent  material , is
     set forth on SCHEDULE 4.15(A)(4).

(b)  Except as set forth on SCHEDULE 4.15(B):

(1)  The  Company  Intellectual  Property  and Company  Information  Technology,
     together  with the  Excluded  IT and  Third  Party IT  include  all  rights
     necessary  to enable  Company and each of the  Subsidiaries  to conduct its
     day-to-day business operations in the manner in which it is conducting them
     as of the date of this Agreement.

(2)  The  Company  and  each of the  Subsidiaries  has  taken  all  commercially
     reasonable  measures  to keep in full force and effect  all  Company  Owned
     Intellectual   Property   and   Company   Owned   Information    Technology
     registrations,  renewals, and applications for registration and to maintain
     the  confidentiality  of all trade  secrets that  constitute  Company Owned
     Intellectual Property or Company Owned Information Technology.  The Company
     Owned  Intellectual  Property and the Company Owned Information  Technology
     (and any Company Intellectual  Property and Company Information  Technology

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     that the  Company  and any of the  Subsidiaries  shall  own  following  the
     Closing)  is free  and  clear of any  Encumbrance.  All  registrations  and
     applications for registration of Company Owned Intellectual Property with a
     governmental  authority  currently comply in all material respects with the
     formal legal  requirements  for such  registrations  and  applications  (as
     applicable).

(3)  The Company and the  Subsidiaries  either  exclusively own or have licensed
     from a third  party  the  Company  Intellectual  Property  and the  Company
     Information Technology.

(4)  (A) All licenses,  service Contracts,  and other Contracts that constitute,
     or shall constitute following the Closing,  Company Information  Technology
     are in full force and effect and are the Company's and, to the Knowledge of
     Seller, the applicable  licensor's legal,  valid, and binding  obligations,
     (B) Company and the Subsidiaries are not in default under any such licenses
     and (C) none of  Company  or any  Subsidiary,  all  licensors  or any other
     contracting parties have exercised  termination rights with respect to such
     licenses, service Contracts or other Contracts.

(5)  As of the date of this Agreement,  there is no material  Litigation pending
     or, to Knowledge of Seller, threatened,  that involves a claim (A) that any
     Company Owned Intellectual Property or Company Owned Information Technology
     (or any Company  Intellectual  Property and Company Information  Technology
     that Company shall own following the Closing)  infringes,  misappropriates,
     dilutes, or violates a Third Party's rights in or to Intellectual  Property
     or   Information   Technology   or   challenging   the   ownership,    use,
     protectability, registerability, validity, or enforceability of the Company
     Owned Intellectual Property or Company Owned Information  Technology or (B)
     against any customers of Company,  any of the Subsidiaries or Seller or any
     of its  Affiliates,  as the case may be, with respect to the Company  Owned
     Intellectual  Property or Company Owned Information  Technology or any such
     customer's use thereof.

(6)  To the  Knowledge  of  Seller,  no Third  Party is  infringing,  violating,
     diluting,  misusing,  or  misappropriating  any Company Owned  Intellectual
     Property,  Company  Owned  Information  Technology,   Company  Intellectual
     Property or Company Information Technology.  Neither Company nor any of the
     Subsidiaries  nor Seller has made any claim  against  any Third Party based
     upon   any   such   infringement,    violation,    dilution,   misuse,   or
     misappropriation.

(7)  The processes employed,  the services provided,  the businesses  conducted,
     the  products  used or dealt in by the  Company and the  Subsidiaries,  the
     Company  Intellectual  Property and/or Company Information  Technology,  do
     not, and,  within the last six years did not,  infringe,  violate,  dilute,
     misuse  or   misappropriate   any  Intellectual   Property  or  Information
     Technology  rights of a Third  Party.  No Third Party has made a complaint,
     demand,  notice,  material charge or claim against the Company,  any of the
     Subsidiaries  or  Seller  based  upon  any  such  infringement,  violation,
     dilution,  misuse,  or  misappropriation.  There  are  no  interference  or
     opposition  proceedings relating to any Company Owned Intellectual Property
     or Company Owned Information Technology.

(8)  No  Company  Owned  Intellectual  Property  or  Company  Owned  Information
     Technology  is  currently  the subject of any  re-examination,  opposition,
     cancellation or invalidation proceeding before any governmental authority.

4.16 TAXES.

Except as set forth on SCHEDULE 4.16:

(a)  All Tax Returns  required to be filed by or with  respect to the Company or
     Subsidiaries  have been timely  filed and such Tax Returns are complete and
     accurate in all  material  respects.  All Taxes that were  required to have
     been paid by, or with respect to, the Company or any  Subsidiary  have been
     paid.

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(b)  None of the Company or any Subsidiary  currently is the  beneficiary of any
     extension of time within which to file any Tax Return.

(c)  No  deficiencies  for any  material  Tax have been  proposed,  asserted  or
     assessed  against the Company  which have not been settled and paid in full
     or for  which  adequate  reserves  in  accordance  with  GAAP have not been
     established, and, to the Knowledge of Seller, no such assertion of material
     deficiency or  assessment  of Tax liability is pending or being  threatened
     with respect to the Company or any Subsidiary.

(d)  There are  currently no agreements in effect with respect to the Company or
     any  Subsidiaries to extend the period of limitations for the assessment or
     collection of any Tax.

(e)  There  is  no  presently  pending  audit  examination,   refund  claim,  or
     litigation,  proposed  adjustment or matter in controversy  with respect to
     any Taxes for which the Company or any Subsidiaries may be liable,  and, to
     the  Knowledge of Seller,  no such  examination,  action or  proceeding  is
     threatened.

(f)  Neither the Company nor any  Subsidiary has been a member of an affiliated,
     combined,  consolidated  or unitary group for purposes of filing any income
     or franchise Tax Return,  other than a group of which  Principal  Financial
     Group, Inc. was the common parent.

(g)  Seller is not a "foreign person" within the meaning of Treasury Regulations
     Section 1.1445-2(b).

(h)  Neither  the  Company  nor  any  Subsidiary  is a party  to any  agreement,
     contract,   arrangement,  or  plan  that  has  resulted  or  would  result,
     individually  or in the  aggregate,  in  connection  with the  transactions
     contemplated  by this  Agreement  in the payment of any  "excess  parachute
     payments" within the meaning of Section 280G of the Code.

(i)  Neither the Company nor any Subsidiary is a party to any Tax sharing or Tax
     allocation agreement.

(j)  Each of the Company and  Subsidiaries  and each  Securitization  Entity has
     withheld  and paid to the proper  taxing  authority  on a timely  basis all
     Taxes  required to have been withheld and paid in  connection  with amounts
     paid,  or deemed to have been paid, or owing,  or amounts  allocated to any
     employee,  independent  contractor,  creditor,  stockholder  or other third
     party. Each such obligation of each  Securitization  Entity to withhold and
     pay is listed on SCHEDULE 4.16(J).

(k)  No power of attorney has been granted with respect to any of the Company or
     Subsidiaries as to any matter relating to Taxes.

(l)  There  are no  Encumbrances  for  Taxes on the  assets  of the  Company  or
     Subsidiaries other than Encumbrances for Taxes not yet due and payable.

(m)  To the  Knowledge  of  Seller,  no  claim  has ever  been  made by a taxing
     authority in a  jurisdiction  where the  Company,  any  Subsidiary,  or any
     Securitization  Entity does not file Tax Returns  that any of the  Company,
     its Subsidiaries,  or a Securitization Entity,  respectively,  is or may be
     required to file Tax Returns with respect to such jurisdiction.

(n)  Neither the Company nor any Subsidiary will be required to include any item
     of income in, or exclude any item of deduction from, taxable income for any
     period  ending  after the  Closing  Date as a result  of any (i)  change in
     method of accounting for a taxable period ending on or prior to the Closing
     Date;  (ii)  "closing  agreement" as described in Code Section 7121 (or any
     corresponding  or similar  provision  of any law  relating  to income  Tax)
     executed prior to the Closing;  (iii)  installment sale or open transaction
     disposition  made prior to the  Closing;  or (iv) prepaid  amount  received
     prior to the Closing.

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(o)  Neither the Company nor any Subsidiary distributed stock of another Person,
     or has had its stock  distributed by another Person,  in a transaction that
     was  purported  or  intended  to be  governed  in  whole or in part by Code
     Section 355 or Code Section 361.

(p)  Since its  formation,  each  Securitization  Entity  (i) has been  properly
     treated  for United  States  federal  income Tax  purposes as other than an
     association,  "Taxable  Mortgage  Pool"  within the meaning of Code Section
     7701(i),  or  "Publicly  Traded  Partnership"  within  the  meaning of Code
     Section  7704  taxable  as a  corporation,  and (ii) has not been an entity
     subject to Tax for federal,  state,  local,  or foreign Tax  purposes.  All
     securities  issued by the EBO Trust  (other than those  securities  held by
     Principal  Residential  Mortgage  Funding,  LLC) (the "EBO Securities") are
     properly  treated as either  debt of the Company or equity of the EBO Trust
     for United States federal income Tax purposes.

(q)  The Principal  Financial  Group,  Inc. is eligible to make a joint election
     pursuant to Code Section  338(h)(10)  with respect to the Company and those
     Subsidiaries  listed on  SCHEDULE  4.16(Q) in  connection  with the sale of
     Stock to Buyer contemplated by this Agreement.

(r)  Since its formation each of Principal Wholesale Mortgage,  Inc.,  Principal
     Mortgage  Reinsurance  Company and Seller has been properly  classified for
     United  States  federal  Tax  purposes  as  an  association  taxable  as  a
     corporation.  Since its formation  each of Principal  Residential  Mortgage
     Funding, LLC, Principal  Residential Mortgage Servicing,  LLC and Principal
     Residential  Mortgage Capital Resources,  LLC has been properly  classified
     for United States  federal Tax purposes as an entity the existence of which
     is disregarded from that of its owner.

4.17 EMPLOYEE BENEFIT PLANS.

(a)  SCHEDULE 4.17 sets forth an accurate and complete list of all PRMI Employee
     Benefit  Plans and  identifies,  with  respect  to each such PRMI  Employee
     Benefit Plan,  either PRMI or the applicable  ERISA  Affiliate of PRMI that
     established,  sponsors or maintains such PRMI Employee Benefit Plan or that
     contributes or is required to contribute to such PRMI Employee Benefit Plan
     or that has entered into such PRMI  Employee  Benefit  Plan.  Except as set
     forth on SCHEDULE 4.17(A), neither PRMI nor any ERISA Affiliate of PRMI has
     announced or otherwise made a commitment to implement any arrangement that,
     if implemented, would be a PRMI Employee Benefit Plan.

(b)  With respect to each PRMI Employee Benefit Plan,  Seller has made available
     or caused to be made  available to Buyer a true and  complete  copy of each
     PRMI Employee Benefit Plan, any amendments thereto (or if the PRMI Employee
     Benefit Plan is not written, a description  thereof),  any related trust or
     other funding  vehicle,  any reports or summaries  required under ERISA and
     the most recent  determination  letter  received from the Internal  Revenue
     Service with respect to each PRMI Qualified Plan.

(c)  Each PRMI Employee  Benefit Plan  complies in form and has been  maintained
     and operated in all material  respects in accordance with the  requirements
     of all  applicable  laws,  including  ERISA  and the  Code,  and each  PRMI
     Employee  Benefit  Plan has been  maintained  and  operated in all material
     respects in accordance  with its terms.  With respect to each PRMI Employee
     Benefit  Plan  that  is  intended  to  meet  requirements  for  tax-favored
     treatment under the Code, the term "applicable laws" shall include, without
     limitation,  the  provisions of the Code that provide for such  tax-favored
     treatment.

(d)  SCHEDULE 4.17 separately identifies each PRMI Qualified Plan. Except as set
     forth on  SCHEDULE  4.17(D),  each  PRMI  Qualified  Plan  and  each  trust
     established in connection with each PRMI Qualified Plan is the subject of a
     favorable determination letter issued by the Internal Revenue Service.

(e)  SCHEDULE 4.17 separately  identifies each PRMI Defined Benefit Plan. Except
     as set forth on  SCHEDULE  4.17(E),  the present  fair market  value of the
     assets of each PRMI Defined  Benefit Plan equal or exceed the present value
     of vested and nonvested  accrued  benefits under such PRMI Defined  Benefit

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     Plan,  based on the actuarial  assumptions and methodology used for funding
     purposes  as set forth in such PRMI  Defined  Benefit  Plan's  most  recent
     actuarial  report.  No  reportable  event under  Section  4043 of ERISA has
     occurred  with  respect  to any PRMI  Defined  Benefit  Plan.  No event has
     occurred  and no  condition  has  existed or exists  that could  constitute
     grounds under Section 4042 of ERISA for  termination of or appointment of a
     trustee to administer any PRMI Defined  Benefit Plan.  Neither PRMI nor any
     ERISA  Affiliate  of PRMI has  transferred,  in  whole  or in part,  a PRMI
     Defined  Benefit  Plan to a  trade  or  business  that  was at the  time of
     transfer not an ERISA Affiliate of PRMI. No accumulated  funding deficiency
     (as defined in Section 402 of ERISA or Section 412 of the Code)  exists nor
     has any funding waiver from the Internal  Revenue  Service been received or
     requested with respect to any PRMI Defined Benefit Plan. No excise or other
     tax is due or owing  because of any  failure to comply with (i) the minimum
     funding  standards  of the Code or ERISA with  respect to any PRMI  Defined
     Benefit Plan or (ii) the provisions of Section 4980B of the Code.

(f)  Neither  PRMI nor any  ERISA  Affiliate  of PRMI  contributes  to or has an
     obligation to contribute to or has contributed to a  multiemployer  pension
     plan (as defined in Section  3(37) of ERISA) for the benefit of any active,
     retired or former employee or director of PRMI or any Subsidiary.

(g)  No PRMI Employee Benefit Plan is a multiple  employer  welfare  arrangement
     within the meaning of Section 3(41) of ERISA.

(h)  PRMI does not, and,  following  the Closing Date,  Buyer will not, have any
     liability  (actual or contingent) with respect to any Employee Benefit Plan
     established, maintained, or sponsored by any ERISA Affiliate of PRMI, or to
     which  any  ERISA  Affiliate  of PRMI has  contributed  or is  required  to
     contribute,  or into which any ERISA  Affiliate of PRMI has entered that is
     not a PRMI Employee Benefit Plan.

(i)  Except  as  provided  on  SCHEDULE   4.17(I),   the   consummation  of  the
     transactions  contemplated  by this Agreement will not,  either alone or in
     combination with another event, (i) entitle any current or former employee,
     officer or consultant  of PRMI or any ERISA  Affiliate of PRMI to severance
     pay, unemployment  compensation or any other payment or (ii) accelerate the
     time of payment or vesting,  or increase the amount of compensation due any
     such employee, officer or consultant.

(j)  Except as provided on  SCHEDULE  4.17(J),  no PRMI  Employee  Benefit  Plan
     provides  medical,  surgical,  hospitalization,  death or similar  benefits
     (whether or not insured) for  employees or former  employees of PRMI or any
     Subsidiary  for  periods   extending   beyond  their  retirement  or  other
     termination of service, other than (i) coverage mandated by applicable law,
     (ii) death  benefits  under any "pension  plan" or (iii)  benefits the full
     cost  of  which  is  borne  by the  current  or  former  employee  (or  his
     beneficiary).

(k)  There are no pending,  threatened or anticipated  material  claims by or on
     behalf of any PRMI Employee  Benefit  Plan, by any employee or  beneficiary
     covered under any such PRMI Employee  Benefit Plan, or otherwise  involving
     any such  PRMI  Employee  Benefit  Plan  (other  than  routine  claims  for
     benefits).

(l)  Neither the  Company  nor any  Subsidiary  maintains  or sponsors  any PRMI
     Qualified Plan.

4.18 ENVIRONMENTAL  LIABILITY.  There is no  pending  or,  to the  Knowledge  of
     Seller,  material threatened Litigation against the Company, any Subsidiary
     or  against  any  Person or  entity  whose  liability  the  Company  or any
     Subsidiary has or may have retained or assumed either  contractually  or by
     operation  of law that could  reasonably  result in the  imposition  on the
     Company or any  Subsidiary  of any  material  liability  arising  under any
     Environmental  Laws,  and neither the Company nor any Subsidiary is subject
     to any agreement,  order,  judgment,  decree,  or memorandum by or with any
     court,  governmental  authority,  regulatory agency or third party imposing

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     any such material  liability.  There are no present or, to the Knowledge of
     Seller,  past actions,  activities,  circumstances,  conditions,  events or
     incidents,  including without limitation, the release or threatened release
     or presence of any Hazardous Materials,  which could form the basis for any
     material  Litigation that would impose any material liability or obligation
     on the Company or any Subsidiary under  Environmental  Laws.  During or, to
     the  Knowledge of Seller,  prior to the period of (i) the  Company's or any
     Subsidiary's  ownership  or operation  of any of their  respective  current
     properties,  (ii) the Company's or any  Subsidiary's  participation  in the
     management  of any  property  or (iii) the  Company's  or any  Subsidiary's
     holding of a security  interest or other  interest in any  property,  there
     were no releases or threatened releases of hazardous, toxic, radioactive or
     dangerous  materials or other materials  regulated under any  Environmental
     Laws in, on, under or affecting any such property.  Neither the Company nor
     any  Subsidiary  has taken any action with respect to any  properties  that
     they do not  currently own or operate that would prevent the Company or any
     Subsidiary  from  qualifying  under the lender  exclusion  of CERCLA or any
     other Environmental Laws with respect to such property.

4.19 ADVANCES/RECEIVABLES.

(a)  The Advances are valid and  subsisting  amounts owing to the Company or the
     Subsidiaries,  are carried on the books of the Company and the Subsidiaries
     at values  determined in accordance with GAAP in all material  respects and
     are not subject to setoffs or claims  arising from acts or omissions of the
     Company or the Subsidiaries.  Except as set forth in SCHEDULE  4.19(a),  no
     Investor has or has claimed any material defense, offset or counterclaim to
     repayment  of any Advance  that is  pending.  SCHEDULE  4.19(A)  accurately
     summarizes the Advances outstanding as of the date of the Balance Sheet.

(b)  The accounts  receivable  reflected on the Balance  Sheet,  and those to be
     reflected  on the  Pre-Closing  Balance  Sheet or the Closing  Date Balance
     Sheet,  have (or will  have)  arisen  from  bona fide  transactions  in the
     ordinary course of the business of the Company and the Subsidiaries and are
     (or will be) valid obligations of the respective makers thereof and are not
     (and will not be)  subject to  material  setoffs or claims,  except for the
     amounts reserved for doubtful or uncollectible accounts as reflected on the
     Balance Sheet,  the  Pre-Closing  Balance Sheet or the Closing Date Balance
     Sheet,  as the  case  may be.  The  accounts  receivable  are (or  will be)
     reflected  on the  Balance  Sheet,  the  Pre-Closing  Balance  Sheet or the
     Closing Date Balance  Sheet,  as the case may be, at values  determined  in
     accordance with GAAP in all material respects.

4.20 NO  RECOURSE.  Except for those  Loans and  Mortgage  Pools  designated  as
     Recourse  on the Tape set forth on  SCHEDULE  4.20 which do not exceed $600
     million in aggregate  principal  amount as of the date of the Balance Sheet
     and for which Loan Reserves are  reflected in  accordance  with GAAP on the
     Balance Sheet, none of the Loans, Collateral  Certificates,  Securitization
     Instruments or Servicing  Agreements provide for Recourse to the Company or
     any Subsidiary.

4.21 LOAN REPRESENTATIONS AND WARRANTIES.

         The Seller makes the  representations  and  warranties  set forth below
regarding each Loan (PROVIDED,  for purposes of this SECTION 4.21, the Investor,
if any,  for any  Warehouse  Loan  shall  be the  Investor  that is party to the
applicable  Investment  Commitment)  and, if and to the extent  specified,  each
Pipeline Loan or REO:

(a)  Except  as  set  forth  on  SCHEDULE  4.21(A),   each  Loan  or  Collateral
     Certificate  in  the  Mortgage  Servicing  Portfolio  was  eligible  in all
     material  respects for sale to, insurance by, or pooling to back securities
     issued or guaranteed by, the applicable Investor or Insurer upon such sale,
     issuance of insurance or pooling,  except for Serviced  Loans or Collateral
     Certificates  as to which the  ineligibility  for such  sale,  issuance  of
     insurance or pooling would not be the  contractual or legal  responsibility
     of Company or any  Subsidiary  under  Applicable  Requirements  because the
     Company  or any  Subsidiary  did not  originate,  sell or pool such Loan or
     Collateral  Certificate.  Each  Warehouse  Loan  allocated  to a particular
     Investor in accordance with the standard  secondary market practices of the
     Company or any  Subsidiary  is eligible in all  material  respects for sale
     under an Investment  Commitment.  Except as set forth on SCHEDULE  4.21(A),
     each  Warehouse  Loan not allocated to a particular  Investor in accordance
     with the  foregoing  sentence  would be otherwise  eligible for sale in all
     material  respects  under an Investment  Commitment  upon  allocation to an

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     Investor.  Except as set forth on SCHEDULE 4.21(A), there exists no fact or
     circumstance  that would entitle the applicable  Insurer or Investor to (i)
     demand from the Company or any Subsidiary either repurchase of any Serviced
     Loan or any Collateral  Certificate or indemnification for losses or refuse
     to purchase a Warehouse  Loan, (ii) impose on the Company or any Subsidiary
     sanctions,  penalties or special  requirements  in respect of any Loan,  or
     (iii) rescind any insurance policy or reduce insurance  benefits in respect
     of any Loan which would result in a breach of any obligation of the Company
     or any  Subsidiary  under any Contract.  Each Pipeline Loan complied in all
     material respects with Applicable  Requirements for the stage of processing
     that had been  achieved  as of the  Closing  Date based on the  Investor or
     Insurer Program under which Company originated the Pipeline Loan, including
     but not limited to  compliance  with  applicable  Laws and  procurement  of
     required settlement services (E.G.,  appraisal,  title and insurance).  The
     Company and each of the  Subsidiaries  have handled each REO in  accordance
     with Applicable Requirements.

(b)  Each Loan is  evidenced  by a Mortgage  Note and is duly secured by a valid
     first lien  Mortgage on the related  Mortgaged  Property,  in each case, on
     such forms and with such terms as comply with all Applicable  Requirements.
     Each  Mortgage  Note and the  related  Mortgage  is genuine and each is the
     legal,  valid and binding  obligation of the maker thereof,  enforceable in
     all material respects in accordance with its terms,  subject to bankruptcy,
     insolvency  and  similar  laws  affecting   generally  the  enforcement  of
     creditors'  rights  and  the  discretion  of  a  court  to  grant  specific
     performance.  All parties to the  Mortgage  Note and the Mortgage had legal
     capacity to execute the Mortgage  Note and the  Mortgage and each  Mortgage
     Note and Mortgage has been duly and properly executed by such parties. Each
     Loan is not subject to any rights of rescission,  set-off,  counterclaim or
     defense,  including the defense of usury,  nor will the operation of any of
     the terms of the  Mortgage  Note or the  Mortgage,  or the  exercise of any
     right  thereunder,   render  either  the  Mortgage  Note  or  the  Mortgage
     unenforceable by the Company,  in whole or in part, or subject to any right
     of rescission  (except any Warehouse  Loan which is closed but not funded),
     set-off,  counterclaim or defense,  including the defense of usury,  and no
     such  right of  rescission,  set-off,  counterclaim,  or  defense  has been
     asserted  with  respect  thereto.  For  purposes of this  SECTION  4.21(B),
     references to Mortgage  Notes shall be deemed to include  mortgage notes in
     respect of REO.

(c)  The Company and each Subsidiary (in their respective capacities as Servicer
     or otherwise)  and each  Originator and Prior Servicer have complied in all
     material  respects  with the  Applicable  Requirements  including,  without
     limitation,  the federal Fair Housing Act, federal Equal Credit Opportunity
     Act and Regulation B, federal Fair Credit  Reporting Act,  federal Truth in
     Lending Act and Regulation Z, National Flood Insurance Act of 1968, federal
     Flood  Disaster  Protection  Act of 1973,  federal  Real Estate  Settlement
     Procedures  Act and  Regulation X, federal Fair Debt  Collection  Practices
     Act,  federal Home Mortgage  Disclosure  Act, and state consumer credit and
     usury codes and laws.

(d)  There has been no  material  fraudulent  action  on the part of any  Person
     (including   without  limitation  any  borrower,   appraiser,   builder  or
     developer,  credit reporting agency,  settlement agent, realtor,  broker or
     correspondent)  in connection  with the origination of any Loan or Pipeline
     Loan or the application of any insurance proceeds with respect to a Loan or
     the Collateral for which Company is responsible to the applicable  Investor
     or Insurer.

(e)  SCHEDULE 4.21(E)  represents a complete and accurate list of each Servicing
     Agreement as of the date of the Balance Sheet  pertaining to Serviced Loans
     and  includes  (i) the  identity of the  Mortgage  Group  member  acting as
     Servicer under such Servicing Agreement; (ii) whether the relevant Servicer
     is acting as master servicer,  servicer or subservicer under such Servicing
     Agreement; and (iii) the outstanding principal balance of any advances made
     by the relevant Servicer with respect to the Loans,  Collateral Certificate
     Pools or Pipeline Loans (if any) Serviced  under such Servicing  Agreement.
     All  information  contained in SCHEDULE  4.2(E) is complete and accurate in
     all  material   respects.   The  Servicing  of  the  Loans  and  Collateral
     Certificate  Pools  complies in all material  respects with all  Applicable
     Requirements.

                                      137

(f)  Except as  disclosed  in SCHEDULE  4.21(F),  all  Mortgage  Pools have been
     initially  certified,  finally certified and/or  recertified if required by
     the relevant Investor,  Insurer or other certifying Person and otherwise in
     accordance in all material respects with Applicable Requirements.

(g)  All  Custodial  Accounts  required to be  maintained by the Company and the
     Subsidiaries   have  been  established  and   continuously   maintained  in
     accordance with Applicable Requirements in all material respects. Except as
     to payments  which are past due under the Loans or Collateral  Certificates
     identified on SCHEDULE 4.21(G),  all Custodial Account balances required by
     the Loans and paid to the  Company or  Subsidiaries  for the account of the
     Mortgagors  under the Loans or with respect to Collateral  Certificates  or
     Securitization  Transactions have been credited to the appropriate  account
     and have been retained in and  disbursed  from the  appropriate  account in
     accordance  with the  Applicable  Requirements  in all  material  respects.
     Subject to and in accordance  with the Applicable  Requirements  pertaining
     generally  to the  type,  size,  rating  or  capitalization  of  depository
     institutions   qualified  to  hold  such  balances,  the  Company  and  the
     Subsidiaries   have  the  right  and  power  to  determine   the  financial
     institution in which the Custodial Accounts are held.

(h)  Except as disclosed in SCHEDULE  4.21(H) and for indemnity  agreements with
     any of such Persons (a true and complete list of all current such indemnity
     agreements  being in SCHEDULE  4.21(H)) and except for  customary  industry
     standards for  indemnification  and repurchase  remedies in connection with
     agreements for the sale or servicing of mortgage loans, none of the Company
     or any Subsidiary is now nor has been, during the last three years, subject
     to  any  material  fine,  suspension,  settlement  or  other  agreement  or
     administrative  agreement or sanction by, or any  obligation  to indemnify,
     HUD, GNMA, VA, FNMA, FHLMC or other Investor,  any federal agency, or State
     Agency  relating  to the  origination,  sale or  servicing  of  mortgage or
     consumer loans.

(i)  Each Loan is  covered by an  American  Land  Title  Association  or similar
     lender's  title  insurance  policy (or a title  commitment  or title binder
     committing  the title  company to issue such title  insurance  policy)  or,
     where  customary,  an  attorney's  opinion of title  (collectively,  "TITLE
     INSURANCE POLICY") in each case meeting the Applicable  Requirements in all
     material respects,  issued by an Insurer acceptable to any relevant Agency,
     and any other Investor or Private  Investor and qualified to do business in
     the  jurisdiction  where the  Mortgaged  Property is located,  insuring the
     Company or the relevant  Subsidiary,  its  successors and assigns as to the
     lien of the  Mortgage  in the  original  principal  amount  of the Loan and
     against any loss by reason of the  invalidity  or  unenforceability  of the
     lien.  Additionally,  such lender's title  insurance  policy  affirmatively
     insures ingress and egress to and from the Mortgaged Property,  and against
     encroachments  by or  upon  the  Mortgaged  Property.  The  Company  or the
     relevant  Subsidiary is the sole insured of each lender's  title  insurance
     policy,  and each  lender's  title  insurance  policy is in full  force and
     effect and will be in full force and effect  upon the  consummation  of the
     transactions  contemplated  by  this  Agreement.  Except  as  disclosed  in
     SCHEDULE 4.21(I), no claims have been made under a lender's title insurance
     policy, and no prior holder of the related Mortgage,  including the Company
     and any  Subsidiary,  has done,  by act or omission,  anything  which would
     impair the coverage of any lender's title insurance policy.

(j)  Each  appraisal  made in connection  with the  origination of a Loan or, if
     applicable,  a Pipeline  Loan,  was  performed in all material  respects in
     accordance with Applicable  Requirements.  Except as otherwise permitted or
     required by the Applicable Requirements, each conventional Loan with an LTV
     at  origination in excess of 80% is subject to a primary  insurance  policy
     satisfying the  requirements  of the  applicable  Investor or to the extent
     that no Investor exists,  complying with the requirements  contained in the
     Seller and  Servicing  Guides.  All  provisions  of such primary  insurance
     policy have been and are being complied with in all material respects, such
     policy is in full force and effect,  and all premiums due  thereunder  have
     been paid.  Any  Mortgage  subject  to any such  primary  insurance  policy
     obligates  the Mortgagor  thereunder to maintain such  insurance and to pay
     all  premiums  and  charges in  connection  therewith  if the  Investor  so
     requires  or to the extent  that no  Investor  exists,  complying  with the
     requirements contained in the Seller and Servicing Guides.

                                      138

(k)  All flood and hazard insurance policies with respect to Loans were obtained
     where  required  and  are in  compliance  in  all  material  respects  with
     Applicable Requirements.

(l)  Except as disclosed on SCHEDULE  4.21(L),  no Loan is a "high-cost loan" or
     "covered loan" under either the Home Ownership  Equity  Protection Act or a
     similar state or local anti-predatory lending Law.

(m)  Except as  disclosed  in SCHEDULE  4.21(M),  there are no  material  taxes,
     ground  rents,   water  charges,   sewer  rents,   assessments   (including
     assessments payable in future installments),  insurance premiums, leasehold
     payments or other  outstanding  charges  affecting  the  related  Mortgaged
     Properties  (i) with  respect  to any  Warehouse  Loan or REO and (ii) with
     respect to any Serviced Loan (except those items which, if unpaid,  are not
     obligations   of  the   Company   or  any   Subsidiary   under   Applicable
     Requirements),  in each case that are past due and,  except with respect to
     insurance premiums, for which a penalty is payable.

(n)  Except as  disclosed  in SCHEDULE  4.21(N),  the proceeds of each Loan have
     been fully disbursed to or for the account of the related Mortgagor,  there
     is no  obligation  for the related  mortgagee to advance  additional  funds
     thereunder and any and all  requirements as to completion of any on site or
     off site  improvement and as to  disbursements  of any completion or repair
     escrow funds therefore have been complied with in all material respects.

4.22 SECURITIZATION TRANSACTIONS.

(a)  SCHEDULE  4.22(A)  represents a complete and accurate list of each material
     Securitization  Transaction  as of the date of the  Balance  Sheet and sets
     forth the relevant Securitization Issuer, the classes of securities issued,
     the current principal balance for each class, the applicable coupon rate or
     discount of each class,  the current rating assigned to each class, if any,
     and the scheduled maturity date(s) of each class. The information contained
     in SCHEDULE  4.22(A) is complete  and  accurate in all  material  respects.
     Since the date of the Balance Sheet, no further Securitization Transactions
     other than those  disclosed on SCHEDULE  4.22(A) have been completed or are
     currently  pending.  The Company and each  Subsidiary  has  complied in all
     material  respects with all  obligations  and conditions to be performed or
     satisfied by it with respect to all agreements and arrangements pursuant to
     which it is bound under a Securitization  Transaction  (such agreements and
     arrangements   are   collectively   referred  to  as  the   "SECURITIZATION
     INSTRUMENTS").   Each   Securitization   Issuer,   Securitization   Entity,
     Securitization Trustee,  Servicer and Prior Servicer (if any) has performed
     in all material  respects all of its respective  obligations  for which the
     Company or any  Subsidiary  is  responsible  or may be subject to liability
     under the  Securitization  Instruments or any other existing Law applicable
     to Securitization Transactions.  Neither the Company nor any Subsidiary nor
     any   governmental   entity,   Tax   authority,    Securitization   Issuer,
     Securitization  Trustee  or  Servicer  has  taken  any  action  that  would
     materially and adversely affect the  characterization  or Tax treatment for
     federal,   state  or  local  income  or  franchise  Tax  purposes,  of  any
     Securitization  Entity  or  any  securities  issued  in  connection  with a
     Securitization  Transaction,  and except as set forth in SCHEDULE  4.22(A),
     all  required  federal,  state and local Tax and  information  returns  and
     elections relating to any Securitization Transaction for which the Company,
     any Subsidiary or a  Securitization  Issuer under the control of Company or
     any Subsidiary is responsible  under the  Securitization  Instruments  have
     been  accurately  prepared  and  properly  and timely filed in all material
     respects.

(b)  Neither the Company nor any  Subsidiary  (acting as Servicer or  otherwise)
     has  materially  changed  its  policies  and  procedures  relating  to  its
     reporting  obligations  under any  Servicing  Agreement  or  Securitization
     Instrument.  The relevant Servicer has consistently applied in all material
     respects all accounting principles and calculation methodologies used by it
     in the preparation of any reports required to be delivered  pursuant to any
     Servicing  Report  or  Securitization  Instrument,  except to  account  for
     changes in GAAP.

(c)  There  is no  material  Litigation  pending  or  any  investigation  by any
     governmental authority pending, or, to the Knowledge of Seller,  threatened
     against the Seller, the Company, any Subsidiary,  any Securitization Entity

                                      139

     or any  Securitization  Issuer  relating to any  Collateral  Certificate or
     Securitization Transaction,  including but not limited to any Litigation or
     investigation relating to an untrue statement of material fact contained in
     any  disclosure  or  offering  document  delivered  to  Investors,  Private
     Investors or creditors  relating to the Loans, the Collateral  Certificates
     or any  Securitization  Transaction  (including any exhibits,  attachments,
     supplements   or   amendments   thereto)   (collectively,   the   "OFFERING
     Documents"), or the omission of a material fact from any Offering Documents
     necessary  to make the  statements  contained  therein not  misleading.  No
     Offering  Document contains an untrue statement of a material fact or omits
     a material  fact  necessary to make the  statements  contained  therein not
     misleading  with respect to the Company,  any Subsidiary or any information
     for which the Company or any  Subsidiary  is  responsible  in such Offering
     Document.

(d)  Except as publicly  disclosed prior to the date hereof,  none of Standard &
     Poor's,  a division of The McGraw-Hill  Companies,  Inc.,  Moody's Investor
     Service.,  Inc.,  Fitch Inc., doing business as Fitch Ratings or A.M. Best,
     has indicated that it has under  surveillance or review,  its rating of (i)
     the financial  strength,  claims paying ability or servicer rating (if any)
     of the Company or any Subsidiary and (ii) any  Collateral  Certificates  or
     securities issued in connection with  Securitization  Transactions,  and to
     the  Knowledge  of  Seller,  there  exists  no  circumstance  or  condition
     reasonably  likely to cause any such  ratings  to be  modified,  qualified,
     lowered or placed under such surveillance.

4.23 ABSENCE OF CERTAIN CHANGES OR EVENTS.  Except as set forth in the Financial
     Statements  or in SCHEDULE  4.23,  since  December  31,  2003,  no Material
     Adverse Effect has occurred.  Except as  contemplated  by this Agreement or
     permitted  under SECTION 6.2, since February 29, 2004, the Company and each
     Subsidiary  has  carried on its  business in all  material  respects in the
     ordinary course.

4.24 LABOR  MATTERS.  Neither the Company nor any Subsidiary is a party to or is
     bound by any collective bargaining  agreement,  contract or other agreement
     or  understanding  with a labor  union  or labor  organization,  nor is the
     Company or any Subsidiary the subject of a proceeding asserting that any of
     them has  committed  an unfair  labor  practice  (within the meaning of the
     National  Labor  Relations  Act) or seeking  to compel  the  Company or any
     Subsidiary to bargain with any labor organization as to wages or conditions
     of  employment,  nor is there any strike or other material labor dispute or
     disputes  involving  the  Company  or  any  Subsidiary  pending,  or to the
     Knowledge of Seller, threatened.  There is no activity involving any of the
     Company's  or the  Subsidiary's  employees  seeking to certify a collective
     bargaining unit or engaging in other organizational activity.

4.25 TRANSACTIONS  WITH  AFFILIATES.  Except  as set  forth on  SCHEDULE  3.4 or
     SCHEDULE 4.25,  there are no outstanding  amounts  payable to or receivable
     from,  or  advances by the  Company or any  Subsidiary  to, and neither the
     Company nor any of the  Subsidiaries  is otherwise a creditor or debtor to,
     Seller or any of its  Affiliates,  or any director,  officer or employee of
     Seller  or  any  of  its   Affiliates   (including   the  Company  and  the
     Subsidiaries).  Except as set forth on SCHEDULE  4.25,  neither the Company
     nor any  Subsidiary  has  purchased,  acquired  or leased any  property  or
     services from or sold,  transferred  or leased any property or services to,
     or made any management  consulting or similar fee agreement with, Seller or
     any of its  Affiliates  (other than the Company or any  Subsidiary)  or any
     director, officer or employee of Seller or any of its Affiliates (including
     the Company and the Subsidiaries).

4.26 SUFFICIENCY  OF ASSETS.  Except for the property  and services  provided by
     Seller  and its  Affiliates  as listed on  SCHEDULE  4.25,  the  assets and
     properties  of  the  Company  and  the  Subsidiaries,  taken  as  a  whole,
     constitute all of the material  assets and properties  which are reasonably
     required  for  the  operation  of the  business  of  the  Company  and  the
     Subsidiaries as currently conducted.

4.27 INTEREST RATE RISK MANAGEMENT  INSTRUMENTS.  All interest rate swaps, caps,
     floors  and  option  agreements  and other  interest  rate risk  management
     arrangements  (collectively,  "HEDGING  INSTRUMENTS")  entered into for the
     account of the Company or the Subsidiaries  were entered into in accordance
     with applicable Law. The Hedging  Instruments are legal,  valid and binding
     obligations  of the  Company  or the  applicable  Subsidiary  and the other
     parties thereto, enforceable against the Company or such Subsidiary, and to
     the Knowledge of Seller, the counterparty thereto, in accordance with their
     terms (except as  enforceability  may be limited by bankruptcy,  insolvency
     and other  laws  relating  to  creditors'  rights  generally  or by general
     equitable   principles),   without  any   material   set-off,   defense  or
     counterclaim, and are in full force and effect with respect to the Company,
     the applicable  Subsidiary and the other parties  thereto.  The Company and

                                      140

     the  Subsidiaries  have duly  performed all of their  material  obligations
     under the  Hedging  Instruments  to the  extent  that such  obligations  to
     perform have accrued, and there are no breaches,  violations or defaults or
     allegations or assertions of such by any party thereunder.

4.28 NO REGULATORY  IMPEDIMENT.  Seller is not aware of any fact relating to its
     business,  operations,  financial  condition  or legal  status  that  might
     reasonably  be  expected to impair in any  material  respect its ability to
     obtain all consents, orders, authorizations,  and approvals from federal or
     state  governmental  authorities  necessary  for  the  consummation  of the
     transactions  contemplated  hereby within the time period  contemplated  by
     this Agreement.

4.29 MASTER SERVICING. Neither the Company nor any of the Subsidiaries engage in
     Master Servicing.

4.30 DILIGENCE  MATERIALS.  Seller has previously delivered to Buyer (i) certain
     tapes  (electronic  media) on which  information  regarding the Loans as of
     February  27, 2004 and March 31, 2004 is recorded  (the  "Tapes")  and (ii)
     other information concerning the Company and its Subsidiaries identified in
     SCHEDULE  4.30(A) and (B) (such  information,  together with the Tapes, the
     "Diligence Materials").  The information contained in the Tapes is true and
     accurate in all material  respects as of the date specified  therein,  with
     the exception of the following excluded "fields:"

                                    sas_type
                                    sas_purp
                                      group
                                     mn_del
                                   escrow_bal
                                   crsibnkfcl
                                      term
                                      rterm

     Subject to any written limitations stated in such Diligence Materials or on
     SCHEDULE  4.30(A),  the Diligence  Materials listed on SCHEDULE 4.30(A) are
     true  and  accurate  in all  material  respects  as of the  date  specified
     therein.  Subject  to any  written  limitations  stated  in such  Diligence
     Materials  or in  SCHEDULE  4.30(B),  the  Diligence  Materials  listed  on
     SCHEDULE 4.30(B) are true copies of the documents that they purport to be.

                                   ARTICLE 5
                     REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby represents and warrants to Seller as follows:

5.1  ORGANIZATION  OF BUYER.  Buyer is duly organized and validly  existing as a
     corporation and in good standing under the laws of the  jurisdiction of its
     organization  and has full  corporate  power and  authority  to conduct its
     business  as it is  presently  being  conducted  and to own and  lease  its
     properties.

5.2  AUTHORIZATION. The execution, delivery and performance of this Agreement by
     Buyer have been duly  authorized by all necessary  corporate  action.  This
     Agreement has been duly  executed and delivered by Buyer and,  assuming the
     due execution of this Agreement by the other parties hereto, is a valid and
     binding obligation of Buyer,  enforceable against it in accordance with its
     terms, except as such enforcement may be limited by bankruptcy, insolvency,
     receivership, conservatorship,  reorganization, moratorium or other similar
     laws now or  hereafter in effect  relating to or  affecting  the rights and
     remedies of creditors generally,  and general principles of equity (whether
     considered in a proceeding  at law or in equity) and the  discretion of the
     court before which any proceeding therefor may be brought.

5.3  CONSENTS  AND  APPROVALS.  No  consent,  approval or  authorization  of, or
     declaration,  filing or registration  with, any  governmental or regulatory
     authority  or any other  Person is required to be made or obtained by Buyer
     on or prior to the Closing Date in connection with the execution,  delivery

                                      141

     and performance of this Agreement and the  consummation of the transactions
     contemplated  by  this  Agreement,  except  (i)  the  filing  of  premerger
     notification reports under the Hart-Scott-Rodino Antitrust Improvements Act
     of 1976,  as amended  and (ii) any  required  approvals  or  consents  from
     federal and state regulatory  agencies.  Buyer has no knowledge of any fact
     or  circumstance  concerning  itself that  reasonably  could be expected to
     delay the  receipt  of, or result in a denial of, any  required  consent or
     approval.

5.4  NO BROKERS.  Buyer has not employed,  and is not subject to the valid claim
     of, any broker, finder, consultant or other intermediary in connection with
     the transactions contemplated by this Agreement.

5.5  NO  CONFLICT  OR  VIOLATION.  Neither the  execution  and  delivery of this
     Agreement nor the  consummation  of the  transactions  contemplated by this
     Agreement  will in any material  respect (i) conflict with or result in any
     material  breach  which  would  constitute  a  default  under  any  term or
     provision of any  Contract,  agreement,  indebtedness,  lease,  commitment,
     license, franchise,  Permit,  authorization or concession to which Buyer or
     any of its  Affiliates  is a party or is  subject or by which any assets of
     Buyer or such Affiliate are bound, (ii) result in any material violation of
     the  provisions  of the charter or bylaws of Buyer,  or (iii) result in any
     material violation by Buyer of any Law.

5.6  FINANCIAL ABILITY. Buyer has sufficient funds available to it to consummate
     the  transactions  contemplated  in  this  Agreement,   including,  without
     limitation, payment of the amounts contemplated in SECTION 3.3(A) hereof.

5.7  ACQUISITION OF STOCK AND OTHER PURCHASED  ASSETS.  Buyer has such knowledge
     and  experience  in financial  and  business  matters that it is capable of
     evaluating  the  merits  and  risks of its  purchase  of the  Stock.  Buyer
     confirms  that Seller has made  available to Buyer the  opportunity  to ask
     questions of the officers and management  employees of Seller,  the Company
     and the  Subsidiaries  and to  acquire  additional  information  about  the
     business and financial condition of the Company and the Subsidiaries. Buyer
     is  acquiring  the Stock for  investment  and not with a view toward or for
     sale in  connection  with any  distribution  thereof,  or with any  present
     intention of distributing or selling the Stock. Buyer agrees that the Stock
     may not be sold,  transferred,  offered for sale, pledged,  hypothecated or
     otherwise  disposed of without  registration  under Securities Laws, except
     pursuant to an exemption from registration  under such Securities Laws, and
     without  compliance with state securities laws, in each case, to the extent
     applicable.

5.8  NO  REGULATORY  IMPEDIMENT.  Buyer is not aware of any fact relating to its
     business,  operations,  financial  condition  or legal  status  that  might
     reasonably  be  expected to impair in any  material  respect its ability to
     obtain all consents, orders, authorizations, and approvals from federal and
     state  governmental  authorities  necessary  for  the  consummation  of the
     transactions  contemplated  hereby within the time period  contemplated  by
     this Agreement.

5.9  GAAP. As of the date of this Agreement,  Buyer has no actual knowledge that
     the Company did not prepare the Balance Sheet in  accordance  with GAAP and
     consistent with the policies,  procedures and methodologies employed by the
     Company in the  preparation  of the  Financial  Statements.  Seller has the
     burden of proving  Buyer's  actual  knowledge  for purposes of this SECTION
     5.9.

                                   ARTICLE 6
                              ACTIONS BY SELLER AND
                           BUYER PRIOR TO THE CLOSING

Seller or Buyer,  as the case may be,  covenants  as follows for the period from
the date hereof to the Closing Date:

6.1  MAINTENANCE  OF  BUSINESS.  Seller  shall cause the Company and each of the
     Subsidiaries  in all  material  respects  to (i)  carry on  their  business
     (including  but not  limited to the manner and  selection  of Loans sold to
     Investors),  in the ordinary course consistent with past practice except as
     contemplated  or  required by this  Agreement,  or as  otherwise  agreed in
     writing by the parties hereto, (ii) use commercially  reasonable efforts to
     maintain  and  preserve  intact the business  organization,  employees  and
     advantageous  business  relationships of the Company and the  Subsidiaries,
     (iii) maintain the reserves in account numbers 1440000,  1410600,  1440100,
     1430100 and 1512000  consistent  with the  assumptions and formulas used by

                                      142

     the Company in calculating the reserves recorded on the Company's March 31,
     2004 balance  sheet in such  account  numbers and (iv) take no action which
     would  reasonably  be expected to adversely  affect or delay its ability to
     obtain any approvals  required to consummate the transactions  contemplated
     hereby.

6.2  CERTAIN  PROHIBITED  TRANSACTIONS.  Except as permitted or  contemplated by
     this Agreement,  Seller shall cause the Company and each Subsidiary not to,
     without  the  prior  written   approval  of  Buyer,   which  shall  not  be
     unreasonably withheld:

(a)  except for  compensation  and benefit  increases in the ordinary  course of
     business  consistent with past practice and the items set forth on SCHEDULE
     4.17(I),  (i)  increase  the  compensation  or fringe  benefits  payable or
     provided by the Company or any Subsidiary to any individual,  or (ii) enter
     into  or  commit  itself  to any  new  officer  employment,  management  or
     consulting  agreement with any Person,  other than  agreements  that can be
     terminated without additional payment in less than 30 days;

(b)  issue  any  broadly  distributed  communication  of  a  general  nature  to
     Continuing Employees (including general communications relating to benefits
     and  compensation)  without the prior written approval of Buyer (which will
     not be unreasonably  delayed or withheld),  except for communications  that
     either are in the  ordinary  course of  business  that do not relate to the
     transactions  contemplated hereby or are made pursuant to a mutually-agreed
     upon communications plan;

(c)  except as set forth on SCHEDULE  6.2(C),  except in the ordinary  course of
     business  consistent  with past  practice,  permit  or allow any  assets or
     properties  of the Company or any  Subsidiary to be subject to any material
     Encumbrance;

(d)  make  any  capital  expenditure  or any  commitment  to  make  any  capital
     expenditure,  except  for  such  expenditures  or  commitments  made in the
     ordinary  course of  business  consistent  with  either the  business  plan
     previously furnished to Buyer or not exceeding $250,000 in the aggregate;

(e)  enter  into  any   Material   Contract  or  any  other   Contract   with  a
     non-cancelable  term  in  excess  of  six  months  or  involving  aggregate
     expenditures  or  revenues by the  Company or any  Subsidiary  in excess of
     $250,000;

(f)  except as set forth on SCHEDULE 6.2(F), sell, lease,  license,  transfer or
     otherwise  dispose of, or acquire or agree to acquire,  any material assets
     except in the ordinary  course of business;  PROVIDED,  with respect to the
     buyout of  delinquent  Loans  from  GNMA  securities,  "ordinary  course of
     business"  shall be deemed to be in a manner and amount  consistent  in all
     material respects with methodologies  employed by, and average  repurchases
     of, the Company during the six months ended March 31, 2004;

(g)  except in the ordinary course of business consistent with past practice and
     as set forth on  SCHEDULE  6.2(G),  (I) enter  into,  amend  (including  by
     re-pricing), extend, or terminate, or agree to enter into, amend, extend or
     terminate,  any  material  Servicing  Agreement,  or  (II)  acquire,  sell,
     transfer or otherwise  dispose of, or agree to (or amend any  agreement to)
     acquire, sell, transfer or dispose of, any Servicing;

(h)  except in the ordinary course of business consistent with past practice and
     as set forth on  SCHEDULE  6.2(H),  and  except for  immaterial  amounts or
     terms,  incur any  indebtedness  for  borrowed  money,  assume,  guarantee,
     endorse  or  otherwise  become  responsible  for  obligations  of any other
     Person, or make any loans or advances to any Person;

(i)  change in any  material  respect  any (A)  financial  accounting  policies,
     practices or procedures, (B) collections,  pricing, origination,  credit or
     underwriting  policies,  practices or procedures,  (C) Servicing practices,
     policies  and  procedures  with  respect  to the  Loans  or (D)  actuarial,
     reserving,  investment or risk management or other similar  policies of the
     Company or any  Subsidiary,  except to hedge to the pricing  matrix for the
     Servicing and other  components of the Final  Purchase  Price as determined

                                      143

     pursuant to SCHEDULE 2.2 and EXHIBITS A - F hereto or to respond to changes
     in GAAP or SAP, Applicable Requirements and market conditions;

(j)  settle any material  Litigation that contains terms that generally bind the
     way the  Company  conducts  business  in the  future or waive any  material
     rights or claims;

(k)  make, declare, set aside or pay any dividends or distributions  (whether in
     cash,  stock or property) in respect of any capital stock of the Company or
     any  Subsidiary  or directly or  indirectly  redeem,  purchase or otherwise
     acquire  any of the  Company's  or any  Subsidiary's  capital  stock or any
     securities or obligations  convertible  into or exercisable  for any of the
     Company's or any Subsidiary's capital stock;

(l)  issue or commit to issue any shares of capital  stock of the Company or any
     Subsidiary or obligations or securities  convertible  into or  exchangeable
     for  capital  stock of the  Company or any  Subsidiary,  or grant any stock
     appreciation  rights or grant any Person any right to acquire any shares of
     capital stock of the Company or any Subsidiary;

(m)  amend its charter or bylaws or comparable organizational documents;

(n)  merge with any other  Person or permit any other Person to merge into it or
     consolidate with any other Person;

(o)  authorize or permit any of Seller's,  Seller's  Affiliates or the Company's
     or any Subsidiary's  officers,  directors,  employees,  representatives  or
     agents (collectively, "REPRESENTATIVES") to directly or indirectly solicit,
     initiate or encourage any inquiries  relating to, or that may reasonably be
     expected  to lead to,  the  making of, any  proposal  that  constitutes  an
     Acquisition  Proposal  (as  defined  below),  or  recommend  or endorse any
     Acquisition Proposal, or participate in any discussions or negotiations, or
     provide third parties with any nonpublic information,  relating to any such
     Acquisition  Proposal or otherwise facilitate any effort or attempt to make
     or implement an Acquisition Proposal.  Each of Seller or the Company or any
     Subsidiary  will   immediately   cease  and  cause  to  be  terminated  any
     activities, discussions or negotiations conducted prior to the date of this
     Agreement with any parties other than Buyer with respect to any Acquisition
     Proposal and, to the extent it is able to do so,  require the return (or if
     permitted by the terms of the  applicable  confidentiality  agreement,  the
     destruction) of all confidential  information  previously  provided to such
     parties.  As used in  this  Agreement,  "ACQUISITION  PROPOSAL"  means  any
     inquiry,  proposal or offer  relating  primarily  to any tender or exchange
     offer, proposal for a merger, consolidation,  other business combination or
     other   acquisition   involving  the  Company  or  any  Subsidiary  or  the
     acquisition  in any manner of any of the voting  stock,  equity,  assets or
     properties of the Company or any  Subsidiary,  other than the  transactions
     contemplated  by  this  Agreement  or  as  otherwise   expressly  permitted
     elsewhere in this SECTION 6.2;

(p)  take any action that is intended or may reasonably be expected to result in
     any of its representations and warranties set forth in this Agreement being
     or becoming untrue in any material respect at any time prior to the Closing
     Date,  or in any of the  conditions  set forth in  SECTION 7 or 8 not being
     satisfied  in  any  material  respect  or in a  material  violation  of any
     provision of this  Agreement,  except,  in each case, as may be required by
     Applicable Requirements;

(q)  make or change any  election,  file any amended Tax Return,  enter into any
     closing agreement, settle any Tax claim or assessment of or relating to the
     Company or any Subsidiary,  surrender any right to claim a refund of Taxes,
     or consent to any extension or waiver of the limitation  period  applicable
     to any Tax claim or  assessment  upon or  relating  to the  Company  or any
     Subsidiary if such election, amendment, agreement,  settlement,  surrender,
     consent or other action would likely have the effect of increasing  the Tax
     liability of the Company or any Subsidiary for any taxable period beginning
     on or after the day after the Closing  Date unless  required by  applicable
     Law;

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(r)  engage in any transaction  with, or enter into any agreement,  arrangement,
     or understanding with, directly or indirectly,  any Affiliate,  or make any
     payment or distribution to any Affiliate  (other than payments for services
     as an officer, director or employee of the Company or a Subsidiary), except
     for  transactions in the ordinary  course of business  consistent with past
     practice or involving immaterial amounts or terms;

(s)  permit any employee of the Company or any Subsidiary having decision making
     responsibility for the sale or retention of Servicing  (including,  but not
     limited to, best execution strategies  surrounding Warehouse Loans) to take
     actions in  respect  of the  calculations  and  methodologies  used in this
     Agreement  (including  as set forth on the Exhibits and  schedules  hereto)
     related to the calculation of Pre-Closing  Servicing Rights Value,  Closing
     Servicing Rights Value,  Pipeline Loans Servicing Value and Warehouse Loans
     Servicing  Value  or  otherwise  used  in  determination  of the  Estimated
     Purchase  Price or Final Purchase Price in order to, or with the effect of,
     affecting or manipulating in bad faith the Estimated  Purchase Price or the
     Final Purchase Price; or

(t)  authorize, commit or agree to take any of the foregoing actions.

6.3  ACCESS.  Seller shall allow Buyer during  regular  business  hours  through
     Buyer's   employees,   agents   and   representatives   (i)  to  make  such
     investigation of the business, properties, books and records of the Company
     or any Subsidiary, (ii) to conduct such examination of the condition of the
     Company or any Subsidiary, as Buyer reasonably deems necessary or advisable
     for purposes of an orderly  integration of the Company and the Subsidiaries
     by Buyer following  Closing,  (iii) to train  Continuing  Employees and any
     other Seller's  employees who will or may become  employees of Buyer or who
     will provide  services to Buyer through the Transition  Services  Agreement
     with respect to Buyer's policies, procedures and systems and (iv) for other
     purposes reasonably  consistent with this Agreement.  In furtherance of the
     foregoing,  to the fullest extent permitted under applicable Law, not later
     than seven (7) Business Days from the date hereof,  the Seller, the Company
     and  the  Subsidiaries  shall  jointly  appoint  three  (3)  officers  with
     knowledge of, and  experience in, the operations and affairs of the Company
     and the  Subsidiaries,  and Buyer shall  appoint  three (3)  officers  with
     responsibility  for overseeing the  operational  integration of the Company
     and the Subsidiaries with Buyer's  business,  to comprise a transition team
     (the  "TRANSITION  TEAM") that shall meet on a regular basis to discuss and
     implement  reasonable steps necessary to achieve an orderly  integration of
     the Company and the Subsidiaries with Buyer as of the Closing. In addition,
     subject to the establishment of appropriate  screening and  confidentiality
     mechanisms as determined by the Transition  Team, the Transition Team shall
     ensure  that  Buyer has  access to  necessary  information  to enable it to
     prepare for the conversion of those information  technology  systems of the
     Company and the Subsidiaries, as may be identified by Buyer's appointees on
     the Transition Team, to the information  technology  systems of Buyer as of
     the Closing or as promptly as practicable thereafter.

     All  reasonable  requests  for access to the offices,  properties,  plants,
     books and records  relating  to Seller or the  Company or the  Subsidiaries
     shall be made to such  representatives  of Seller as Seller shall designate
     or to the Seller's  representatives  on the  Transition  Team, who shall be
     solely  responsible  for  coordinating  all such  requests  and all  access
     permitted hereunder. It is further understood and agreed that neither Buyer
     nor its  representatives  shall contact any of the employees,  customers or
     suppliers of Seller or the Company or the  Subsidiaries  in connection with
     the transactions  contemplated  hereby,  whether in person or by telephone,
     mail or other means of  communication  without the prior  authorization  of
     such representatives of Seller as Seller may designate;  provided, that the
     foregoing  shall not be deemed to preclude  ongoing  contact  with any such
     Person with whom Buyer or its  Representatives has been in contact prior to
     the date hereof. Any information obtained from Seller or the Company or any
     Subsidiary  shall be deemed to be  "Evaluation  Material" as defined in the
     Confidentiality  Agreement dated February 20, 2004 between Seller and Buyer
     (the   "CONFIDENTIALITY   AGREEMENT")   and   shall  be   subject   to  the
     Confidentiality Agreement.  Notwithstanding the foregoing, Seller shall not
     be required to violate any obligation of  confidentiality  to which Seller,
     or the Company or any Subsidiary is subject or to waive any privilege which
     any of them may possess in discharging their  obligations  pursuant to this
     SECTION 6.3 or to violate any Law.

6.4  REGULATORY  APPROVALS.  As soon as practicable after execution and delivery
     of this Agreement,  Buyer and Seller shall make all filings  required under
     applicable  laws  and  regulations  for  consummation  of the  transactions
     contemplated  hereby.  In  addition,  Buyer and Seller  will each  promptly
     furnish  all  information  as  may be  required  by any  federal  or  state

                                      145

     regulatory  agency  properly  asserting  jurisdiction  in  order  that  the
     requisite  approvals  for  the  transactions  contemplated  hereby  may  be
     obtained or to cause any applicable  waiting periods to expire.  Seller and
     Buyer will, as soon as practicable,  use commercially reasonable efforts to
     take,  or cause to be taken,  all action  required to obtain as promptly as
     practicable all necessary Permits, consents, approvals,  authorizations and
     agreements  of,  and to give all  notices  and  reports  and make all other
     filings  with,  any  governmental  or  regulatory  authority,  necessary to
     authorize,   approve  or  permit  the   consummation  of  the  transactions
     contemplated  hereby,  and Buyer and Seller shall cooperate with each other
     in good faith  with  respect  thereto.  To the extent  such  documents  are
     publicly  available,  Buyer and Seller shall promptly provide to each other
     copies of all applications,  documents, correspondence and written comments
     that  each of them or any of  their  Affiliates  files  with,  sends  to or
     receives  from any  regulatory  or  governmental  agency,  or the  staff or
     supervisory  agents  of any of them,  relating  to this  Agreement  and the
     transactions  contemplated herein, including any applications filed for the
     purpose of  obtaining  any  necessary  regulatory  consents,  approvals  or
     waivers.  Buyer and Seller each  represents  and warrants to the other that
     all  information   concerning  it,  its  Affiliates  or  their   respective
     directors,  officers,  shareholders  and  subsidiaries  (or  submitted  for
     inclusion)  in any such  application  or filing shall be true,  correct and
     complete in all material respects.

6.5  EFFORTS TO CLOSE. Subject to the terms and conditions herein provided, each
     of the parties hereto shall use commercially reasonable efforts to take, or
     cause to be  taken,  all  action  or do,  or cause to be done,  all  things
     necessary,  proper or  appropriate  to  consummate  and make  effective the
     transactions  contemplated  hereby  and to  cause  the  fulfillment  of the
     parties' obligations hereunder.

6.6  AGENCIES.  Promptly  after the  execution of this  Agreement,  Seller shall
     cause the Company to cooperate with Buyer to proceed to obtain any required
     Permits   from  the  Agencies   necessary  to  complete  the   transactions
     contemplated by this  Agreement.  Seller shall have the  responsibility  to
     cause the Company to use all commercially  reasonable efforts to secure any
     such  Permits  from the  Agencies,  and Buyer shall  cooperate  and use all
     commercially reasonable efforts to secure any such Permit. Seller shall pay
     all fees imposed by the Agencies and costs with respect to any Permits.

6.7  CONSENTS  AND WAIVERS OF THIRD  PARTIES.  Seller shall cause the Company or
     any of the Subsidiaries to use commercially  reasonable efforts, and Buyer,
     upon  request  of  Seller,  shall use  commercially  reasonable  efforts to
     cooperate  with Seller,  in  attempting to secure any approvals or consents
     from (or file notices with or obtain waivers from) any third party required
     to consummate the transactions contemplated herein.

6.8  MONTHLY FINANCIAL INFORMATION. Not later than the 10th Business Day of each
     month between the date of this Agreement and the Closing Date, Seller shall
     provide  Buyer with (i) an  unaudited  consolidated  balance  sheet for the
     Company as of the most  recently  completed  month-end  period (a  "MONTHLY
     UNAUDITED  BALANCE  SHEET") in  sufficient  detail to  determine  the Final
     Purchase Price in conformance  with SECTION 2.2, which shall be accompanied
     by a  certificate,  duly  executed by the chief  financial  officer,  chief
     accounting officer or other senior financial officer of Seller stating with
     respect  to  such  Monthly  Unaudited  Balance  Sheet,  that  such  Monthly
     Unaudited  Balance  Sheet is based on the books and  records of the Company
     and its  Subsidiaries and fairly presents,  in all material  respects,  the
     financial  position  of the Company  and its  Subsidiaries,  as of the date
     indicated  therein,  in accordance with GAAP; (ii) a report  delivered as a
     computer  tape  containing,  with respect to each Loan owned by the Company
     and the  Subsidiaries  and each Serviced  Loan and  Subserviced  Loan,  the
     information  specified  on  SCHEDULE  1.2 as of the most  recent  month-end
     period;  and (iii) an updated servicing data file as of the prior month-end
     regarding  Serviced Loans containing the same information and data elements
     and in the same format as the month-end servicing tape provided to Buyer as
     of March 31, 2004. As soon as such information  becomes  available,  Seller
     shall  provide Buyer with PMRC's  audited  balance sheet as of December 31,
     2003 and the related  audited  statements of operations and income and cash
     flows for the year then ended.

6.9  PRECLOSING TRANSACTIONS.

(a)  Seller  shall,  on or prior to the  Closing  Date,  transfer or cause to be
     transferred to the Company or a Subsidiary,  as appropriate,  the contracts
     and  other  assets  owned  by  Seller  or  its   Affiliates  and  presently
     exclusively  used and  necessary  for the  operation of the business of the
     Company as set forth on SCHEDULE  6.9(A).  All such  transfers  shall be on

                                      146

     terms, and made pursuant to documents,  reasonably  acceptable to Buyer and
     Seller.  The  purchase  price for all  transfers of assets that are made to
     Seller or any Subsidiary shall be as set forth on SCHEDULE 6.9(A), shall be
     paid in  cash  or,  in the  case  of  transfers  to  Seller,  reduction  of
     intercompany indebtedness owed by the Company and shall be at Seller's sole
     cost and expense.

(b)  Seller shall, on or prior to the Closing Date, amend or terminate, or cause
     to be amended or  terminated,  all interest  rate swap  agreements or other
     instruments or arrangements which have the intent or effect of transferring
     net  interest  margin  from one or more of the  Subsidiaries  such that the
     benefit of such  instruments or arrangements  inures to Buyer following the
     Closing, and Seller shall provide Buyer with evidence to such effect.

(c)  Seller shall cause the Company to provide such  information to Buyer as may
     be  reasonably  necessary  to  enable  Buyer  to  arrange  the  pay off and
     termination  at Closing of all the  Company's  and any of the  Subsidiary's
     existing financing with third parties and shall cooperate with Buyer in the
     filing of UCC-3  termination  statements  and other similar  instruments to
     effect the release of liens related thereto.

                                   ARTICLE 7
                       CONDITIONS TO SELLER'S OBLIGATIONS

The obligations of Seller to consummate the transactions  contemplated hereby on
the Closing Date are subject,  in the discretion of Seller,  to the satisfaction
or waiver in writing,  on or prior to the Closing Date, of each of the following
conditions:

7.1  REPRESENTATIONS,   WARRANTIES  AND  COVENANTS.   All   representations  and
     warranties of Buyer  contained in this Agreement  shall be true and correct
     in all  material  respects as of the date of this  Agreement  and as of the
     Closing  Date as though made on and as of the Closing  Date (or on the date
     when made in the case of any representation and warranty which specifically
     relates to an earlier date), except as otherwise consented to in writing by
     Seller and except for the failure or failures of such  representations  and
     warranties  to be so true and correct that (after  excluding  any effect of
     materiality  qualifications  as set  forth  in any such  representation  or
     warranty),  in the aggregate,  has not resulted in, or would not reasonably
     be expected to result in, a material  adverse effect on Buyer's  ability to
     consummate the transactions contemplated by this Agreement, and Buyer shall
     have  performed in all material  respects all  agreements  and covenants as
     required  hereby to be  performed  by it prior to or at the  Closing  Date.
     There shall be delivered to Seller a  certificate  (signed by the President
     or a Vice President of Buyer) to the foregoing effect.

7.2  CONSENTS.  All Permits,  consents,  approvals and waivers from governmental
     and  regulatory  authorities  and  Agencies and those set forth in SCHEDULE
     4.11 necessary to permit Seller to consummate the transactions contemplated
     hereby shall have been obtained;  all  conditions  required to be satisfied
     prior to Closing imposed by the terms of such Permits, consents,  approvals
     or waivers shall have been satisfied;  and all waiting periods  relating to
     such approvals shall have expired.

7.3  NO GOVERNMENTAL  ORDERS.  Neither of the parties hereto shall be subject to
     any  order,  decree  or  injunction  of a  court  or  agency  of  competent
     jurisdiction  which enjoins or prohibits the consummation of this Agreement
     or the transactions contemplated hereby.

7.4  CERTIFICATES.  Buyer will  furnish  Seller  with such  certificates  of its
     officers,  directors and others to evidence  compliance with the conditions
     set forth in this ARTICLE 7 as may be reasonably requested by Seller.

7.5  CORPORATE  AUTHORITY.  Seller  shall  have  received  certified  copies  of
     resolutions  adopted  by the  board of  directors  of Buyer  approving  the
     execution, delivery and performance of this Agreement.

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                                   ARTICLE 8
                        CONDITIONS TO BUYER'S OBLIGATIONS

The obligations of Buyer to consummate the transactions  contemplated hereby are
subject,  in the discretion of Buyer, to the satisfaction or waiver, on or prior
to the Closing Date, of each of the following conditions:

8.1  REPRESENTATIONS,   WARRANTIES  AND  COVENANTS.   All   representations  and
     warranties of Seller  contained in this Agreement shall be true and correct
     as of the date of this  Agreement and as of the Closing Date as though made
     on and as of the Closing  Date (or on the date when made in the case of any
     representation and warranty which specifically relates to an earlier date),
     except as  consented  to in writing by Buyer and except for the  failure or
     failures of such  representations  and warranties to be so true and correct
     (after excluding any effect of materiality  qualifications set forth in any
     such  representation or warranty) that, in the aggregate,  has not resulted
     in a Material  Adverse  Effect,  and Seller  shall  have  performed  in all
     material  respects  all  agreements  and  covenants  required  hereby to be
     performed  by  Seller  prior  to or at the  Closing  Date.  There  shall be
     delivered  to  Buyer  a  certificate  (signed  by the  President  or a Vice
     President of Seller) to the foregoing effect.

8.2  CONSENTS.  All Permits,  consents,  approvals and waivers from governmental
     and  regulatory  authorities  and  Agencies  necessary  to permit  Buyer to
     consummate  the  transactions  contemplated  hereby and those  consents set
     forth on SCHEDULES  4.11 or 6.7 shall have been  obtained;  all  conditions
     required to be satisfied  prior to the Closing imposed by the terms of such
     Permits, consents,  approvals or waivers shall have been satisfied; and all
     waiting periods relating to such approvals shall have expired. For purposes
     of this SECTION 8.2, a consent or approval from a governmental authority or
     Agency shall not be deemed to have been obtained if in connection  with the
     grant  thereof  there shall have been an  imposition  by such  governmental
     authority or Agency of any condition, requirement, restriction or change of
     regulation,  or any other  action  directly or  indirectly  related to such
     grant taken by such governmental  authority or Agency,  which, either alone
     or together with all such other  conditions or  requirements,  requires the
     Company or any of the  Subsidiaries  to be  operated  in a manner  which is
     materially  different from industry  standards in effect on the date hereof
     and which materially  adversely affects the business,  financial condition,
     results of  operations  or  prospects  of the Company and the  Subsidiaries
     taken as a whole.

8.3  NO GOVERNMENTAL  ORDERS. None of the parties hereto shall be subject to any
     order, decree or injunction of a court or agency of competent  jurisdiction
     which enjoins,  conditions or prohibits the  consummation of this Agreement
     or the transactions contemplated hereby.

8.4  CERTIFICATES.  Seller shall  furnish  Buyer with such  certificates  of its
     officers,  directors and others to evidence  compliance with the conditions
     set forth in this ARTICLE 8 as may be reasonably requested by Buyer.

8.5  CORPORATE  AUTHORITY.   Buyer  shall  have  received  certified  copies  of
     resolutions  adopted  by the board of  directors  of Seller  approving  the
     execution, delivery and performance of this Agreement.

                                   ARTICLE 9
                                ACTIONS BY SELLER
                           AND BUYER AFTER THE CLOSING

9.1  BOOKS AND  RECORDS.  From and after the  Closing,  any books,  records  and
     files, including Evaluation Material, relating to the business, properties,
     assets or  operations  of the Company or any  Subsidiary,  including to the
     extent that they  pertain to the  operations  of the  Company  prior to the
     Closing Date (to the extent they remain in existence and  available)  shall
     become the property of Buyer.  Except with respect to the  retention of any
     books,  records  and files  relating  to Taxes,  which shall be governed by
     ARTICLE  11 hereof,  for a period  ending on the first  anniversary  of the
     Closing Date,  Seller shall have the right to inspect and to make copies of
     the same at any time during normal  business  hours in connection  with the
     audit, Tax, reporting, litigation or similar needs of Seller arising in the
     ordinary   course  of  business  and  for  no  other  purposes   whatsoever
     (including,  for the  avoidance of doubt,  any record  retention  policy of
     Seller or any Affiliate of Seller).  From and after the Closing,  except as
     required by applicable Law and the regulations, rules and requirements of a
     recognized stock exchange or regulatory authority,  Seller shall, and shall

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     cause its  Affiliates  and  authorized  Representatives  to,  hold all such
     information and any other  confidential  information  that Seller possesses
     concerning the Company and the Subsidiaries (including any information that
     qualifies as  "Evaluation  Material"  for  purposes of the  Confidentiality
     Agreement)  in  confidence  and not  disclose  to any third  party any such
     confidential   information   possessed  by  it,  and  shall  use  any  such
     information   solely  for  the  purposes   delineated   above  unless  such
     information (1) is disclosed with the prior written  approval of Buyer, (2)
     is or becomes  readily  ascertainable  from published  information or trade
     sources or (3) is required to be disclosed by law, regulation,  supervisory
     authority,  other applicable  judicial or governmental  order or applicable
     stock exchange rules.  Except as otherwise provided in the  Confidentiality
     Agreement,   in  the  event  that  this  Agreement  is  terminated  or  the
     transactions   contemplated   by  this  Agreement   otherwise  fail  to  be
     consummated,  Buyer will promptly cause all copies of documents or extracts
     thereof  containing  information and data as to Seller, the Company and the
     Subsidiaries to be returned to Seller at Buyer's  expense,  or (at Seller's
     option)  confirm in writing to Seller that Buyer has  completely  destroyed
     all such copies, documents, extracts, information and data.

9.2  FURTHER ASSURANCES. On and after the Closing Date, Seller, the Company, the
     Subsidiaries  and Buyer will take all  appropriate  action and  execute all
     documents,  instruments  or conveyances of any kind which may be reasonably
     necessary  or  advisable  to  carry  out  any  of  the  provisions  hereof,
     including,  but not limited to, any necessary powers of attorney or limited
     appointment of officers to enable the Company, after Closing, to assign and
     release Mortgages.

9.3  NAME CHANGE AND LIMITED USE OF MARKS.

(a)  Except as provided in this  SECTION  9.3,  Buyer will cause the Company and
     each of the  Subsidiaries  to change their names and take such other action
     necessary  to ensure  that none of such  entities  retains,  does  business
     under,  or has any  ownership  right  in,  any  Licensed  Mark,  except  as
     specifically provided in this SECTION 9.3.

(b)  Seller hereby grants to Buyer following the Closing Date, a  non-exclusive,
     non-transferable,  fully paid and  royalty-free  license to use the service
     marks  shown in EXHIBIT H as have been used by Seller,  the  Company or the
     Subsidiaries  prior to the Closing Date in connection  with their  mortgage
     businesses (the "LICENSED MARKS") on stationery, signage and other business
     materials  (whether in tangible or electronic  form) in connection with the
     transition  of the names used by the  Company and the  Subsidiaries  to new
     names  (the   "LICENSED   USES"),   all  in  accordance   with  EXHIBIT  H.
     Notwithstanding  the  foregoing,  Buyer,  the Company and the  Subsidiaries
     shall use reasonable efforts to change all references to the Licensed Marks
     used by the Company and the Subsidiaries as soon as reasonably  practicable
     following the Closing Date.  Buyer agrees that within nine months following
     the  Closing  Date,  it  shall  amend  the  names  of the  Company  and the
     Subsidiaries in their respective organizational documents to names which do
     not include the Marks or Licensed  Marks.  The Licensed Marks are set forth
     in EXHIBIT H. For a period of nine months  after the Closing  Date,  Seller
     shall cause  hypertext  transfer  protocol  servers  registered to internet
     domains  that  are  set  forth  on  SCHEDULE   9.3(B)  to  operate  and  to
     automatically  redirect  to such  internet  domain or  domains  that do not
     include the Marks or Licensed  Marks as Buyer  shall  specify.  The license
     granted by this  SECTION 9.3 shall be  effective as of the Closing Date and
     shall terminate on the date nine months  following the Closing Date.  Buyer
     acknowledges, covenants and agrees that, except as specifically provided or
     permitted  under this  Agreement,  Buyer  shall not acquire  hereunder  any
     right,  title or  interest  in or to the  Licensed  Marks  and,  except  as
     specifically permitted under this SECTION 9.3, shall not use in any manner,
     (i) any Licensed Mark (except for  descriptive  or other fair use), and any
     content or text  owned or  licensed  by Seller  that is subject to state or
     federal copyright protection, or (ii) any confusingly similar registered or
     unregistered  trademark,  service mark,  trade dress, or other  identifying
     symbol.

(c)  Buyer  shall  submit  to  certain  of  Seller's   personnel,   specifically
     designated  by  Seller  in  writing,   for   approval,   the  form  of  any
     communications in which Buyer proposes to use the Licensed Marks covered by
     this license if such use departs from the Licensed  Uses.  Seller agrees it
     will not unreasonably delay or withhold approval of any proposed use of the
     Licensed Marks that is the same as or substantially similar to that made by
     Seller,  the Company or the  Subsidiaries  prior to the Closing  Date.  The
     license granted to Buyer under this SECTION 9.3 is not assignable by Buyer,

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     and,  except as  sub-licensed  or authorized by Seller,  the Company or the
     Subsidiaries  prior to the Closing  Date,  Buyer shall not  sub-license  or
     authorize  any other party to make use of the  Licensed  Marks  without the
     prior written consent of Seller.

(d)  Buyer agrees that it shall:

     (i)  use the Licensed  Marks  hereunder  only for the Licensed  Uses and in
          conformity with this SECTION 9.3;

     (ii) take reasonable  steps to guard against the dilution and misuse of the
          Licensed  Marks by using the  Licensed  Marks  hereunder  only for the
          Licensed Uses; and

     (iii)ensure that all of the services  identified by the Licensed  Marks (x)
          comply  in all  material  respect  with  applicable  local,  state and
          federal  government laws and regulations  pertaining to such services,
          and (y) meet  standards  for such services  generally  accepted in the
          mortgage banking  industry,  except if and to the extent such services
          of Seller,  the Company or the  Subsidiaries do not so comply prior to
          the Closing Date.

(e)  Seller and Buyer  agree  that the  Licensed  Marks are a valuable  asset of
     Seller and its Affiliates and any misuse of the Licensed Marks in violation
     of this SECTION 9.3 may cause Seller and its  Affiliates  irreparable  harm
     for which it may have no adequate remedy at law; therefore, Seller shall be
     entitled to seek a preliminary  injunction  and other  equitable  relief to
     prevent any further misuse of the Licensed Marks.

(f)  Buyer acknowledges and agrees that Seller shall have the right at any time,
     at Seller's expense,  to reasonably  require the Company and any Subsidiary
     to make  amendments or other  modifications  to mortgages,  deeds of trust,
     financing statements or other recorded documents recorded prior to the date
     hereof  necessary  to  remove  the  word  "Principal"  or the  name  of any
     predecessor  of the  Company  or any  Subsidiary  from  the  name  of  such
     documents.

(g)  Seller  shall  license the Company  Intellectual  Property  that  comprises
     Excluded  IT, and to the  extent  permissible,  Seller  shall  license  the
     balance  of the  Excluded  IT and  Third  Party  IT,  to  Company  and  the
     Subsidiaries  on a limited basis, or use the Excluded IT and Third Party IT
     on Company's and the  Subsidiaries'  behalf,  to allow Buyer to conduct the
     business of the Company and the  Subsidiaries  as it was conducted prior to
     the Closing  Date,  for a period of 180 days  following  the Closing  Date,
     pursuant  to this  SECTION  9.3 and as shall  be  further  documented  in a
     Transition  Services  Agreement.  The Transition  Services  Agreement shall
     provide  that,  at the request of Buyer,  Seller  shall agree to extend the
     term of the license for up to an additional  180 days at such prices as the
     parties may agree pursuant to the Transition Services  Agreement.  Prior to
     the Closing  and during the  applicable  transition  period,  Seller  shall
     reasonably assist Buyer in acquiring (with Buyer and Seller equally sharing
     any required cost and expense) such rights in the Excluded IT and the Third
     Party IT as are reasonably  necessary to the Company's  day-to-day business
     operations.

(h)  Seller covenants and agrees not to bring any action against Buyer or any of
     its Affiliates on the grounds that Buyer has violated Seller's rights under
     United  States  Patent  Application  Serial  Number  10/342,062  and Number
     09/918,091  (the "Seller  Patents") by practicing one or more of the claims
     of the Seller Patents without obtaining a license to do so. Buyer covenants
     and agrees not to bring any action  against Seller or any of its Affiliates
     on the grounds that Seller has violated Buyer's  intellectual  property and
     proprietary rights by exercising Seller's rights to the Seller Patents.

9.4  EMPLOYEE BENEFIT PLANS.

(a)  Pursuant to the terms of the Transition Services Agreement, Seller will, at
     Buyer's expense,  administer the payroll for Continuing Employees and will,
     at Buyer's expense, provide coverage to Continuing Employees under Seller's

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     welfare benefit plans for a period beginning on the Closing Date and ending
     no later than December 31, 2004 (the "TRANSITION PERIOD").

(b)  Except as otherwise provided in this Article,  until January 1, 2005, Buyer
     shall, or shall cause its Affiliates to, provide each  Continuing  Employee
     with (i) salary or wages, including incentive compensation,  as applicable,
     at least equal to those provided to such  Continuing  Employee  immediately
     prior  to the  Closing  Date and (ii)  employee  benefits  that are no less
     favorable in the aggregate than the employee  benefits provided by Buyer to
     its  similarly  situated  employees.   Subject  to  SECTION  9.4(H)  below,
     notwithstanding  any provision hereof, none of Buyer, the Company or any of
     their  respective  Affiliates  will have any  obligation  to  continue  the
     employment of any Continuing  Employee for any period following the Closing
     Date.

(c)  Subject to SECTION  9.4(I),  Buyer shall cause the Buyer  Employee  Benefit
     Plans to credit service with PRMI and the ERISA  Affiliates of PRMI and any
     predecessor  employers prior to the last day of the Transition  Period,  to
     the extent  credited under the  corresponding  or comparable  PRMI Employee
     Benefit Plans, as service with Buyer and its  subsidiaries  for purposes of
     eligibility  and vesting  under  Buyer  Employee  Benefit  Plans in which a
     Continuing  Employee  becomes eligible to participate in after the last day
     of the  Transition  Period and for  purposes of  determining  the amount of
     benefits under Buyer's severance plan or vacation plan; PROVIDED,  HOWEVER,
     that in no event shall the  Continuing  Employees be entitled to any credit
     to the extent that it would result in  duplication of benefits with respect
     to the same period of service.

(d)  Subject  to  SECTION  9.4(I),  on and after the last day of the  Transition
     Period,  Buyer shall, or shall cause its subsidiaries,  to give full credit
     to Continuing  Employees for, and permit the Continuing Employees to either
     retain and carry over or to be paid in respect of all unused  paid time off
     accrued by the Company on the  Closing  Date  Balance  Sheet and during the
     Transition Period in respect of the Continuing Employees while employees of
     PRMI and the ERISA Affiliates of PRMI.

(e)  Subject to SECTION 9.4(I),  Buyer shall, from and after the last day of the
     Transition   Period,   (i)  cause  any  and  all   pre-existing   condition
     limitations,  eligibility waiting periods,  active employment  requirements
     and  requirements  to show evidence of good health under the Buyer Employee
     Benefit Plans, to the extent that such  conditions,  exclusions and waiting
     periods would have been waived or satisfied under the corresponding welfare
     plan in which any such Continuing Employee  participated  immediately prior
     to the last day of the  Transition  Period,  to be waived  with  respect to
     Continuing Employees (and their spouses and eligible dependents) who become
     participants in such Buyer Employee  Benefit Plans and (ii) give credit for
     or otherwise take into account under the Buyer  Employee  Benefit Plans the
     out-of-pocket  expenses and annual expense  limitation amounts paid by each
     Continuing Employee under the comparable PRMI Employee Benefit Plan for the
     year in which the last day of the Transition Period occurs.

(f)  Buyer shall cause a Buyer  Employee  Benefit Plan that is  qualified  under
     Section  401(a)  of the  Code  to,  at  the  direction  of  the  Continuing
     Employees,  accept rollovers of "eligible rollover  distributions"  (within
     the meaning of Section 402(c)(4) of the Code) to Continuing  Employees from
     the PRMI Qualified  Plans,  to the extent that the Buyer  Employee  Benefit
     Plan allows rollovers.

(g)  Except as  otherwise  set forth  herein,  Seller  shall  retain any benefit
     liabilities  under PRMI Employee  Benefit Plans  accruing in respect of the
     pre-closing  period that are not accrued on the Closing Date Balance Sheet,
     including but not limited to the Retention Agreements.

(h)  If the  employment of a Continuing  Employee  terminates (a) on or prior to
     the first  anniversary of the Closing Date, such Continuing  Employee shall
     be entitled to severance  benefits  from Buyer or its  Affiliates  at least
     equal to the severance benefits specified on SCHEDULE 4.17(I) and (b) after
     the first  anniversary of the Closing Date, such Continuing  Employee shall
     be entitled to severance benefits in accordance with the severance policies
     of  Buyer,  as in effect  from time to time  thereafter.  For  purposes  of
     subsection (a) of this SECTION  9.4(H),  it is understood  that if Buyer or
     any of its Affiliates  changes,  without such Continuing  Employee's  prior

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     consent,  a Continuing  Employee's work location and such change results in
     an increase in the one-way commute from such Continuing  Employee's primary
     residence  to his or her  worksite  by 25 miles or  more,  such  Continuing
     Employee  shall be entitled to terminate his or her  employment and receive
     the severance  benefits  described above if such employee  declines to make
     such change.

(i)  Seller shall,  or shall cause PRMI and any  Subsidiary  to,  cooperate with
     Buyer or any of its  subsidiaries  or  Affiliates  in providing  reasonable
     access to any employees and providing  such  information as is necessary to
     facilitate the implementation of the provisions of this SECTION 9.4.

9.5  NONCOMPETITION AND NONSOLICITATION.

(a)  During  the period  beginning  on the  Closing  Date and ending on the date
     which is three (3) years following the Closing Date, neither Seller nor any
     Affiliate  of Seller that is an entity  (other  than any pooled  investment
     vehicle  to which  Seller or an  Affiliate  serves as  general  partner  or
     investment advisor) shall, within the United States of America, without the
     prior  written  consent  of  Buyer:  (x)  engage  in  the  business  of (A)
     originating  or servicing  one-to-four  family  residential  first mortgage
     loans  with a  consumer  purpose  ("RESIDENTIAL  MORTGAGE  LOANS"),  or (B)
     establishing correspondent and wholesale contractual arrangements providing
     for the purchase from time to time of eligible  Residential  Mortgage Loans
     and purchasing  Residential Mortgage Loans pursuant to such arrangements or
     (y) enter into a transaction the primary purpose of which is to acquire 15%
     or more of the equity  interests or voting power of any Person  principally
     engaged in the business of  originating or servicing  Residential  Mortgage
     Loans (a "COMPETING  BUSINESS");  provided,  however, that this SECTION 9.5
     shall not apply to the activities of Seller or its Affiliates undertaken in
     a fiduciary or representative  capacity.  For purposes of this Agreement, a
     loan is made "with a consumer  purpose" if it is made for personal,  family
     or  household  purposes  or  is  a  loan  reasonably   incidental  thereto.
     Residential   Mortgage  Loans  do  not  include  (i)   one-to-four   family
     residential  second or other junior lien mortgage  loans or (ii) loans made
     for  commercial,  corporate,  business  or  agricultural  purposes or loans
     secured by liens on nonresidential property. Notwithstanding the foregoing,
     Seller and its Affiliates shall not be prohibited from or restricted in:

     (1)  Making bulk  purchases  of  Residential  Mortgage  Loans or  interests
          therein  intended at the time of  purchase to be held for  Seller's or
          any of its Affiliates' own account;

     (2)  Purchasing  Residential  Mortgage Loans or interests therein where the
          sellers are obligated  either to repurchase the  Residential  Mortgage
          Loans or direct their  delivery for  subsequent  sale to a third party
          within a specified period of time;

     (3)  Servicing   Residential   Mortgage   Loans  for  its  own  account  or
          contracting  with third  parties to perform  servicing of  Residential
          Mortgage  Loans  held  for  Seller's  or any of  its  Affiliates'  own
          account;

     (4)  Acquiring a security  interest in  Residential  Mortgage  Loans or the
          ownership  thereof or any interest therein by virtue of enforcing such
          security interest;

     (5)  Purchasing,   pooling  or   otherwise   dealing   in   mortgage-backed
          securities, collateralized mortgage bonds or other forms of securities
          based on,  backed by or  otherwise  related  to  Residential  Mortgage
          Loans;

     (6)  Engaging in any hedge or derivative transactions;

     (7)  With respect to  Principal  Bank,  in addition to the other  permitted
          activities enumerated in this Section:

          (a)  Lending and other activities determined by Principal Bank, acting
               in good faith,  to be necessary or desirable in  connection  with
               its  obligations,  goals or commitments to provide loan and other

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               credit  services  pursuant to the Community  Reinvestment  Act of
               1977, as amended,  or any similar  federal,  state or local legal
               requirement or any state or local housing  program or any housing
               assistance  program  engaged in by Principal  Bank to satisfy its
               legal obligations;

          (b)  Originating  or servicing  commercial  purpose  loans  secured by
               one-to-four family residential properties;

          (c)  Purchasing  Residential  Mortgage  Loans in  connection  with the
               foreclosure  or workout of home equity loans or home equity lines
               of credit; or

          (d)  Originating  other  Residential  Mortgage  Loans,  the  aggregate
               principal  balance of which  shall not exceed $50  million in any
               calendar year.

     (8)  Engaging in a mortgage  broker  business by any  employees,  agents or
          contractors  of  Seller  or any of its  Affiliates  as  long  as  such
          activity  is  an  incidental  part  of  such  employee's,  agent's  or
          contractor's business activities;

     (9)  Making investments in the ordinary course of business,  including in a
          general and separate  account of an insurance  company,  in investment
          funds  that  make  investments  in  Persons  engaging  in a  Competing
          Business  and in Persons  engaging in a Competing  Business,  provided
          that each such  investment is a passive  investment and Seller and its
          Affiliates  do not have  representatives  on the board of directors or
          similar  governing body comprising a majority of such board or body of
          such Competing Business;

     (10) Making investments in Buyer and its Affiliates;

     (11) Managing investment funds that make investments in Persons engaging in
          a Competing Business or in Residential Mortgage Loans;

     (12) Making,  purchasing,   selling,  servicing  or  otherwise  dealing  in
          commercial real estate transactions of any type;

     (13) Acquiring any business or entity that includes  operations the conduct
          of which by Seller would, but for this clause (13),  otherwise violate
          the  restrictions  of  SECTION  6.2,  if the  primary  purpose of such
          acquisition is not to acquire a Competing Business;  provided that (i)
          if such  business  or entity is  substantially  engaged in one or more
          businesses,  but (ii) if more than 50% of such  entity's  consolidated
          net income is derived from the Competing Business for each of the last
          two (2) fiscal years immediately preceding such acquisition and exceed
          $20 million in each year,  then within one year after the date of such
          acquisition  (unless less than one year remains on the non-competition
          covenant in this Section),  Seller shall have ceased  conducting  such
          Competing  Business or shall have entered a binding  agreement  (which
          may be an agreement  with Buyer) for the  disposition of the Competing
          Business.  If any such binding  agreement shall terminate prior to the
          completion of the sale of such Competing Business,  Seller shall cease
          conducting  such  Competing  Business  or  enter  into  a new  binding
          agreement  for its  disposition  within three months after the date of
          such termination; and

     (14) Merging  into,  or  otherwise  combining  in any  form  with or  being
          acquired by any entity in any  transaction  in which  Seller or any of
          its  Affiliates  is not the surviving  entity or ultimate  controlling
          person  following  such  transaction,  in  which  event  none  of  the
          restrictions  set forth in this  SECTION 9.5 shall  continue to apply,
          PROVIDED that the parties have not  structured  the  transaction  as a
          pretext to avoid the restrictive covenants in this SECTION 9.5.

(b)  From the  Closing  Date,  neither  Seller nor any of its  Affiliates  shall
     solicit  Mortgagors  for  any  purposes,  including,  but not  limited  to,
     financial services,  insurance coverage or prepayment of Mortgage Loans, on
     a targeted basis by either using information that they obtained as a result
     of Seller's  ownership of the Company or  conducting a targeted  search for
     such information.  Without the prior written consent of Buyer, Seller shall

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     not  sell or  distribute  any  customer  list  incorporating  the  names of
     Mortgagors and shall not itself use any such list to solicit or promote, or
     to allow any other  person to solicit or promote,  the sale of any services
     or products to any  Mortgagor,  in each case using  information  that it or
     they obtained as a result of Seller's ownership of the Company.  Seller and
     its  Affiliates  may make sales to, or solicit the sale to,  Mortgagors  of
     financial   services  and   products,   including,   but  not  limited  to,
     insurance-related  products,  provided that such sales or solicitations are
     not made on a targeted basis on the basis of information that they obtained
     as a result  of  Seller's  ownership  of the  Company  or as a result  of a
     targeted search for such information.  The foregoing restrictions shall not
     apply to:

     (1)  any advertising or marketing campaign by or on behalf of the Seller or
          any of its Affiliates offering financial services, including mortgages
          (to  the  extent  not  prohibited   pursuant  to  SECTION  9.5(A))  or
          insurance-related products and services,  directed to its own customer
          base or the  general  public  or any  segment  thereof  provided  such
          segment does not target the Mortgagors; or

     (2)  a  solicitation  for  financial  services to any  Mortgagor  with whom
          Seller or an Affiliate  has a customer  relationship  unrelated to the
          Mortgage  Loan  existing as of the Closing  Date;  provided  that such
          solicitation is part of a solicitation  program not directed primarily
          to the Mortgagors.

     (c)  Seller  agrees  that,  for a  period  beginning  on the  date  of this
          Agreement and ending on the date three (3) years following the Closing
          Date,  neither Seller nor its  Affiliates  will solicit for employment
          any  of  the  Continuing  Employees;  provided,  however,  that  it is
          understood   that  this  SECTION   9.5(C)  shall  not  prohibit:   (1)
          solicitation  of any  Continuing  Employee who contacts  Seller or any
          Affiliate  of  Seller  on  his  or  her  own  initiative  without  any
          solicitation  by  or  encouragement   from  Seller  or  any  Affiliate
          (excluding any solicitation by a professional search firm where Seller
          or an Affiliate  has not directed  such firm to solicit that  person);
          (2)  generalized  solicitations  by advertising and the like which are
          not  directed  to  the  Continuing  Employees;  (3)  solicitations  of
          Continuing  Employees whose  employment was terminated by Buyer or the
          Company or any Subsidiary;  provided that for any Continuing  Employee
          hired after termination by Buyer within thirty (30) days after Closing
          and  who  obtained  a  severance  benefit  from  Buyer,  Seller  shall
          reimburse Buyer the amount of the severance  benefit paid by Buyer; or
          (4)  solicitations  of Continuing  Employees who have terminated their
          employment  with the  Company  or any  Subsidiary  without  any  prior
          solicitation  (which would  otherwise  violate this SECTION 9.5(C)) by
          Seller or any Affiliate.

     (d)  Seller acknowledges that the restrictions and agreements  contained in
          this  SECTION  9.5  are   reasonable  and  necessary  to  protect  the
          legitimate  interests of Buyer, and that any violation of this SECTION
          9.5 will cause substantial and irreparable  injury to Buyer that would
          not be  quantifiable  and for which no adequate  remedy would exist at
          law and  agrees  that  injunctive  relief,  in  addition  to all other
          remedies, shall be available therefor.

     (e)  It is the intent and  understanding  of each party  hereto that if, in
          any action  before any court or agency  legally  empowered  to enforce
          this SECTION 9.5, any term, restriction, covenant, or promise is found
          to be unreasonable and for that reason unenforceable,  then such term,
          restriction,  covenant or promise shall not thereby be terminated  but
          that it shall be deemed  modified to the extent  necessary  to make it
          enforceable  by such court or agency and, if it cannot be so modified,
          that it shall be deemed amended to delete  therefrom such provision or
          portion adjudicated to be invalid or unenforceable,  such modification
          or amendment in any event to apply only with respect to the  operation
          of this  SECTION  9.5 in the  particular  jurisdiction  in which  such
          adjudication is made.

     9.6  ANCILLARY  AGREEMENTS.  On the Closing  Date,  Buyer and Seller  shall
          enter  into  a  mutually   agreeable  Loan  Servicing   Agreement  and
          Transition Services Agreement,  both in form and substance  reasonably
          satisfactory  to Buyer and Seller and, with respect to the  Transition
          Services Agreement,  at rates that are equal to the 2004 rates charged
          to the Company by Seller or any Affiliate thereof;  provided,  that at
          Seller's discretion,  Seller may elect to keep in place one or more of
          the  existing  loan  servicing   agreements  between  Company  or  any
          Subsidiary and any of their Affiliates.

     9.7  CUSTODIAL ACCOUNT BALANCES.  Upon Buyer's request, Seller shall obtain
          all  necessary  approval  and provide any  required  notices and shall
          transfer to Buyer the balances of all  Custodial  Accounts  held by it

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          pursuant  to  Servicing  Agreements  as of the  Closing  Date  by wire
          transfer to such accounts as Buyer may designate, subject to the terms
          of the respective Servicing Agreements.

9.8  POST-CLOSING COOPERATION AND RETENTION OF RECORDS.

(a)  Buyer and Seller agree that following the Closing,  each party and/or their
     independent  auditors shall have  reasonable  access during normal business
     hours to the books and  records of the  Company  and the  Subsidiaries  and
     their predecessors  applicable to the period prior to the Closing and shall
     have the  reasonable  assistance and  cooperation of appropriate  personnel
     consistent  with  assistance and  cooperation  furnished  during the period
     prior to the Closing, in each case in connection with the audit, reporting,
     litigation or similar needs of Seller. Without limiting the foregoing,  the
     Transition  Services  Agreement  shall  provide  that (i) Buyer  shall make
     available to Seller and its Affiliates the employees of the Company and the
     Subsidiaries  and  the  affected  employees  whose  assistance,  expertise,
     testimony,  notes,  recollections or presence (including participation as a
     witness in a deposition,  hearing or trial) is necessary or  appropriate in
     connection with the foregoing and (ii) Seller shall reimburse Buyer for the
     cost incurred by Buyer in providing such assistance  (including  reasonably
     allocated  charges  for  the  cost  of the  time of any  Buyer  or  Company
     employees made available to Seller). This SECTION 9.8(A) shall not apply to
     any books, records or other matters relating to Taxes.

(b)  Following  the Closing,  Buyer  shall,  and shall cause the Company and the
     Subsidiaries  to, (i) subject to the last sentence of this SECTION  9.8(B),
     preserve and keep (x) the records of the Company and the Subsidiaries  held
     by the Company and the  Subsidiaries  prior to the Closing  relating to the
     business of the Company and the Subsidiaries  (including personnel records)
     for so long as and to the  extent  required  by  applicable  Law (but in no
     event less than three years after the Closing  Date) and (ii) to the extent
     permitted by applicable  Law, make such records and personnel  available to
     Seller and its Affiliates, subject to customary confidentiality commitments
     reasonable under the  circumstances,  as may be reasonably  required by any
     such party,  including in connection  with any  insurance  claims by, legal
     proceedings  against or  investigations  by any governmental  authority of,
     Seller or any of its Affiliates or for similar  matters or to enable Seller
     to comply with its obligations  under  applicable Law and this Agreement or
     otherwise  reasonably  necessary  for the conduct of Seller's  business and
     operations.  In the event Buyer or any of its Affiliates  wishes to destroy
     any such records  after that time in  accordance  with its normal  document
     retention policy,  then Buyer shall (or shall cause such Affiliate to) give
     30 days' prior  written  notice to Seller and (to the extent  permitted  by
     applicable Law) Seller shall have the right at its option and expense, upon
     prior written notice given within such 30-day period, to take possession of
     the records  within sixty days after the date such notice is given.  Seller
     shall  reimburse  Buyer for the cost  incurred by Buyer of  providing  such
     assistance (including reasonably allocated charges for the cost of the time
     of any Buyer or any Company  employees  made  available  to  Seller).  This
     SECTION  9.8(B)  shall not apply to any  books,  records  or other  matters
     relating to Taxes.

                                   ARTICLE 10
                                 INDEMNIFICATION

10.1 INDEMNIFICATION BY SELLER.

(a)  INDEMNIFICATION.  Subject to the provisions of this SECTION 10.1 and except
     as provided in SECTION 10.3 hereof,  Seller shall save,  defend,  indemnify
     and hold harmless Buyer, the Company,  each Subsidiary and their respective
     Affiliates,   and  each  of  their  respective  past,  present  and  future
     directors,  officers,  agents  and  representatives  (together,  the "BUYER
     INDEMNIFIED  PARTIES") from and against,  and shall promptly reimburse such
     Buyer  Indemnified  Parties for, any and all Losses  incurred by such Buyer
     Indemnified Party and arising out of or resulting from:

     (1)  the  inaccuracy  of any  representation  or warranty made by Seller in
          this Agreement; and

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     (2)  the  failure by Seller to perform any  obligation  or covenant in this
          Agreement.

(b)  HOLDBACK AMOUNT; LIMITS ON LIABILITY. No Buyer Indemnified Party shall seek
     reimbursement from Seller for Losses under SECTION 10.1(A) until all Losses
     for which Buyer Indemnified Parties are entitled to indemnification  exceed
     the  Holdback  Amount,  and then  only to the  extent  of such  excess.  In
     addition,  Seller  shall  have no  obligation  under  CLAUSE (1) of SECTION
     10.1(A) to pay by way of  indemnification  amounts that aggregate more than
     Three  Hundred  Million  Dollars   ($300,000,000)  (the  "INDEMNITY  CAP").
     Notwithstanding  the  foregoing,  the  Indemnity Cap shall not apply to the
     extent any Buyer Indemnified Party seeks  reimbursement or  indemnification
     for Losses  resulting from a breach of any  representations  and warranties
     set forth in SECTIONS 4.3, 4.4 AND 4.5.

(c)  EXCLUSION FROM  LIABILITY.  Notwithstanding  anything else to the contrary,
     and in addition to any other  limitations  and exclusions set forth in this
     Agreement,   Seller  shall  not   indemnify  or  hold  harmless  any  Buyer
     Indemnified  Party, and no Buyer Indemnified Party shall seek reimbursement
     or  indemnity  from Seller for any Losses  unless,  in the case of SECTIONS
     10.1(A)(1) and 10.1(A)(2) (but only insofar as SECTION  10.1(A)(2)  relates
     to ARTICLE 6 hereof),  written demand for  reimbursement  of such Losses is
     made  within  one (1) year from the  Closing  Date,  except  that such time
     limitation  shall  not  apply to the  extent  Buyer or the  Company  or any
     Subsidiary  seeks  reimbursement  or  indemnification  for  breach  of  any
     representations  and warranties set forth in (x) SECTIONS 4.15, 4.19, 4.20,
     4.21 and 4.22, in which case written demand for reimbursement  must be made
     within six (6) years from the Closing Date or five (5) years in the case of
     SECTION  4.15 and (y)  SECTIONS  4.3, 4.4 AND 4.5, in which case receipt of
     written demand for  reimbursement is not subject to time  limitations.  Any
     such  written  demand must (i) set forth  actual  Losses that have begun to
     accrue but in respect of which the total  liability  has not yet been fixed
     or (ii)  contain a notice  from a third  party of a claim  that will  cause
     actual Losses to accrue after such applicable  survival  period,  including
     without   limitation,   pending   curtailments,   lawsuits  or   government
     investigations,  in which case such  survival  period  will be  extended in
     order to cover the finally determined Losses related thereto.

10.2 INDEMNIFICATION BY BUYER.

(a)  Except as  provided in SECTION  10.3  hereof,  Buyer  shall  save,  defend,
     indemnify and hold harmless Seller and its Affiliates and their  respective
     past, present and future directors,  officers,  agents and  representatives
     (together,  the "SELLER  INDEMNIFIED  PARTIES")  from,  and shall  promptly
     reimburse  such Seller  Indemnified  Parties for any Losses  incurred by or
     assessed  against  such  Seller  Indemnified  Party and  arising  out of or
     resulting from:

     (1)  the inaccuracy of any representation or warranty made by Buyer in this
          Agreement;

     (2)  the failure by Buyer to timely  perform any  obligation or covenant in
          this Agreement; or

     (3)  any of the businesses, assets, operations or activities of the Company
          or the  Subsidiaries  occurring  after the  Closing  Date which do not
          arise out of or result from any actions or  inactions of Seller or its
          Affiliates  or in  respect  of  which a  Buyer  Indemnified  Party  is
          entitled to indemnification pursuant to SECTION 10.1(A).

(b)  LIMITS ON  LIABILITY.  Buyer shall have no  obligation  under CLAUSE (1) of
     SECTION  10.2(A) to pay by way of  indemnification  amounts that  aggregate
     more than Indemnity Cap.

(c)  EXCLUSION FROM  LIABILITY.  Notwithstanding  anything else to the contrary,
     and in addition to any other  limitations  and exclusions set forth in this
     Agreement,   Buyer  shall  not   indemnify  or  hold  harmless  any  Seller
     Indemnified Party, and no Seller Indemnified Party shall seek reimbursement
     or indemnity  from Buyer for any Losses (other than Losses  resulting  from
     Buyer's  covenants  under  SECTIONS  9.3 and  9.4)  unless,  in the case of
     SECTIONS  10.2(A)(1) and 10.2(A)(2) (but only insofar as SECTION 10.2(A)(2)
     relates to  ARTICLE 6 hereof),  written  demand for  reimbursement  of such
     Losses is made within one (1) year from the Closing Date.  Any such written

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     demand must (i) set forth actual  liabilities that have begun to accrue but
     in respect of which the total liability may not yet have been fixed or (ii)
     contain  a notice  from a third  party of a claim  that will  cause  actual
     liabilities  to accrue after such  applicable  survival  period,  including
     without   limitation,   pending   curtailments,   lawsuits  or   government
     investigations,  in which case such  survival  period  will be  extended in
     order to cover the finally determined liabilities related thereto.

10.3 COORDINATION WITH TAX INDEMNITY. Except as expressly provided in ARTICLE 11
     hereof,  the  provisions  of this  ARTICLE  10 shall  not  apply to (i) any
     representations   or  warranties  under  SECTION  4.16  hereof,   (ii)  any
     representations  or warranties  relating to Taxes under SECTION 4.22, (iii)
     any  obligations  or covenants  contained in ARTICLE 11 hereof and (iv) any
     other provision of this Agreement providing any representation, warranty or
     covenant  relating  to Taxes  other than  those set forth in SECTION  4.21.
     ARTICLE 11 shall  provide  the  exclusive  means for  indemnity  under this
     Agreement for any  indemnity for Losses  relating to Taxes other than those
     set forth in SECTION 4.21.

10.4 INDEMNIFICATION   PROCEDURE.   The   obligations  and  liabilities  of  the
     indemnifying  party (the  "INDEMNIFYING  PARTY") under this ARTICLE 10 and,
     where  expressly  provided for in ARTICLE 11, under  ARTICLE 11 hereof with
     respect to Losses shall be subject to the following terms and conditions:

(a)  The indemnified party (the "INDEMNIFIED PARTY") shall give the Indemnifying
     Party prompt notice ("CLAIM  NOTICE") of any Losses  incurred (or likely to
     be incurred)  by the  Indemnified  Party,  and the  Indemnifying  Party may
     undertake the defense of any proceeding  regarding such Losses by selecting
     representatives  of its own choosing.  Such notice shall describe the claim
     or suit in reasonable detail and shall indicate the amount  (estimated,  if
     necessary)  of  the  Losses  that  have  been  or may  be  suffered  by the
     Indemnified  Party.  If the  Indemnifying  Party agrees to payment  under a
     Claim Notice as provided in SECTION 10.4(G) but elects not to undertake the
     defense of any proceeding,  it shall notify the  Indemnified  Party of such
     election within ten (10) Business Days of its receipt of a Claim Notice.

(b)  The  Indemnified  Party shall be entitled to participate at its own expense
     in the defense of any claim relating to such Losses, but such defense shall
     be controlled by counsel to the  Indemnifying  Party.  Notwithstanding  the
     foregoing,  an  Indemnified  Party shall have the right to employ  separate
     counsel at the  Indemnifying  Party's  expense if (i) the named  parties to
     such  proceeding  (including  any  impleaded  parties)  include  both  such
     Indemnified  Party and the Indemnifying  Party, (ii) such Indemnified Party
     shall  have been  advised  by counsel  in its  reasonable  judgment  that a
     material  conflict of interest is likely to exist if the same  counsel were
     to represent such Indemnified  Party that would make it  inappropriate  for
     the same counsel to represent both parties and the  Indemnifying  Party and
     (iii) such  Indemnified  Party notifies the  Indemnifying  Party in writing
     that  it  elects  to  employ  separate   counsel  at  the  expense  of  the
     Indemnifying Party.

(c)  The  Indemnifying  Party  shall not be  liable  for any  settlement  of any
     litigation  or  proceeding  effected  without  the  written  consent of the
     Indemnifying  Party,  which  shall  not  be  unreasonably   withheld.   The
     Indemnifying  Party shall not,  without  the  Indemnified  Party's  written
     consent,  settle or  compromise  any claim  regarding  Losses or consent to
     entry of any judgment  which would impose an injunction or other  equitable
     relief  upon  the  Indemnified  Party  or  which  does  not  include  as an
     unconditional  term thereof the release by the claimant or the plaintiff of
     the Indemnified Party from all liability in respect of any such Losses.

(d)  In the event (x) the Indemnifying  Party fails,  within twenty (20) days of
     receipt of a Claim Notice, to defend, contest, or otherwise protect against
     any such claim or suit, or is not defending such claim in good faith or (y)
     the  Indemnified  Party  concludes in good faith that such ongoing claim or
     suit would have a material  adverse impact on the business or operations of
     Buyer, the Company or any Subsidiary, and the Indemnifying Party determines
     in good faith that such assumption of defense by the Indemnified Party will
     not prejudice the Indemnifying  Party's  interests in any material respect,
     the Indemnified  Party may, but will not be obligated to, defend,  contest,
     or  otherwise  protect  against  the  same,  and  make  any  compromise  or
     settlement   thereof  and  recover  the  entire  costs   thereof  from  the
     Indemnifying  Party,  including  reasonable  attorneys'  and experts' fees,
     disbursements and all amounts paid as a result of such claim or suit or the

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     compromise or  settlement  thereof,  provided  that any such  settlement or
     compromise  shall be permitted  hereunder only with the written  consent of
     the Indemnifying  Party, which consent shall not be unreasonably  withheld.
     The  Indemnified  Party shall  cooperate and provide such assistance as the
     Indemnifying Party may reasonably request in connection with the defense of
     the matter subject to indemnification.

(e)  In  calculating  Losses,  a Buyer  Indemnified  Party  shall be entitled to
     include  Damages  (and  reasonable   out-of-pocket   costs,   expenses  and
     attorneys' fees relating to Damages or to any proceedings, counterclaims or
     defenses  that could  reasonably  result in incurring  or avoiding  Damages
     (including any such reasonable out-of-pocket costs, expenses and attorneys'
     fees  incurred  in  enforcing  such right of  indemnification  against  any
     indemnitor or with respect to any appeal))  incurred after the Closing Date
     by virtue of the  continuation  by Buyer,  the Company or any Subsidiary of
     the  business  practices of the Company and the  Subsidiaries  as in effect
     prior to the Closing Date if and to the extent such business  practices are
     materially  inconsistent with those of Buyer Indemnified  Party;  PROVIDED,
     that a Buyer Indemnified Party shall only be entitled to seek reimbursement
     or indemnity  of such amounts  until the earlier of (x) the ninety (90) day
     anniversary  of the Closing  Date or (y) such time as Buyer,  after  having
     obtained actual or constructive  knowledge of the reasonable  likelihood of
     the incurrence of Damages as a result of such  practices,  shall have had a
     commercially  reasonable  opportunity  to have  changed  or  corrected  the
     practices in question.

(f)  In calculating Losses there shall be deducted (retroactively, if necessary)
     (i) any insurance  recovery in respect thereof (and no right of subrogation
     shall  accrue  hereunder  to any  insurer),  (ii) any  amount  specifically
     accrued or reserved  against as a liability  on the  Closing  Date  Balance
     Sheet  with  respect  to such  Losses  (or,  in the case of any  such  Loss
     comprised  of the loss of, or reduced  value of,  any asset,  the extent to
     which such asset was written  down on the  Closing  Date  Balance  Sheet to
     reflect  such  reduction  in value)  and (iii) any  recoveries  from  third
     Persons pursuant to indemnification or otherwise with respect thereto.  Any
     party receiving indemnity shall assign to the Indemnifying Party all of its
     claims for recovery  against  third  Persons as to such Losses,  whether by
     insurance coverage,  contribution claims,  subrogation or otherwise.  Buyer
     and  Seller  agree  that,  for  purposes  of  computing  the  amount of any
     indemnification  payment  under this  ARTICLE 10 or ARTICLE 11 hereof,  any
     such  indemnification  payment  shall be  treated as an  adjustment  to the
     Purchase Price for all Tax purposes.  The Indemnified  Party shall claim on
     the  appropriate Tax Return any Benefit Item arising from the incurrence or
     payment of Losses if the  Indemnified  Party  believes such Benefit Item is
     allowable or if the Indemnifying  Party provides the Indemnified Party with
     an opinion of a nationally  recognized  law firm or accounting  firm (which
     firm and opinion shall be reasonably  acceptable to the Indemnified  Party)
     to the effect that such Benefit Item "should" be  allowable.  Not more than
     ten (10)  Business  Days after  filing the Tax Return on which such Benefit
     Item is claimed, the Indemnified Party shall pay the Indemnifying Party the
     amount of any realized  Tax Benefit  arising from such Benefit Item (net of
     the Tax cost, including the net present value of any reasonably anticipated
     future Tax cost, to the  Indemnified  Party or its Affiliates  arising from
     the receipt of the indemnification  payment).  For purposes of this SECTION
     10.4(F),  "BENEFIT  ITEM" shall mean any loss,  deduction,  credit or other
     item that decreases Taxes paid or payable or increases Tax Basis,  and "Tax
     Benefit"  shall  mean the Tax effect of any  Benefit  Item,  including  any
     interest with respect  thereto or interest that would have been payable but
     for such item.

(g)  After the giving of any Claim Notice  pursuant to SECTION 10.3,  the amount
     of  indemnification  to which an Indemnified  Party shall be entitled under
     this  ARTICLE  10 or  ARTICLE  11 hereof  shall be  determined:  (i) by the
     written agreement between the Indemnified Party and the Indemnifying  Party
     or payment by an  Indemnifying  Party of all amounts  specified  in a Claim
     Notice;  provided,  however,  that if  agreement  has not been  reached  or
     payment  has not been made  within 30 days of the  receipt of the  material
     information that the Indemnifying Party needs to evaluate the merits of the
     Claim,  the  Indemnified  Party  shall be  entitled  to pursue  recourse in
     accordance  with SECTION  12.5;  (ii) by a final  judgment or decree of any
     court  of   competent   jurisdiction   or,  in  the  case  of  income   tax
     indemnification  under ARTICLE 11, a "determination"  within the meaning of
     Code Section 1313(a);  or (iii) by any other means to which the Indemnified
     Party and the  Indemnifying  Party shall agree. The judgment or decree of a
     court shall be deemed  final when the time for appeal,  if any,  shall have

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     expired and no appeal shall have been taken or when all appeals taken shall
     have been finally  determined.  The Indemnified Party shall have the burden
     of proof in establishing the amount of Losses suffered by it.

(h)  In any case where an  Indemnified  Party  recovers  from third  Persons any
     amount (other than any amounts deducted pursuant to SECTION 10.4(E) hereof)
     in respect of a matter  with  respect  to which an  Indemnifying  Party has
     indemnified  it  pursuant  to this  ARTICLE 10 or  ARTICLE 11 hereof,  such
     Indemnified  Party shall  promptly pay over to the  Indemnifying  Party the
     amount so  recovered  (after  deducting  therefrom  the full  amount of the
     expenses  incurred by it in procuring such recovery),  but not in excess of
     the sum of (i) any amount  previously so paid by the Indemnifying  Party to
     or on behalf of the  Indemnified  Party in respect of such  matter and (ii)
     any amount expended by the Indemnifying  Party in pursuing or defending any
     claim arising out of such matter.

(i)  An Indemnified Party shall make commercially reasonable efforts to mitigate
     any actual or  potential  Loss,  and the failure to do so shall result in a
     reduction in the Indemnifying Party's indemnification  obligation hereunder
     but only to the extent such efforts  would have  mitigated the Loss. By way
     of  illustration,  the Buyer  agrees  that,  if it suffers,  or  reasonably
     expects to suffer,  Losses attributable to a breach of SECTION 4.21 and the
     facts or  circumstances  giving rise to such breach also would constitute a
     breach under the applicable  mortgage loan origination,  mortgage loan sale
     or similar  agreement  with a Prior  Originator or seller of the Loan other
     than the Seller or an  Affiliate  of the  Seller  (and such  mortgage  loan
     origination,   mortgage  loan  sale  or  similar   agreement   contains  an
     indemnification  provision  providing  the  Buyer  with a means of  seeking
     indemnity  thereunder),  the Buyer Indemnified Parties will not be entitled
     to indemnification under SECTION 10(A)(1) above with respect to such breach
     until Buyer shall have first used commercially reasonable efforts to pursue
     available  remedies under the applicable  agreement  against such breaching
     party with no less  diligence  than the Company and its  Subsidiaries  used
     within the last two (2) years and, in any event,  it would  pursue if there
     were no indemnification by Seller hereunder; provided, however, that in the
     event that the Buyer has used its commercially reasonable efforts to pursue
     its remedies under the applicable mortgage loan origination,  mortgage loan
     sale or  similar  agreement  against  such  breaching  party  and the Buyer
     Indemnified  Parties have not been  successful in  recovering  their Losses
     directly  resulting from the breach of the applicable  agreement  after one
     year has  elapsed  from the date on which the  relevant  Buyer  Indemnified
     Parties  first gave notice of the relevant  Claim to the Seller (which such
     one year period shall act to toll the relevant survival period contained in
     SECTION 10.1(C) or 10.2(C),  as applicable),  the Buyer Indemnified Parties
     shall be entitled to seek  indemnification  for such remaining  Losses from
     the Seller pursuant to the terms of SECTION 10.4 of this Agreement, without
     further regard to the mitigation  provisions of this SECTION  10.4(I),  but
     subject to the remaining  provisions  of this SECTION 10. The  Indemnifying
     Party shall have the right,  but not the obligation,  and shall be afforded
     the opportunity by the Indemnified Party to the extent reasonably possible,
     to make  commercially  reasonable  efforts to minimize  damages before such
     damages actually are incurred by the Indemnified Party.

10.5 INDEMNIFICATION AS EXCLUSIVE REMEDY.

Except  in  the  case  of  fraud,  with  respect  to  any  matter  as  to  which
indemnification  is provided pursuant to this ARTICLE 10 (other than breaches of
covenants  contained  in Articles  other than ARTICLE 6 hereof and any claim for
equitable or injunctive relief),  such indemnification  shall be the sole remedy
available to the Indemnified Party.

10.6 DISTRIBUTION OF EXCESS HOLDBACK AMOUNT.

Within  thirty (30) days  following the sixth  anniversary  of the Closing Date,
Buyer shall pay (by wire transfer in immediately  available  funds) to Seller an
amount in cash equal to the excess,  if any,  of (x) the amount of the  Holdback
Amount  LESS  (y)  the  sum of (i)  the  aggregate  amount  of all  payments  or
reimbursements  for Losses that,  but for the existence of the Holdback  Amount,
would have been paid to any of the Buyer  Indemnified  Parties  pursuant to this
ARTICLE 10 on or prior to such payment date AND (ii) the aggregate amount of all
Unresolved  Claims  as of such  payment  date  (the  "UNRESOLVED  CLAIM  RESERVE
AMOUNT").  For purposes of this SECTION 10.6, "UNRESOLVED CLAIMS" shall mean, as
of  any  payment  date,  all  claims  for  indemnification  made  by  any  Buyer
Indemnified  Parties pursuant to this ARTICLE 10 that are the subject of dispute
or are otherwise  unresolved as of such date. On a bi-annual basis following the
sixth  anniversary  of  the  Closing  Date,  following  the  resolution  of  any
Unresolved  Claims,  Buyer shall pay (by wire transfer in immediately  available

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funds)  to  Seller an  amount  in cash  equal to the  excess,  if any of (x) the
Unresolved Claim Reserve Amount in respect of any Unresolved Claims LESS (y) the
aggregate amount of all payments or reimbursements for Losses that, but for this
existence  of the  Holdback  Amount,  would  have  been paid to any of the Buyer
Indemnified  Parties pursuant to ARTICLE 10 in respect of the Unresolved Claims.
Buyer shall  provide  Seller with  bi-annual  reports of the status of claims in
respect of which  Buyer has made  written  demand on Seller  pursuant to SECTION
10.1(C) hereof and for which  indemnification would be payable by Seller but for
the  amounts  applied  by the Buyer  from the  Holdback  Amount,  including  the
application of any reserves.

10.7 GUARANTEE.  Guarantor hereby  unconditionally  guarantees to Buyer the full
     and prompt  payment of all amounts  which may become due and owing to Buyer
     from Seller pursuant to this ARTICLE 10. Guarantor also shall reimburse the
     Buyer for reasonable fees and expenses  incurred in successfully  enforcing
     this guarantee  obligation.  This SECTION 10.7 shall survive termination of
     this Agreement.

                                   ARTICLE 11
                                      TAXES

11.1 ELECTION UNDER CODE SECTION 338(H)(10).

(a)  Seller  and Buyer  shall  join in making an  election  under  Code  Section
     338(h)(10) (and any  corresponding  election under state,  local or foreign
     Tax law) with respect to the sale and purchase of Stock  hereunder  and any
     deemed sale and purchase of the equity of any  Subsidiary for which such an
     election  may  lawfully be made (the  "SECTION  338(H)10)  ELECTION"),  and
     Seller shall  cooperate  fully with Buyer in making the Section  338(h)(10)
     Election, including executing and filing IRS Form 8023 and all other forms,
     returns, elections, schedules, and documents required to effect the Section
     338(h)(10) Election.

(b)  Seller and Buyer  agree that,  except as required by a final  determination
     with any tax  authority,  they  will not take,  or cause to be  taken,  any
     action in connection with the filing of any Tax Return on behalf of Seller,
     Buyer, or their Affiliates or otherwise which would be inconsistent with or
     prejudice the Section 338(h)(10) Election.

11.2 TRANSFER TAXES. All sales, use, transfer,  documentary, stamp, registration
     and  other  similar   Taxes  that  are  payable  in  connection   with  the
     transactions  contemplated  by this  Agreement  shall be borne  one-half by
     Buyer and one-half by Seller.  The party required by applicable law to file
     any Tax  Returns  and other  documentation  with  respect to any such Taxes
     shall  prepare and file such Tax  Returns and Buyer and Seller  shall each,
     and shall each cause its Affiliates to, cooperate in the timely preparation
     and filing of, and join in the execution of, any such Tax Returns and other
     documentation.

11.3 INDEMNIFICATION FOR TAXES.

(a)  Except as otherwise  provided herein,  Seller shall be liable for and shall
     indemnify the Buyer Indemnified  Parties for (x) any Losses attributable to
     (i) any Taxes of any member (other than the Company and Subsidiaries) of an
     affiliated, consolidated, combined or unitary group of which the Company or
     any  Subsidiary  is or  was a  member  on or  prior  to the  Closing  Date,
     including pursuant to Treasury  Regulations Section 1.1502-6 or any similar
     provision of state,  local or foreign law,  (ii) any Taxes that are imposed
     on the Company or any  Subsidiary  for any taxable year or period that ends
     on or before the Closing Date and, with respect to any Straddle Period, the
     portion of such  Straddle  Period ending on and including the Closing Date,
     and  (iii)  any  Taxes  of  any  person  (other  than  the  Company  or any
     Subsidiary) liability for which is imposed on the Company or any Subsidiary
     as a  transferee  or  successor,  by contract or  otherwise,  pursuant to a
     transaction or contract or other indemnification  obligation that occurs or
     arises before the Closing;  and (y) any Losses  (including Taxes) for which
     the Company, any Subsidiary,  any Securitization Entity, or Buyer or any of
     Buyer's  Affiliates  become  liable  as a result of the  inaccuracy  of any
     representation  or  warranty  relating  to Taxes made by Seller in SECTIONS
     4.16 and 4.22 of this Agreement.  Notwithstanding the foregoing, (i) Seller
     shall have no obligation  pursuant to this SECTION 11.3(A) for any Taxes or

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     Losses accrued or reserved as a liability on the Closing Date Balance Sheet
     that are not  included in the  calculation  of the Closing Date Tax Amount,
     and (ii) Seller shall have no  indemnification  obligation for any Taxes or
     Losses  relating  to a breach of the  representations  set forth in Section
     4.16(p) or 4.22 hereof (the  "Securitization  Entity Losses") to the extent
     that such Securitization  Entity Losses are related to or attributable to a
     taxable year  beginning  after the second  anniversary of the Closing Date;
     provided,  further that Seller's obligation to indemnify any person for any
     Securitization  Entity  Losses for any taxable  period  shall not exceed an
     amount equal to the product of (x) the aggregate  amount of  Securitization
     Entity Losses related or attributable to such taxable period, multiplied by
     (y) a ratio,  not to exceed one (1.00),  of (i) the  Aggregate  Outstanding
     Loan  Balance  of the  relevant  Securitization  Entity as of the  Closing,
     divided  by (ii) the  Average  Aggregate  Outstanding  Loan  Balance of the
     relevant  Securitization  Entity  for  the  taxable  period  to  which  the
     Securitization  Entity Losses relate or are  attributable.  Notwithstanding
     anything to the contrary in this Agreement, Seller shall have no obligation
     to indemnify the Company, any Subsidiary, any Securitization Entity, Buyer,
     or any of Buyer's Affiliates pursuant to this Section 11.3(a) for any Taxes
     or Losses resulting from the breach of any  representation set forth in any
     of   Sections   4.16(p),   4.16(q)  or  4.22,   to  the  extent  that  such
     indemnification  obligation  is  attributable  to  Buyer's  breach  of  the
     covenant set forth in Section 11.3(f)  hereof.  Seller shall be entitled to
     any  refund  of Taxes of the  Company  or any  Subsidiary  attributable  to
     taxable  periods  ending on or prior to the  Closing  Date  (other than any
     refunds for Taxes  reflected as an asset on the Closing Date Balance  Sheet
     and not  included in the  calculation  of Closing  Date Tax  Amounts),  and
     Buyer,  the Company,  and  Subsidiaries  shall promptly remit to Seller the
     amount of any such refund received by Buyer, the Company, or Subsidiaries.

(b)  Except to the extent  inconsistent  with  SECTION  11.3(A),  Buyer shall be
     liable for and shall  indemnify  Seller and any Affiliate of Seller for (x)
     the Taxes of the Company or any Subsidiaries for any taxable year or period
     that  begins  after the  Closing  Date and,  with  respect to any  Straddle
     Period,  the portion of such Straddle  Period  beginning  after the Closing
     Date; and (y) any Taxes owed by Seller or any Affiliate of Seller resulting
     from any transaction engaged in by the Company or any Subsidiary not in the
     ordinary  course of business  occurring on the Closing  Date after  Buyer's
     purchase  of the Stock.  Buyer  shall be entitled to any refund of Taxes of
     the Company or any  Subsidiaries  attributable  to such  periods  beginning
     after the Closing Date or attributable to such transactions, and Seller and
     its Affiliates  shall promptly remit to Buyer the amount of any such refund
     received by Seller or its Affiliates.

(c)  For  purposes of  SECTIONS  11.3(A) and (B),  whenever it is  necessary  to
     determine the liability for Taxes of the Company or any  Subsidiaries for a
     Straddle  Period,  the  determination  of the Taxes for the  portion of the
     Straddle  Period ending on and  including,  and the portion of the Straddle
     Period  beginning  after,  the Closing Date shall be determined by assuming
     that the Straddle  Period  consisted of two taxable  years or periods,  one
     which ended at the close of the  Closing  Date and the other which began at
     the beginning of the day  following the Closing Date,  and items of income,
     gain, deduction,  loss or credit, and state and local apportionment factors
     of the Company or  Subsidiaries  for the Straddle Period shall be allocated
     between such two taxable years or periods on a "closing of the books basis"
     by assuming that the books of the Company or any  Subsidiaries  were closed
     at the close of the Closing Date, provided,  however,  that (i) exemptions,
     allowances or deductions  that are  calculated on an annual basis,  such as
     the deduction for  depreciation,  and Taxes  calculated on a periodic basis
     (such  as real  property  Taxes  and  other  ad  valorem  Taxes)  shall  be
     apportioned  ratably  between such  periods on a daily basis,  and (ii) any
     extraordinary  item  within the  meaning of  Treasury  Regulations  Section
     1.1502-76(b)(2)(ii)(C) that occurs or results from a transaction that takes
     place after the Closing on the Closing  Date shall be treated as  occurring
     at the beginning of the day following the Closing Date.

(d)  The provisions of SECTIONS 10.3,  10.4(D) (other than SECTION  10.4(D)(Y)),
     10.4(F) (other than 10.4(F)(II)),  10.4(G), 10.4(H) and 10.4(I) shall apply
     for purposes of the indemnification provisions of this SECTION 11.3 and the
     contest provisions of SECTION 11.6.

(e)  Notwithstanding  anything else to the contrary,  Seller shall not indemnify
     or hold  harmless any Buyer  Indemnified  Party,  and no Buyer  Indemnified
     Party shall seek  reimbursement  or indemnity  from Seller,  for any Losses
     pursuant to SECTION  11.3(A)(Y)  unless written demand for reimbursement of

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     such  Losses is made  within  one month  following  the  expiration  of the
     applicable statute of limitations, including any applicable tolling period.

(f)  Unless Buyer obtains Seller's prior written  consent,  Buyer will not take,
     nor shall it permit any of Buyer's Affiliates, the Company, any Subsidiary,
     or any Securitization Entity to take (i) any action with respect to the EBO
     Securities  or any  Securitization  Entity  that is  inconsistent  with the
     Company's  characterization  of the EBO  Securities  or any  Securitization
     Entity  prior to Closing  for United  States  federal  income Tax  purposes
     (collectively, the "Pre-Closing Securitization Entity Treatment"); and (ii)
     any action that could be expected to result in a change in the  Pre-Closing
     Securitization Entity Tax Treatment.

11.4 PAYMENTS.  Any  payment by Buyer or Seller  under this  ARTICLE 11 or under
     ARTICLE  10, or any  payment by Buyer or Seller  under  SECTION  3.5 of the
     difference  between the  Estimated  Purchase  Price and the Final  Purchase
     Price  (determined  under  SECTIONS 2.4 and 2.5 hereof),  or any payment by
     Buyer or Seller  under  SECTIONS  2.2 or 3.4 with  respect to  intercompany
     accounts shall be treated by Buyer and Seller as an adjustment to the Final
     Purchase Price for Tax purposes if payment occurs after the Closing Date.

11.5 TAX RETURNS.

(a)  Seller  shall file or cause to be filed when due (x) all Tax  Returns by or
     with  respect  to the  Company  or any  Subsidiary  that are due before the
     Closing  Date,  and (y) all income and  franchise Tax Returns and other Tax
     Returns  either (i) measured by or based on net income or (ii)  measured by
     or based on equity  that,  in either  case,  are required to be filed by or
     with respect to the Company or any  Subsidiary for taxable years or periods
     ending on or before the Closing Date and shall pay (or cause,  prior to the
     Closing to be paid by Company or any  Subsidiary)  any Taxes due in respect
     of the Tax Returns  described  in clauses  (x) and (y) for which  Seller is
     liable pursuant to SECTION 11.3(A).  Buyer shall file, or cause to be filed
     when  due,  all Tax  Returns  with  respect  to the  Company  or any of its
     Subsidiaries  other than those described in the previous sentence and shall
     remit any Taxes due in respect  of such Tax  Returns.  Seller  shall pay by
     wire  transfer  to Buyer the Taxes for which  Seller is liable  pursuant to
     SECTION 11.3(A) but which are payable with Tax Returns to be filed by Buyer
     pursuant to the previous sentence at least three days prior to the due date
     for the  payment of such  Taxes.  To the extent  permitted  or  required by
     applicable  law,  the  income,  gains,  deductions,   losses,  credits  and
     recapture  of credits,  and each item  thereof of the Company or any of its
     Subsidiaries  for all  taxable  periods or portions  thereof  ending on the
     Closing  Date  including  items  attributable  to  the  Section  338(h)(10)
     election  shall be included in the  consolidated  federal income Tax Return
     filed by the  parent  of the  affiliated  group of which the  Company  is a
     member on the Closing Date and any state or local  consolidated,  combined,
     unitary or similar  income or franchise  Tax Return filed by an  affiliated
     group of which the  Company  is a member  on the  Closing  Date;  provided,
     however,  that  no  extraordinary  item  within  the  meaning  of  Treasury
     Regulations  Section  1.1502-76(b)(2)(ii)(C)  that occurs or results from a
     transaction  that takes place  after the Closing  shall be included in such
     Tax Returns,  notwithstanding  any other provision of this  Agreement,  and
     Buyer agrees to indemnify Seller and any Affiliate of Seller from any Taxes
     and Losses relating to any such extraordinary item.

(b)  With respect to Tax Returns to be filed by Buyer  pursuant to the preceding
     SECTION 11.5(A) that relate to taxable years or periods ending on or before
     the  Closing  Date,  such Tax  Returns  (x) shall be  prepared  in a manner
     consistent with past practice (unless the positions that would otherwise be
     taken in accordance  with past practice are not  reasonable  positions) and
     (y) shall be  submitted  to Seller not later than thirty (30) days prior to
     the due date for filing  such Tax Returns (or if such due date is within 45
     days following the Closing Date, as promptly as  practicable  following the
     Closing Date) for review and approval by Seller,  which  approval shall not
     be  unreasonably  withheld,  and Buyer  shall  incorporate  any  reasonable
     comments of Seller.

(c)  All  Straddle  Period Tax Returns to be filed by Buyer  pursuant to SECTION
     11.5(A)  (x) shall be prepared in a manner  consistent  with past  practice
     (unless the positions that would otherwise be taken in accordance with past
     practice  have no  "reasonable  basis"  within the meaning of Code  Section
     6662(d) (or comparable state,  local, or foreign law) or are not reasonable

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     positions)  and (y) shall be submitted to Seller not later than thirty (30)
     days prior to the due date for filing of such Tax  Returns  (or if such due
     date is  within  45 days  following  the  Closing  Date),  as  promptly  as
     practicable  following the Closing Date. The Seller shall have the right to
     review such  Straddle  Period Tax Returns and to review all work papers and
     procedures used to prepare any such Tax Return. If Seller,  within ten (10)
     business  days after  delivery  of any such Tax Return,  notifies  Buyer in
     writing that it objects to any of the items in such Tax Return  (including,
     without limitation, the allocation of Tax liability between the pre-closing
     and  post-closing  periods  included in such  Straddle  Period Tax Return),
     Buyer and Seller shall attempt in good faith to resolve the dispute and, if
     they are unable to do so, the  disputed  items shall be resolved  (within a
     reasonable  time,  taking  into  account the  deadline  for filing such Tax
     Return) by an internationally recognized independent accounting firm chosen
     by and mutually acceptable to both Buyer and Seller. Upon resolution of all
     such items,  the  relevant  Tax Return  shall be filed on that  basis.  The
     costs, fees, and expenses of such accounting firm shall be borne equally by
     Buyer and Seller.

(d)  The  Buyer  will not carry  back  (nor  permit  the  Company  or any of its
     Subsidiaries  to carry back) to any period  ending on or before the Closing
     Date  (treating  for this purpose  such date as the end of a short  taxable
     year) any losses,  deductions,  or credits giving rise to a refund of Taxes
     for such period  without  Seller's  prior written  consent.  Buyer shall be
     entitled  to any refund of Taxes  relating to a  permitted  carryback,  and
     Seller and its  Affiliates  shall promptly remit to Buyer the amount of any
     such refund of Taxes received by Seller or its Affiliates.

(e)  None of Buyer or any Affiliate of Buyer shall (or shall cause or permit the
     Company to) amend, refile or otherwise modify (or grant an extension of any
     statute of limitation  with respect to) any Tax Return relating in whole or
     in part to the Company or any  Subsidiary  with respect to any taxable year
     or period  ending on or before  the  Closing  Date (or with  respect to any
     Straddle Period) without the prior written consent of Seller.

(f)  With  respect to any  taxable  period for which  Seller is  responsible  to
     prepare and file a Tax Return  pursuant to this SECTION 11.5,  Buyer, if so
     requested by Seller, shall promptly cause the Mortgage Group to prepare and
     provide  to  Seller  a  package  of tax  information  materials  (the  "TAX
     PACKAGE"),  which  shall be  completed  in  accordance  with past  practice
     including past practice as to providing the information, schedules and work
     papers and as to the method of  computation  of separate  taxable income or
     other relevant measure of income of the Mortgage Group members. Buyer shall
     cause the Tax Package for the portion of the taxable  period  ending on the
     Closing Date to be  delivered  to Seller  within 120 days after the Closing
     Date.  Seller shall  reimburse  Buyer for out of pocket  costs  incurred in
     preparing the Tax Package.

11.6 CONTEST PROVISIONS.

(a)  In the event (i) Seller or its  Affiliates or (ii) Buyer or its  Affiliates
     receive  notice of any pending or threatened  Tax audits or  assessments or
     other disputes  concerning Taxes (each, a "Tax Proceeding") with respect to
     which the other  party may incur  liability  under  ARTICLE 11 hereof,  the
     party in receipt of such notice  shall  promptly  notify the other party of
     such matter in writing, provided that failure to comply with this provision
     shall not affect a party's right to  indemnification  hereunder unless such
     failure  materially and adversely affects the indemnifying  party's ability
     to challenge or participate  in such Tax Proceeding in accordance  with the
     provisions of this SECTION 11.6.

(b)  Seller shall have the sole right to represent the interests of the Company,
     Subsidiaries and  Securitization  Entity in any Tax Proceeding  relating to
     taxable  periods ending on or before the Closing Date and to employ counsel
     of its choice at its expense.  Notwithstanding the foregoing,  Seller shall
     not  be  entitled  to  settle,   either   administratively   or  after  the
     commencement of litigation, any claim for Taxes that would adversely affect
     the  liability  for Taxes of Buyer or the  Mortgage  Group  members for any
     period after the Closing Date to any extent (including, but not limited to,
     the imposition of income Tax deficiencies,  the reduction of asset basis or
     cost  adjustments,  the  lengthening of any  amortization  or  depreciation
     periods,  the denial of  amortization or  depreciation  deductions,  or the

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     reduction of the loss or credit  carryforwards)  without the prior  written
     consent of Buyer,  which consent shall not be  unreasonably  withheld,  and
     such  consent  shall  not  be  necessary  to the  extent  that  Seller  has
     indemnified Buyer against the effect of any such settlement.

(c)  In the case of any Tax  Proceeding  with respect to any Straddle  Period or
     period  beginning  after the Closing Date that relates to matters for which
     Seller could be obligated to indemnify any person as the result of a breach
     of any of Seller's  representations  set forth in SECTION 4.16(P),  SECTION
     4.16(Q),  or SECTION  4.22  ("Breach  Matter"):  (i) if the Tax  Proceeding
     involves  both a claim for Taxes that would be borne,  pursuant  to SECTION
     11.3(A),  by Seller if the Tax authority  were  successful  with respect to
     such  claim (a  "Seller  Tax  Claim")  and a claim for Taxes  that would be
     borne,  pursuant to SECTION  11.3(B),  by Buyer if the Tax  authority  were
     successful  with  respect  to such  claim (a  "Buyer  Tax  Claim")  and the
     relevant Tax authority  agrees to permit the Seller Tax Claim and the Buyer
     Tax Claim to be  separately  contested  and settled,  then,  unless the Tax
     Proceeding relates to a Tax Return of a consolidated,  combined, unitary or
     affiliated  group of which Buyer or any  Affiliate of Buyer (other than the
     Company  or  any  Subsidiary  or  any  successor  to  the  Company  or  any
     Subsidiary) is the common parent (x) the Seller Tax Claim and the Buyer Tax
     Claim shall be  separately  contested,  (y) Seller shall control the Seller
     Tax Claim, and (z) Buyer shall control the Buyer Tax Claim; (ii) if the Tax
     Proceeding involves only a Seller Tax Claim, then unless the Tax Proceeding
     relates to a Tax Return of a consolidated,  combined, unitary or affiliated
     group of which Buyer or any  Affiliate  of Buyer (other than the Company or
     any  Subsidiary or any successor to the Company or any  Subsidiary)  is the
     common  parent,  Seller shall  control  such claim;  and (iii) in any other
     event,  Buyer shall control such claim. If the Buyer is entitled to control
     a Tax  Proceeding  described in this SECTION  11.6(C)  relating to a Breach
     Matter,  Buyer  shall  have the right to  represent  the  interests  of the
     Company,  Subsidiaries and  Securitization  Entity with respect to such Tax
     Proceeding and to determine whether,  when and on what terms to settle such
     Tax Proceeding to the extent that it relates to a Breach Matter;  provided,
     however,  that (i) Buyer shall  provide  Seller on a regular  ongoing basis
     with a timely  and  reasonably  detailed  account of each stage of such Tax
     Proceeding  and all  significant  developments  with  respect  to such  Tax
     Proceeding  to the extent that it relates to a Breach Matter and shall take
     into account the  reasonable  comments of Seller with respect to each stage
     and development in defending such Tax Proceeding;  (ii) Buyer shall provide
     Seller with copies of all correspondence received and delivered by Buyer to
     the extent that such correspondence relates to a Breach Matter; (iii) Buyer
     shall  consult  with  Seller  before  taking  any  significant   action  in
     connection  with such Tax  Proceeding  to the  extent  that it relates to a
     Breach Matter and shall take into account the reasonable comments of Seller
     in carrying  out such  significant  action,  (iv) Buyer shall  consult with
     Seller and offer Seller an  opportunity  to comment  before  submitting any
     written  materials  prepared  or  furnished  in  connection  with  such Tax
     Proceeding  to the extent that it relates to a Breach Matter and shall take
     into account the  reasonable  comments of Seller in preparing  such written
     materials;  (v) Buyer shall defend such Tax Proceeding relating to a Breach
     Matter  diligently and in good faith as if Buyer were  responsible  for 100
     percent of the Taxes  claimed to be due in the Tax  Proceeding;  (vi) Buyer
     shall not settle  such Tax  Proceeding  to the extent  that it relates to a
     Breach Matter  without the prior written  consent of Seller,  which consent
     shall not be unreasonably withheld;  and (vii) notwithstanding  anything to
     the contrary in this  Agreement,  Buyer shall be  responsible  for the full
     amount  of costs  and  expenses  incurred  by Buyer in  defending  such Tax
     Proceeding (including, without limitation, any legal and other professional
     costs and expenses)  and such amounts  shall not be  considered  Losses for
     which Seller is obligated to indemnify  Buyer  pursuant to this  Agreement.
     With respect to any Tax  Proceeding  relating to Breach Matters that Seller
     has the right to control pursuant to this SECTION 11.6(C), Seller shall the
     full right to handle,  defend,  conduct  and control  such Tax  Proceeding.
     Seller  also  shall  have  the  right to  compromise  and  settle  such Tax
     Proceeding  that it has  authority  to  control  pursuant  to this  SECTION
     11.6(C),  subject to Buyer's  prior  written  consent,  which  shall not be
     unreasonably withheld.

(d)  With respect to any Tax  Proceeding  (other than a Tax  Proceeding to which
     SECTION 11.6(C) is applicable) with respect to any Straddle Period,  Seller
     shall be entitled to participate at its expense in the defense of any claim
     for Taxes for such Straddle  Period and, with the written consent of Buyer,
     which  consent  shall not be  unreasonably  withheld,  and at Seller's sole
     expense,  may  assume the  entire  defense  of such Tax  claim,  subject to
     Buyer's  participation  at  its  expense.  Neither  Buyer  nor  Seller,  as

                                      164

     applicable,  shall be entitled to settle any Tax Proceeding with respect to
     any Straddle  Period  described in this SECTION  11.6(D)  without the prior
     written consent of Seller or Buyer, as applicable,  which consent shall not
     be unreasonably withheld.

11.7 TAX  SHARING  AGREEMENTS.  Any  Tax  allocation  or  sharing  agreement  or
     arrangement,  whether or not  written,  that may have been  entered into by
     Seller or any of its  Affiliates  and any  Mortgage  Group  member shall be
     terminated as to the Mortgage  Group member as of the Closing Date,  and no
     payments which are owed by or to the Mortgage Group member pursuant thereto
     shall be made thereunder.

11.8 ASSISTANCE AND COOPERATION.

After the  Closing  Date,  each of Seller and Buyer shall (and shall cause their
respective Affiliates to):

(a)  assist the other party in preparing  any Tax Returns or reports  which such
     other party is responsible for preparing and filing in accordance with this
     ARTICLE 11;

(b)  cooperate  fully in  preparing  for any audits of, or disputes  with taxing
     authorities regarding, any Tax Returns of the Mortgage Group members;

(c)  make  available  to the other and to any  taxing  authority  as  reasonably
     requested all information,  records, and documents relating to Taxes of the
     Mortgage  Group  members,  provided,  however,  that  Buyer  shall  have no
     obligation  to make  available  to Seller such  information,  records,  and
     documents that relate to taxable periods beginning after the Closing Date;

(d)  provide  timely notice to the other in writing of any pending or threatened
     Tax audits or  assessments  of any member of the Mortgage Group for taxable
     periods for which the other may have a liability under this ARTICLE 11;

(e)  furnish  the other  with  copies of all  correspondence  received  from any
     taxing  authority in connection  with any Tax audit or information  request
     with respect to any such taxable period; and

(f)  cooperate  with and assist the other in obtaining  any refund that Buyer or
     Seller  reasonably  believes  should  be  available,   including,   without
     limitation,  through the filing of  appropriate  forms with the  applicable
     taxing authorities.

11.9 RETENTION OF RECORDS.  Buyer will cause the Company and the Subsidiaries to
     retain any records relevant to the  determination of Tax liabilities of the
     Mortgage  Group  members  for  taxable  periods  ending  on or prior to the
     Closing  Date and for  Straddle  Periods  for a period of not less than ten
     (10) years following the Closing Date;  provided,  however,  that Buyer may
     dispose of such records prior to that time with the prior  written  consent
     of Seller, which consent shall not be unreasonably withheld.

11.10SELLER NOT A FOREIGN PERSON. At the Closing,  Seller shall deliver to Buyer
     an affidavit of Seller, in a form reasonably satisfactory to Buyer, stating
     under penalties of perjury Seller's U.S. taxpayer identification number and
     that Seller is not a foreign  person  under  Treasury  Regulations  Section
     1.1445-2(b)(2).

11.11 OTHER.

(a)  In the event either Seller or Buyer breaches any  obligation  imposed on it
     under this ARTICLE 11, such breaching party shall indemnify the other party
     for all losses,  liabilities,  damages or  expenses  incurred by that other
     party as a result of that breach.

(b)  It is the  intention of the parties that the  provisions of this ARTICLE 11
     shall exclusively  govern all matters relating to Taxes with respect to the
     Company  and any  Subsidiary  as  between  the  Buyer  and  its  Affiliates

                                      165

     (including  the Company and any  Subsidiary  following the Closing) and the
     Seller and its Affiliates, and that the provisions of this ARTICLE 11 shall
     exclusively  govern  the  determination  and  administration  of all claims
     between them relating to such Tax matters.

(c)  Notwithstanding any other provisions of this Agreement,  the obligations of
     the  parties  set  forth in this  ARTICLE  11 shall  be  unconditional  and
     absolute.  For the avoidance of doubt,  there shall not be any  duplicative
     payments  of  indemnities  by  Seller or Buyer  under  this  ARTICLE  11 or
     otherwise under this Agreement.

(d)  Notwithstanding  anything to the contrary in this Agreement, the obligation
     of Seller  under this  ARTICLE  11 shall not be  subject  to a  deductible,
     threshold or similar concept and shall be unlimited in amount.

                                   ARTICLE 12
                                  MISCELLANEOUS

12.1 TERMINATION. This Agreement may be terminated:

(a)  At any time on or prior to the  Closing  Date,  by the  mutual  consent  in
     writing of the parties hereto;

(b)  At any time on or prior to the Closing Date, by Buyer in writing, if Seller
     has, or by Seller in writing,  if Buyer has  breached  (i) any  covenant or
     agreement   contained   herein  in  any   material   respect  or  (ii)  any
     representation   or  warranty   contained  herein  and  such  breach  would
     constitute a failure to satisfy the  condition  contained in SECTION 7.1 or
     Section 8.1, as applicable,  and in either case if such breach has not been
     cured by the earlier of 30 days after the date on which  written  notice of
     such  breach is given to the party  committing  such  breach or the Closing
     Date;

(c)  At any time, by either party hereto in writing, if (i) the applications for
     prior approval referred to in SECTION 6.6 hereof have been denied,  and the
     time period for appeals and requests for  reconsideration has run, (ii) any
     governmental or regulatory agency or Governmental Agency which must grant a
     Permit, consent,  approval or waiver contemplated by SECTION 7.2 or 8.2 has
     denied such Permit, consent,  approval or waiver and such denial has become
     final and  nonappealable or (iii) any governmental or regulatory  agency or
     Governmental  Agency of  competent  jurisdiction  shall have issued a final
     nonappealable order enjoining or otherwise  prohibiting the consummation of
     the transactions contemplated by this Agreement; or

(d)  By either party hereto in writing,  if the Closing Date has not occurred by
     the close of  business  on  December  31,  2004,  unless the failure of the
     Closing Date to occur by such date shall be due to the failure of the party
     seeking to terminate this Agreement to perform or observe the covenants and
     agreements of such party set forth herein.

12.2 EFFECT OF TERMINATION.  In the event this Agreement is terminated  pursuant
     to SECTION  12.1  hereof,  this  Agreement  shall  become  void and have no
     effect,  except that (i) the provisions  relating to expenses and publicity
     set forth in SECTIONS  12.10 and 12.11  together  with the  confidentiality
     provision in SECTION 6.3 hereof  concerning the  Confidentiality  Agreement
     and the  provisions of SECTION 10.7,  respectively,  shall survive any such
     termination and (ii) a termination pursuant to SECTION 12.1(B)(I) shall not
     relieve the breaching  party from  liability for an uncured  breach of such
     covenant or agreement giving rise to such termination.

12.3 ASSIGNMENT.  Neither this  Agreement  nor any of the rights or  obligations
     hereunder may be assigned by either party without the prior written consent
     of the other;  PROVIDED that Buyer may assign this Agreement and any rights
     and obligations  hereunder to any Affiliate  without the consent of Seller;
     provided,  that  no  such  assignment  shall  relieve  Buyer  of any of its
     obligations  hereunder.  This Agreement  shall be binding upon and inure to

                                      166

     the  benefit of the  parties  hereto and their  respective  successors  and
     assigns,  and no other Person shall have any right,  benefit or  obligation
     hereunder.

12.4 NOTICES. Unless otherwise provided herein, any notice, request, instruction
     or other document to be given hereunder by any party to the others shall be
     in writing and delivered in person or by courier,  telegraphed,  telexed or
     by facsimile  transmission  or mailed by certified mail,  postage  prepaid,
     return  receipt  requested  (such mailed notice to be effective on the date
     such receipt is acknowledged), as follows:

         If to Buyer:               CitiMortgage, Inc.
                                    1000 Technology Drive
                                    O'Fallon, Missouri 63304
                                    Attention: Legal Department
                                    Telecopy:  (636) 261-6518

         With copies to:            CitiMortgage, Inc.
                                    1000 Technology Drive
                                    O'Fallon, Missouri 63304
                                    Attention: Capital Markets/Brad Brunts
                                    Telecopy:  (636) 261-1312

         If to Seller               The Principal Financial Group
         or Guarantor:              711 High Street
                                    Des Moines, IA 50392
                                    Attention: General Counsel
                                    Telecopy:  (515) 235-9852

         With copies to:            Kirkpatrick & Lockhart LLP
                                    1800 Massachusetts Avenue, N.W.
                                    Washington, D.C.  20036
                                    Attn:   Laurence E. Platt
                                    Telecopy:  (202) 778-9100

     or to such  other  place and with  such  other  copies as either  party may
     designate as to itself by written notice to the others.

12.5 CHOICE OF LAW; JURISDICTION AND FORUM; WAIVER OF JURY TRIAL.

(a)  This  Agreement  shall be  construed,  interpreted  and the  rights  of the
     parties  determined in  accordance  with the laws of the State of New York,
     without  regard to the  conflict  of law  principles  thereof,  except with
     respect to matters of law concerning the internal  corporate affairs of any
     corporate entity which is a party to or the subject of this Agreement,  and
     as to those matters the law of the jurisdiction  under which the respective
     entity derives its powers shall govern.

(b)  Any action brought in connection  with this Agreement may be brought in the
     federal or state courts  located in the City of New York which courts shall
     have  exclusive  jurisdiction.  The parties  further  agree,  to the extent
     permitted by law, that final and unappealable  judgment against any of them
     in any action or proceeding  contemplated above shall be conclusive and may
     be enforced in any other jurisdiction by suit on the judgment,  a certified
     copy of which shall be  conclusive  evidence of the fact and amount of such
     judgment.

(c)  By the execution and delivery of this Agreement, Buyer and Seller submit to
     the personal  jurisdiction of any state or federal court in the City of New
     York  in any  action  or  proceeding  arising  out of or  relating  to this
     Agreement and the transactions contemplated hereby.

(d)  Each party waives,  to the fullest extent  permitted by applicable law, any
     right it may have to a trial by jury in respect of any action or proceeding
     arising  out  of  or  relating  to  this  Agreement  or  the   transactions

                                      167

     contemplated hereby. Each party certifies that it has been induced to enter
     into this  Agreement  by,  among  other  things,  the  mutual  waivers  and
     certifications set forth above in this SECTION 12.5.

12.6 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, together with all
     exhibits and schedules hereto (including  without limitation the Disclosure
     Schedules)  and  the  Confidentiality  Agreement,   constitute  the  entire
     agreement  among the parties  pertaining  to the subject  matter hereof and
     supersedes  all  prior   agreements,   understandings,   negotiations   and
     discussions,  whether  oral or  written,  of the  parties.  No  supplement,
     modification  or waiver of this Agreement  shall be binding unless executed
     in  writing  by all  parties.  No waiver of any of the  provisions  of this
     Agreement  shall be  deemed  or shall  constitute  a  waiver  of any  other
     provision hereof (whether or not similar), nor shall such waiver constitute
     a continuing waiver unless otherwise expressly provided.

12.7 COUNTERPARTS.  This Agreement may be executed in two or more  counterparts,
     each of which shall be deemed an original,  but all of which together shall
     constitute one and the same instrument.

12.8 INVALIDITY.  In the event that any one or more of the provisions  contained
     in this Agreement or in any other instrument referred to herein, shall, for
     any reason, be held to be invalid, illegal or unenforceable in any respect,
     such invalidity,  illegality or unenforceability shall not affect any other
     provision of this Agreement or any other such instrument.

12.9 HEADINGS. The headings of the Articles and Sections herein are inserted for
     convenience  of  reference  only and are not intended to be a part of or to
     affect the meaning or interpretation of this Agreement.

12.10EXPENSES.  Except as otherwise provided herein,  Seller and Buyer will each
     be liable for its own costs and expenses  incurred in  connection  with the
     negotiation, preparation, execution or performance of this Agreement.

12.11PUBLICITY.  The parties shall by mutual consent (which consent shall not be
     unreasonably  withheld or delayed by either party) agree as to the form and
     substance  of  any  press  release   relating  to  this  Agreement  or  the
     transactions  contemplated  hereby and shall  consult with each other as to
     the  form  and  substance  of  other  public  disclosure  related  thereto;
     PROVIDED,  HOWEVER, that nothing contained herein shall prohibit any party,
     following notification to the other party, from making any disclosure which
     its counsel  deems  necessary.  The  parties  shall work  cooperatively  in
     approaching  the  Office  of  Thrift   Supervision  to  inform  it  of  the
     transaction.

12.12DISCLOSURE  SCHEDULES.  Neither the  specification  of any dollar amount in
     any  representation  or  warranty  contained  in  this  Agreement  nor  the
     inclusion  of any  specific  item  in any  Disclosure  Schedule  hereto  is
     intended to imply that such amount, or higher or lower amounts, or the item
     so included or other  items,  are or are not material or that such item has
     had or is  reasonably  likely to result in a material  adverse  effect with
     respect to the  disclosing  party,  and no party  shall use the fact of the
     setting  forth of any such amount or the  inclusion of any such item in any
     dispute or  controversy  between the parties as to whether any  obligation,
     item or matter not described herein or in any Disclosure  Schedule is or is
     not material or that such item has had or is reasonably likely to result in
     a material adverse effect with respect to the disclosing party for purposes
     of this Agreement.  Unless this Agreement  specifically provides otherwise,
     neither the  specification of any item or matter in any  representation  or
     warranty contained in this Agreement nor the inclusion of any specific item
     in any  Disclosure  Schedule  hereto is intended to imply that such item or
     matter, or other items or matters, are or are not in the ordinary course of
     business.  Seller shall at the Closing,  by notice in  accordance  with the
     terms  of this  Agreement,  supplement,  amend  or  create  any  Disclosure
     Schedule  in  order  to add  information  or  correct  previously  supplied
     information.  No such amendment shall be evidence,  in and of itself,  that
     the  representations  and  warranties in the  corresponding  section are no
     longer true and correct in all material respects;  PROVIDED,  HOWEVER, that
     no supplemental, amended or additional Disclosure Schedule shall affect the
     representations, warranties, covenants or agreements of Seller set forth in
     this  Agreement  or be  deemed  to cure any  breach  for  purposes  of this
     Agreement.

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12.13CONSTRUCTION  OF AGREEMENT.  Seller and Buyer  acknowledge  that each party
     and each party's  counsel have reviewed and revised this Agreement and that
     normal rule of  construction  to the effect that any  ambiguities are to be
     resolved   against  the  drafting   party  will  not  be  employed  in  the
     interpretation  of this Agreement or any amendments,  Schedules or Exhibits
     hereto.

12.14DISCLAIMER OF WARRANTIES.  EXCEPT AS TO THOSE MATTERS  EXPRESSLY COVERED BY
     THE  REPRESENTATIONS  AND WARRANTIES IN THIS AGREEMENT AND THE  CERTIFICATE
     DELIVERED BY SELLER  PURSUANT TO SECTION  7.1,  SELLER IS SELLING THE STOCK
     (AND THE BUSINESS AND ASSETS OF THE COMPANY REPRESENTED  THEREBY) ON AN "AS
     IS,   WHERE  IS"  BASIS  AND  SELLER   DISCLAIMS   ALL  OTHER   WARRANTIES,
     REPRESENTATIONS AND GUARANTIES WHETHER EXPRESS OR IMPLIED.  SELLER MAKES NO
     REPRESENTATION  OR  WARRANTY  AS TO  MERCHANTABILITY  OR  FITNESS  FOR  ANY
     PARTICULAR PURPOSE AND NO IMPLIED WARRANTIES WHATSOEVER.  In furtherance of
     the foregoing,  Buyer  understands that any cost estimates,  projections or
     other  predictions  which  have been  provided  to Buyer by or on behalf of
     Seller are not and shall not be deemed to be  representations or warranties
     of Seller. Buyer acknowledges that (i) there are uncertainties  inherent in
     attempting to make such estimates,  projections and other predictions, (ii)
     Buyer is taking full  responsibility  for making its own  evaluation of the
     adequacy and accuracy of all estimates,  projections and other  predictions
     so furnished to it, and (iii) under no  circumstances  shall Buyer have any
     claim against Seller or any of its officers, directors,  Affiliates, agents
     or representatives  (including,  without limitation,  Lehman Brothers Inc.)
     with respect thereto.

                     [signature page to follow on next page]

                                      169

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this  Agreement to be duly  executed on their  respective  behalf by
their  respective  officers  thereunto duly  authorized,  as of the day and year
first above written.

CitiMortgage, Inc.                             Principal Holding Company

By:  ---------------------                     By: ----------------------------

Solely for the  purpose  of its  express  agreement  to be bound by the terms of
SECTION 10.7 of this Agreement,  Principal Financial Services, Inc. has executed
this Agreement as of the day and year first above written.

PRINCIPAL FINANCIAL SERVICES, INC.

By:
     ------------------------------------------------

                                      170

                                                                    Exhibit 10.8
                              EMPLOYMENT AGREEMENT

This  EMPLOYMENT   AGREEMENT  (the  "AGREEMENT")  dated  as  of  April  1,  2004
("AGREEMENT  DATE") by and between Principal  Financial Group,  Inc., a Delaware
corporation,  (together with all successors thereto "PFGI"), Principal Financial
Services,  Inc., an Iowa corporation,  and Principal Life Insurance Company,  an
Iowa  corporation  (together with all successors  thereto,  "LIFE") (each of the
foregoing   referred  to   individually   as  a  "COMPANY"  or  collectively  as
"COMPANIES", and J. Barry Griswell ("EXECUTIVE"),  a resident of Iowa. Executive
is currently  serving as Chairman,  President and Chief Executive Officer of the
Companies. The parties desire to enter into this Agreement, which is intended to
more fully embody the agreement among the parties as to Executive's  employment.
This  Agreement  supersedes the  employment  agreement by and between  Principal
Mutual Holding Company,  Principal  Financial Group, Inc.,  Principal  Financial
Services, Inc., and Principal Life Insurance Company and Executive dated May 19,
2000. In consideration of the mutual agreements contained herein, and other good
and valuable consideration, the sufficiency of which is hereby acknowledged, the
Company and Executive agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS
The terms set forth  below have the  following  meanings  (such  meanings  to be
applicable  to both the  singular  and  plural  forms,  except  where  otherwise
expressly indicated):

1.1  "ACCRUED  ANNUAL BONUS" means the amount of any Annual Bonus earned but not
     yet  paid  with  respect  to any  Fiscal  Year  ended  prior to the Date of
     Termination.

1.2  "ACCRUED BASE SALARY" means the amount of Executive's Base Salary, which is
     accrued but not yet paid as of the Date of Termination.

1.3  "AFFILIATE"  means any Person that  directly  or  indirectly  controls,  is
     controlled by, is under common control with, a Company. For the purposes of
     this  definition,  the term "control" when used with respect to any Person,
     means  (a) the power to direct or cause  the  direction  of  management  or
     policies  of such  Person,  directly  or  indirectly,  whether  through the
     ownership  of voting  securities,  by  contract  or  otherwise,  or (b) for
     purposes  of Section  1.11 and  Article  VII,  the power  substantially  to
     influence  the direction of strategic  management  policies of such Person,
     and  provided a Company  has a direct or indirect  commercial  relationship
     with such Person, all as determined by the Human Resources Committee of the
     Board or its successor.

1.4  "AGREEMENT" - see the introductory paragraph of this Agreement.

1.5  "AGREEMENT DATE" - see the introductory paragraph in this Agreement.

1.6  "ANNIVERSARY DATE" - means any annual anniversary of the Agreement Date.

1.7  "ANNUAL BONUS" - see Section 4.2.

1.8  "BASE SALARY" - see Section 4.1.

1.9  "BENEFICIARY" - see Section 9.6.

1.10 "BOARD"  means the Board of Directors of PFGI unless the context  indicates
     otherwise.

1.11 "CAUSE" means any of the following:

                                      171

     (a)  Executive's  conviction  of,  plea  of  guilty  to,  or  plea  of nolo
          contendere to a felony or  misdemeanor  (other than a  traffic-related
          felony  or  misdemeanor)  that  involves  fraud,  dishonesty  or moral
          turpitude,

     (b)  any  willful  action by  Executive  resulting  in  criminal,  civil or
          internal  Company  conviction,  sanction or judgment  under Federal or
          State workplace  harassment or discrimination laws or internal Company
          workplace  harassment,  discrimination or other workplace policy under
          which such  action  could be and could  reasonably  be  expected to be
          grounds for  immediate  termination  of a member of Senior  Management
          (other than mere failure to meet  performance  goals,  objectives,  or
          measures),

     (c)  Executive's  habitual  abuse of or addiction to alcohol or  controlled
          substances,  which  interferes  with the  performance  of  Executive's
          duties,

     (d)  Executive's willful and intentional material breach of this Agreement,
          including,  but not limited to, the restrictive covenants contained in
          Article VII,

     (e)  Executive's  habitual  neglect of duties,  (other than  resulting from
          Executive's  incapacity  due to  physical  or  mental  illness)  which
          results in substantial  financial detriment to any of the Companies or
          any Affiliate,

     (f)  Executive's  personally  engaging  in such  conduct  as  results or is
          likely to result in (i) substantial damage to the reputation of any of
          the Companies or any Affiliate,  as a respectable  business,  and (ii)
          substantial  financial detriment (whether immediately or over time) to
          any of the Companies or Affiliates,

     (g)  Executive's  willful  and  intentional   material  misconduct  in  the
          performance  or gross  negligence  of his duties under this  Agreement
          that results in  substantial  financial  detriment to a Company or any
          Affiliate,

     (h)  Executive's  intentional  failure (including a failure caused by gross
          negligence)  to cause any of the  Companies to comply with  applicable
          law and  regulations  material to the business of such  Company  which
          results in substantial  financial detriment to any of the Companies or
          any Affiliate, or

     (i)  Executive's  willful or intentional  failure to comply in all material
          respects  with a  specific  written  direction  of the  Board  that is
          consistent with normal  business  practice and not  inconsistent  with
          this Agreement and Executive's responsibilities hereunder.

For purposes of clauses (d), (e),  (f), (g) and (h) of the  preceding  sentence,
Cause shall not mean the mere  existence or occurrence of any one or more of the
following, and for purposes of clause (i) of the preceding sentence, Cause shall
not mean the mere existence or occurrence of item (iv) below:

     (i)  bad judgment,

     (ii) negligence, other than Executive's habitual neglect of duties or gross
          negligence,

     (iii)any act or omission that Executive believed in good faith to have been
          in the  interest of the Company  (without  intent of Executive to gain
          therefrom,  directly  or  indirectly,  a  profit  to  which he was not
          legally entitled), or

     (iv) failure to meet performance goals, objectives or measures;

provided, that for purposes of clauses (c), (d), (e), (f), (g), (h) and (i), any
act or omission  that is curable shall not  constitute  Cause unless the Company
gives Executive written notice of such act or omission that specifically  refers
to this Section and,  within 10 days after such notice is received by Executive,
Executive  fails to cure such act or omission.  Notwithstanding  anything to the
contrary herein, any act or omission of which any member of the Board who is not

                                      172

a party to such act or omission has had actual knowledge for at least six months
shall not constitute "Cause" under any clause of this Section.

1.12 "CODE"  means the Internal  Revenue  Code of 1986,  as amended from time to
     time.

1.13 "COMPANY" - see the introductory paragraph to this Agreement.

1.14 "COMPETITIVE BUSINESS" means as of any date any corporation or other Person
     (and any branch,  office or operation thereof) that engages in, or proposes
     to engage in:

     (a)  the  underwriting,  reinsurance,  marketing or sale of (i) any form of
          insurance of any kind that any of the  Companies as of such date does,
          or has under active consideration a proposal to, underwrite, reinsure,
          market  or sell  (any such form of  insurance,  a  "COMPANY  INSURANCE
          PRODUCT" or (ii) any other form of insurance  that is marketed or sold
          in competition with any Company Insurance Product, or

     (b)  the sale of financial services which involve (i) the management, for a
          fee or  other  remuneration,  of an  investment  account  or fund  (or
          portions thereof or a group of investment accounts or funds), (ii) the
          giving of advice, for a fee or other remuneration, with respect to the
          investment  and/or  reinvestment  of  assets or funds (or any group of
          assets or funds), or (iii) financial planning services, or

     (c)  the design,  implementation  and  administration  of employee  benefit
          plans, including plan documents,  employee communications,  reporting,
          disclosure,   financial  advice,   investment  advice,  and  fiduciary
          services, or

     (d)  any  other  business  that as of such  date is a direct  and  material
          competitor of a Company and its Affiliates to the extent that prior to
          the Date of Termination any of the Companies or its Affiliates engaged
          at any time within 12 months in or had under  active  consideration  a
          proposal to engage in such competitive business;

and that is located  anywhere in the Untied  States or  anywhere  outside of the
United  States where such Company or its  Affiliates  is then engaged in, or has
under active consideration a proposal to engage in, any of such activities.

1.15 "DATE OF  TERMINATION"  means  the date of the  receipt  of the  Notice  of
     Termination  by Executive (if such Notice is given by or on behalf of PFGI)
     or by PFGI (if such Notice is given by  Executive),  or any later date, not
     more  than 15 days  after  the  giving of such  Notice,  specified  in such
     notice,  as of which  Executive's  employment  with the Companies  shall be
     terminated; provided, however, that:

     (i)  if Executive's  employment is terminated by reason of death,  the Date
          of Termination shall be the date of Executive's death; and

     (ii) if Executive's  employment is terminated by reason of Disability,  the
          Date of Termination shall be the 30th day after Executive's receipt of
          the physician's certification of Disability, unless, before such date,
          Executive shall have resumed the full-time  performance of Executive's
          duties; and

     (iii)if Executive  terminates his employment  without Good Reason, the Date
          of Termination  shall be the 30th day after the giving of such Notice;
          and

     (iv) if no Notice of Termination is given, the Date of Termination shall be
          the last date on which Executive is employed by the Companies.

1.16 "DISABILITY"  means a mental or physical  condition which renders Executive
     unable or incompetent to carry out the material job responsibilities  which
     such Executive held or the material  duties to which Executive was assigned

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     at the time the disability was incurred, which has existed for at least six
     months and which in the certified  opinion of a physician  mutually  agreed
     upon  by  PFGI  and  Executive   (which   agreement   neither  party  shall
     unreasonably  withhold)  is  expected  to be  permanent  or to last  for an
     additional duration in excess of six months.

1.17 "EMPLOYMENT PERIOD" - see Section 3.1.

1.18 "EXECUTIVE" - see the introductory paragraph of this Agreement.

1.19 "FISCAL YEAR" means the fiscal year used in connection with the preparation
of the consolidated financial statements of PFGI.

1.20 "GOOD  REASON"  means the  occurrence  of any one of the  following  events
     unless Executive  specifically  agrees in writing that such event shall not
     be Good Reason:

     (a)  any  material  breach  of the  Agreement  by  any  of  the  Companies,
          including  any of  the  following,  each  of  which  shall  be  deemed
          material:

          (i)  any  adverse  change  in  the  title,  status,  responsibilities,
               authorities or perquisites of Executive;

          (ii) any failure of  Executive to be  nominated,  appointed or elected
               and to continue to be nominated,  re-elected,  or re-appointed as
               Chairman,  President and Chief Executive  Officer of PFGI without
               Executive's prior written consent;

          (iii)any failure of  Executive to be  nominated,  appointed or elected
               and to continue to be nominated, re-elected, or re-appointed as a
               member  of the  Board  of  Directors  of  PFGI  or the  Board  of
               Directors of Life;

          (iv) causing or requiring Executive to report to anyone other than the
               Board of PFGI;

          (v)  assignment to Executive of duties  materially  inconsistent  with
               his position and duties  described in this  Agreement,  including
               status,   offices,  or  responsibilities  as  contemplated  under
               Section  2.1 or any other  action by any of the  Companies  which
               results in an adverse change in such position,  status,  offices,
               titles or responsibilities;

          (vi) any  reduction  or  failure  to pay  Executive's  base  Salary in
               violation  of Section  4.1 or his Annual  Bonus in  violation  of
               Section 4.2;

          (vii)any failure to grant or pay an LTIP Award or LTIP Bonus  required
               under Section 4.3; or

          (viii)  any  reduction  in  bonus  or  incentive   (including  without
               limitation,   the  LTIP)  opportunity;   provided  that  no  such
               reduction  shall be deemed to occur  merely  because  the Company
               revises or modifies the structure of or performance factors taken
               into account (or the degree to which any such performance factors
               are taken into account)  under any bonus or incentive  (including
               without  limitation,  the  LTIP)  plan or  arrangement;  provided
               further that the  Executive  shall not be treated less  favorably
               than the other members of Senior Management;

provided  that the  creation,  existence  or  appointment  of a Chief  Executive
Officer other than Executive of any subsidiary of PFGI shall not be deemed to be
Good  Reason  if  such  other  Chief  Executive  Officer  reports,  directly  or
indirectly,  to  Executive;  and  provided,  further,  that  no act or  omission
described in clauses (i) through  (viii) of this Section shall  constitute  Good
Reason unless  Executive  gives PFGI written  notice of such act or omission and
the Company fails to cure such act or omission  within 30-days after delivery of
such notice (except that Executive  shall not be required to provide such notice
in case of intentional acts or omissions by a Company or more than once in cases
of repeated acts or omissions); or

                                      174

     (b)  the failure of PFGI to assign this  Agreement to its  successor or the
          failure of a  successor  of PFGI,  Life or the  Company  to  expressly
          assume and agree to be bound by the Agreement; or

     (c)  relocation  of the  Company's  executive  offices or  Executive's  own
          office location to a location that is outside the United States;

In the event of an occurrence or omission  constituting  Good Reason,  Executive
shall not be entitled to terminate his  employment for Good Reason unless within
3  months  after  Executive  first  obtains  actual  knowledge  of such an event
constituting Good Reason, he notifies PFGI of the events  constituting such Good
Reason and of his  intention to terminate  his  employment  for Good Reason by a
Notice of Termination.

Notwithstanding any provision in this Section to the contrary, no appointment of
a company  president or chief  operating  officer shall  constitute  Good Reason
pursuant to Clause (a) (ii) of this  Section,  and no  reduction in base salary,
bonus or incentive (including without limitation,  the LTIP) that applies to all
members of Senior  Management  shall  constitute Good Reason pursuant to Clauses
(a) (vii) or (viii) of this Section.

1.21 "INCLUDING" means including without limitation.

1.22 "LIFE" - see introductory paragraph to this Agreement.

1.23 "LTIP" means, as applicable,  the Long-Term  Performance  Plan of Life, the
     1999 Long-Term  Performance Plan, and any of their respective successors or
     other  long-term  incentive  plans in which Senior  Management is generally
     eligible to participate.

1.24 "LTIP AWARD" means an incentive compensation  opportunity granted under the
     LTIP.

1.25 "LTIP BONUS" means the amount paid or earned in respect of an LTIP Award.

1.26 "LTIP  PERFORMANCE  PERIOD"  means any  performance  period  designated  in
     accordance  with any LTIP approved by the Board of Life or any committee of
     the Board of Life.

1.27 "PFGI" - see introductory paragraph to this Agreement.

1.28 "NOTICE  OF   TERMINATION"   means  a  written  notice  of  termination  of
     Executive's  employment  given in  accordance  with Section 9.12 by PFGI on
     behalf of the  Companies,  or by Executive,  as the case may be, which sets
     forth (a) the specific termination  provision in this Agreement relied upon
     by the party  giving such  notice,  (b) in  reasonable  detail the specific
     facts and circumstances  claimed to provide a basis for such Termination of
     Employment,  and (c) if the Date of  Termination  is other than the date of
     receipt of such Notice of Termination, the Date of Termination.

1.29 "PERSON" means any  individual,  sole  proprietorship,  partnership,  joint
     venture,  limited liability company,  trust,  unincorporated  organization,
     corporation,  institution, public benefit corporation, entity or government
     instrumentality, division, agency, body or department.

1.30 "PRESENT VALUE  ACTUARIAL  EQUIVALENT"  means an amount equal in value to a
     benefit payable in a specified form on (or commencing on) a specified date,
     based on the method specified in the Supplemental Executive Retirement Plan
     for Employees, as established January 1, 1982, as amended and restated from
     time to time  ("SERP"),  under the  definition  of  "Actuarial  Equivalent"
     (which refers to the definition of such term in the Principal  Pension Plan
     as established  April 1,1940, as amended and restated from time to time) or
     the successor plan to the SERP,  provided that if the SERP no longer exists
     or such method is no longer  specified in the SERP (whether by reference to
     another plan or otherwise), then based on the assumed rates of interest and
     mortality  (weighted .65 male and .35 female)  under Section  417(e) of the
     Code for the month  (generally  published at the beginning of the following
     month) prior to the month of the Executive's Date of Termination.

1.31 "PRORATA  ANNUAL  BONUS"  means the product of (i) the Target  Annual Bonus
     (provided  that no effect  shall be given to any  reduction  in such Target
     Annual  Bonus  that  would  qualify  as Good  Reason if  Executive  were to

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     terminate his employment on account thereof)  multiplied by (ii) a fraction
     of which the  numerator  is the number of days  which have  elapsed in such
     Fiscal Year through the Date of Termination and the denominator of which is
     365.

1.32 "RETIREMENT"  means any Termination of Employment  after Executive  reaches
     age 57, other than for Cause and other than for Good Reason.

1.33 "SENIOR MANAGEMENT" means Executive Vice President or higher-level officers
     of PFGI in the United States.

1.34 "TARGET ANNUAL BONUS" - see Section 4.2.

1.35 "TARGET ANNUAL GOALS" - see Section 4.2.

1.36 "TAX GROSS-UP PAYMENT" means an amount payable to Executive such that after
     payment of Taxes on such amount there  remains a balance  sufficient to pay
     the Taxes being reimbursed.

1.37 "TAXES" means the  incremental  federal,  state,  local and foreign income,
     employment, excise and other taxes payable by Executive with respect to any
     applicable item of income.

1.38 "TERMINATION  FOR  GOOD  REASON"  means  a  Termination  of  Employment  by
     Executive for a Good Reason.

1.39 "TERMINATION  OF  EMPLOYMENT"  means  a  termination  by the  Companies  or
     Executive  of   Executive's   employment   with  the  Companies  and  their
     Affiliates.

1.40 "TERMINATION  WITHOUT  CAUSE"  means a  Termination  of  Employment  by the
     Companies  for  any  reason  other  than  Cause  or  Executive's  death  or
     Disability.

1.41 "VOTING  SECURITIES" of a corporation  means securities of such corporation
     that are  entitled to vote  generally  in the election of directors of such
     corporation.

1.42 "WITHHOLDING TAXES" means any federal, state, provincial,  local or foreign
     withholding  taxes and other  deductions  required to be paid in accordance
     with  applicable law by reason of  compensation  received  pursuant to this
     Agreement.

                                   ARTICLE II.

                                     DUTIES

2.1  DUTIES. PFGI shall continue to employ Executive during Employment Period as
     its Chairman,  President and Chief Executive  Officer,  and Executive shall
     have the authority,  duties, and  responsibilities  as are commensurate and
     consistent  with such  position  and  title,  and as  provided  in,  PFGI's
     by-laws.  The Parties acknowledge that as of the Agreement Date,  Executive
     also serves as Chairman,  President and Chief Executive Officer of Life. It
     is  contemplated  that, in connection with each annual meeting or action by
     written  consent in lieu thereof of stockholders of PFGI and of Life during
     the Employment Period,  the stockholders of PFGI and of Life,  respectively
     will elect  Executive to their  respective  Boards.  Executive shall report
     solely to the Board of PFGI. During the Employment Period,  Executive shall
     be the most senior  executive of PFGI and shall have broad  discretion  and
     authority to manage and direct the day-to-day affairs and operations of the
     Companies in compliance with  applicable law,  including the sole authority
     to direct the strategic  direction of the  Companies,  except to the extent
     required in  connection  with the  exercise  by the Board of its  corporate
     governance  duties and  responsibilities  under  PFGI's  by-laws  and other
     applicable  law. During the Employment  Period,  Executive shall follow the
     directives  of the Board and shall meet with the Board on a periodic  basis
     sufficient  to  enable  the  Board  to  fulfill  its  corporate  governance
     responsibilities.  All operating, staff, other executives, and divisions of
     the  Companies  shall  report  solely  to  Executive,  either  directly  or
     indirectly  through  subordinates  of  Executive  who report to  Executive.

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     During the Employment  Period,  Executive shall perform the duties assigned
     to him  hereunder,  and,  subject to  Section  2.2,  shall  devote his full
     business time,  attention and effort,  excluding any periods of disability,
     vacation,  or sick leave to which Executive is entitled,  to the affairs of
     the  Companies  and shall use his best efforts to promote the  interests of
     the  Companies.  The Executive  acknowledges  that his business time is not
     limited to a fixed number of hours per week.

2.2  OTHER  ACTIVITIES.  Executive may serve on  corporate,  civic or charitable
     boards or committees,  deliver  lectures,  fulfill speaking  engagements or
     teach  at  educational  institutions,   and  manage  personal  investments;
     provided  that such  activities  do not  individually  or in the  aggregate
     significantly  interfere with the  performance of Executive's  duties under
     this Agreement.

                                  ARTICLE III.

                                EMPLOYMENT PERIOD

3.1  EMPLOYMENT  PERIOD.  Subject  to  the  termination  provisions  hereinafter
     provided,  the term of  Executive's  employment  under this  Agreement (the
     "EMPLOYMENT  PERIOD")  shall  begin  on the  Agreement  Date and end on the
     Anniversary  Date which is three years  after such date or, if later,  such
     later  date to which the  Employment  Period is  extended  pursuant  to the
     following  sentence.  On the first  anniversary  of the Agreement  Date and
     thereafter,  the Employment Period shall be automatically extended each day
     by one day to create a new two year term until, at any time after the first
     anniversary  of the  Agreement  Date,  PFGI  delivers  written  notice  (an
     "EXPIRATION  NOTICE") to  Executive  or  Executive  delivers an  Expiration
     Notice to PFGI,  in either  case,  to the effect that the  Agreement  shall
     expire on a date specified in the Expiration Notice (the "EXPIRATION Date")
     that is not less than two years  after  the date the  Expiration  Notice is
     delivered to PFGI or the Executive,  respectively;  provided,  however, the
     Employment  Period shall  automatically  end on  Executive's  65th birthday
     (March 15,  2014) unless PFGI  delivers,  any time prior to one year before
     such date of  expiration,  written  notice to Executive  that the Agreement
     shall not so expire and shall  instead,  subject  to the prompt  consent of
     Executive,  expire (unless  further  extended by mutual  consent) on a date
     specified in such notice.  The employment of Executive by PFGI shall not be
     terminated other than in accordance with Article VI.

                                   ARTICLE IV.

                                  COMPENSATION

4.1  SALARY. Executive shall be paid in accordance with normal payroll practices
     (but not less  frequently  than  monthly)  an  annual  salary  at a rate of
     $1,000,000 per year ("BASE SALARY"). During the Employment Period, the Base
     Salary shall be reviewed  periodically  and may be  increased  from time to
     time as shall be determined by the Board, in accordance with normal Company
     administrative  practices for Senior  Management  after  consultation  with
     Executive. After any such increase, the term "BASE SALARY" shall thereafter
     refer to the increased amount.  Any increase in Base Salary shall not limit
     or reduce  any other  obligation  of the  Company to  Executive  under this
     agreement. Base Salary shall not be reduced at any time without the express
     written  consent  of  Executive;  provided  that  the  Board  may,  in  its
     discretion restructure or alter the time of payment of Base Salary in order
     to  enhance  the  deductibility  thereof,  provided  there  is no  economic
     detriment to the Executive and that the Board and Executive shall cooperate
     in good faith in such restructuring or alteration.

4.2  ANNUAL BONUS.

     (a)  Executive  shall be  eligible  to  receive  an annual  bonus  ("ANNUAL
          BONUS") in  accordance  with the terms  hereof for each  Fiscal  Year,
          which begins or ends during the Employment Period.  Executive shall be
          eligible for an Annual Bonus based upon target  performance goals (the
          "TARGET ANNUAL GOALS"), as determined by the Board on an annual basis,
          after  consultation  with  Executive  and in  accordance  with  normal
          Company administrative practices for Senior Management, which provides
          for a  payment  opportunity  of at  least  the  highest  target  level
          generally  available  to Senior  Management  under any Company  annual
          bonus plan ("TARGET ANNUAL BONUS") upon the Executive's achievement of
          the Target  Annual  Goals.  The parties  acknowledge  that,  as of the
          Agreement  Date,  the Annual Bonus is payable in  accordance  with the
          Company plan named PrinPay.

      (b) The entire Annual Bonus that is payable to Executive with respect to a
          Fiscal  Year  shall  be  paid in  cash,  or such  other  medium  as is
          generally  applicable  to  members  of Senior  Management,  as soon as

                                      177

          practicable after the appropriate Board has determined whether and the
          degree to which Target Annual Goals have been  achieved  following the
          close of such Fiscal Year. In any event,  the entire Annual Bonus that
          is payable to Executive with respect to a Fiscal Year shall be paid at
          the same  time as the  Annual  Bonus is paid to the other  members  of
          Senior  Management,  but in any event no later  than 90 days after the
          end of the Fiscal Year.

4.3  LONG-TERM INCENTIVE PLAN BONUS AND OTHER INCENTIVE COMPENSATION.  Executive
     shall have the opportunity to participate in the LTIP (if such plan exists)
     and any other incentive  compensation  plan or program  available to Senior
     Management at the highest  available level under such plan or program.  The
     appropriate  Board may  restructure or alter the time of payment of amounts
     under the LTIP or other incentive  compensation plan or program in order to
     enhance the deductibility thereof,  provided there is no economic detriment
     to the Executive and that the Board and Executive  shall  cooperate in good
     faith in such restructuring or alteration.

4.4  SAVINGS AND RETIREMENT  PLANS.  Executive  shall be eligible to participate
     during the Employment Period in any Company's savings and retirement plans,
     practices,  policies and programs, in accordance with the terms thereof, at
     the  highest  available  level,  if any,  applicable  from  time to time to
     members  of  Senior  Management,   including  any  supplemental   executive
     retirement plan.

                                   ARTICLE V.

                                 OTHER BENEFITS

5.1  WELFARE BENEFITS.  During the Employment  Period,  Executive and his family
     shall be eligible to participate in at the highest level, and shall receive
     all  benefits  under,  any  Company's  welfare  benefit  plans,  practices,
     policies and programs  provided or made generally  available by the Company
     to Senior Management (including medical, prescription,  dental, disability,
     salary continuance,  employee life, group life, dependent life,  accidental
     death and travel accident insurance plans and programs), in accordance with
     their terms as in effect from time to time.  Notwithstanding the foregoing,
     the Companies shall provide Executive with disability insurance coverage on
     terms no less  favorable to Executive than those in effect on the Agreement
     Date  (including,  without  limitation,  percentage of salary provided as a
     disability  benefit,  but subject to any maximum  limitation  on the dollar
     amount applicable to Senior Management, provided that such limitation shall
     not be  applied  to  reduce  the  dollar  amount of the  monthly  amount of
     Executive's long term disability benefit below $46,630.87). In addition, to
     the extent not covered in the first sentence of this Section 5.1, Executive
     shall  be  entitled  to  reimbursement  for an  annual  executive  physical
     examination  at the Mayo  Clinic  or  equivalent  medical  facility  of his
     choosing.

5.2  FRINGE BENEFITS.  During the Employment Period, Executive shall be entitled
     to fringe benefits generally  applicable to Senior Management in accordance
     with their terms as in effect from time to time.

5.3  VACATION. During the Employment Period, Executive shall be entitled to paid
     vacation time under the plans,  practices,  policies and programs generally
     applicable to members of Senior  Management in accordance  with their terms
     as in effect from time to time.

5.4  EXPENSES.  Executive  shall  be  promptly  reimbursed  for all  actual  and
     reasonable  employment-related  business  expenses  he  incurs  during  the
     Employment Period in accordance with any Company's practices, policies, and
     procedures   generally  applicable  to  members  of  Senior  Management  in
     accordance  with their terms as in effect from time to time,  including the
     timely submission of required receipts and accountings. In addition, at all
     times reasonably  practicable,  Executive and his spouse shall travel, both
     for  business and personal  reasons,  on aircraft  owned and operated by or
     under the  direction of the  Companies.  Spousal use of corporate  aircraft
     will be limited to trips when accompanying Executive.  Where not reasonably
     practicable,  Executive  shall be  entitled to  first-class  air travel for
     business.  Notwithstanding  the  foregoing,  no expense shall be reimbursed
     more than once, and nothing in this Agreement shall be construed to require
     the  Companies to maintain  corporate  aircraft or rent  aircraft to comply
     with this Agreement.

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                                   ARTICLE VI.

                              TERMINATION BENEFITS

6.1  TERMINATION FOR CAUSE OR OTHER THAN FOR GOOD REASON, ETC.

     (a)  If PFGI terminates Executive's employment with the Companies for Cause
          or Executive  terminates  his  employment  other than for Good Reason,
          death or  Disability,  the  Executive  shall be  entitled  to  receive
          immediately  after the Date of  Termination a lump sum amount equal to
          the sum of  Executive's  Accrued Base Salary and Accrued Annual Bonus,
          and Executive  shall not be entitled to receive any severance or other
          payment,  other than  compensation  and  benefits  which  relate to or
          derive from  Executive's  employment with the Companies on or prior to
          the Date of Termination (including,  without limitation, any deferrals
          under the LTIP) and which are otherwise payable in case of termination
          for  Cause or other  than for Good  Reason,  death or  Disability,  as
          applicable.

     (b)  Executive's  employment  may be terminated  for Cause only if (i) PFGI
          provides  Executive  (before  the Date of  Termination)  with  written
          notice of the Board meeting referred to in clause (ii) of this Section
          6.1(b) at least  twenty days prior to such  meeting and  specifies  in
          detail  in  writing  the  basis  of a  claim  of  Cause  and  provides
          Executive,  with or  without  counsel,  at  Executive's  election,  an
          opportunity  to  be  heard  and  present  arguments  and  evidence  on
          Executive's   behalf  at  such  meeting,   (ii)  the  PFGI  Board,  by
          affirmative vote of not less than 2/3 of the entire  membership of the
          PFGI   Board   (excluding   the   Executive's   vote   from  any  such
          determination)  that  the acts or  omissions  constitute  Cause  which
          Executive  failed to cure after being given an  opportunity to cure if
          required  by  Section  1.11,  and  to  the  effect  that   Executive's
          employment  should be terminated  for Cause and (iii) PFGI  thereafter
          provides  Executive a Notice of Termination  which specifies in detail
          the basis of such Termination of Employment for Cause. Nothing in this
          Section  6.1(b)  shall  preclude  the Board,  by majority  vote,  from
          suspending Executive from his duties, with pay at any time.

6.2  TERMINATION FOR RETIREMENT,  DEATH OR DISABILITY. If, before the end of the
     Employment Period, Executive's employment terminates due to his Retirement,
     death or Disability,  Executive or his  Beneficiaries,  as the case may be,
     shall be entitled to receive  immediately after the Date of Termination,  a
     lump sum  amount  which is equal  to the sum of  Executive's  Accrued  Base
     Salary,  Accrued Annual Bonus,  and Prorata Annual Bonus.  Executive's LTIP
     Bonus shall be paid according to the terms of the LTIP.

6.3  TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the event of a Termination
     Without  Cause or a Termination  for Good Reason (in either case  occurring
     during the Employment  Period),  Executive shall be entitled to receive the
     following:

     (a)  promptly  after the Date of  Termination,  (but in no event later than
          ten  business  days after the Date of  Termination)  a lump sum amount
          equal to the sum of  Executive's  Accrued Base Salary,  Accrued Annual
          Bonus and Prorata Annual Bonus;

     (b)  promptly  after the Date of  Termination,  (but in no event later than
          ten business  days after the Date of  Termination),  a lump sum amount
          equal to the product of (i) the sum of Base Salary plus Target  Annual
          Bonus for the Fiscal Year during which the Date of Termination  occurs
          (provided  that no effect  shall be given to any  reduction  in Target
          Annual Bonus that would  qualify as Good Reason if  Executive  were to
          terminate his employment on account  thereof),  and multiplied by (ii)
          three;

     (c)  for each LTIP  Performance  Period that is unexpired as of the Date of
          Termination,  Executive  shall be treated as he would be treated under
          the  LTIP  in  effect  on the  Agreement  Date  if  (i) he  terminated
          employment at age 57 other than for cause (as defined in the LTIP) and
          (ii) he retired ("LTIP Benefit");  provided that the discretion of the
          Committee  shall  not  be  exercised  so as to  treat  Executive  less
          favorably than other members of Senior  Management;  provided  further
          that if such payment  cannot be provided  under the terms of the LTIP,
          then the Company shall pay amounts equal to such LTIP Benefit, reduced
          by amounts  actually  payable  under the LTIP at the same time as they
          otherwise would have been paid;

                                      179

     (d)  the benefits  specified in Section 5.1,  except to the extent provided
          under section 6.3(e), to which Executive is entitled as of the Date of
          Termination, for two years following his Date of Termination,  subject
          to the terms of applicable plans, programs or policies;  PROVIDED that
          the  Executive  shall pay the same amount for such benefits as covered
          members of Senior  Management  who are  actively  employed  would pay;
          PROVIDED  FURTHER  that any  coverage  required  to be  offered by the
          Consolidated  Omnibus Budget  Reconciliation  Act of 1985, as amended,
          shall begin after such benefits otherwise cease hereunder;

     (e)  if the  Date of  Termination  occurs  prior  to the  Executive's  57th
          birthday, the benefits equivalent to those payable under the Principal
          Welfare Benefit Plan for Employees  calculated under the terms of such
          plan as if the Date of  Termination  occurred after  Executive's  57th
          birthday,  reduced by amounts actually payable under such plan, and if
          either Executive or the Company reasonably  believes it is likely that
          such benefits cannot be provided on a tax-favored  basis,  the Company
          shall pay the cost of the insurance premium for such benefits;

     (f)  if the Date of Termination  occurs prior to Executive's 57th birthday,
          promptly,  but in no event later than ten business days after the Date
          of  Termination,  an  amount  equal  to the  Present  Value  Actuarial
          Equivalent of the benefits to which  Executive would be entitled if he
          had reached his 57th birthday prior to his Date of Termination  and if
          he had  accrued  a number  of years  of  service  that is equal to the
          number  of years of  service  he would  have  accrued  had his Date of
          Termination  been his 57th birthday  under the Principal  Pension Plan
          for Employees,  and the  Supplemental  Executive  Retirement  Plan for
          Employees,  reduced  by the  Present  Value  Actuarial  Equivalent  of
          benefits  actually  payable under such plans calculated as though such
          plans  permitted  payment at the  Executive's  Date of  Termination by
          applying  an early  retirement  factor  that  declines by 5% (from the
          factor  utilized for  termination of employment at Executive's  actual
          age at  termination  of  employment  and  upon  commencement  of early
          retirement  at  the  earliest  retirement  age)  for  each  year  that
          Executive's  Date of  Termination  precedes  the earliest age at which
          early retirement is actually permitted under such plan;

     (g)  all  outstanding  stock  options,   stock  appreciation   rights,  and
          restricted stock shall become vested; and

     (h)  key executive level outplacement services, the provider of which shall
          be selected by Executive, up to a maximum of $10,000; provided that in
          no event  shall any  amount be  payable  to  Executive  in lieu of his
          receipt of such services.

Notwithstanding  anything  herein to the  contrary,  the  benefits  provided  in
Section 6.3 shall be provided only upon  Executive's  execution of a release and
waiver as described in Section 6.5.

6.4  OTHER  RIGHTS.  This  Agreement  shall  not  prevent  or limit  Executive's
     continuing  or future  participation  in any benefit,  bonus,  incentive or
     other  plan,  program  or  policy  provided  by the  Company  and for which
     Executive may qualify,  and shall not impair the Company's  rights to amend
     or terminate any benefit, bonus, incentive or other plan program or policy;
     provided  however  that  no  such  amendment  or  termination  shall  treat
     Executive  less  favorably  than other Senior  Management  and  Executive's
     benefits,  bonus and  incentives  in the  aggregate  shall not be  reduced.
     Amounts which are vested benefits or which Executive is otherwise  entitled
     to  receive  under any plan,  program  or policy  and any other  payment or
     benefit  required  by law at or  after  the  Date of  Termination  shall be
     payable in accordance  with such plan,  program or policy or applicable law
     except as expressly modified by this Agreement.

6.5  WAIVER AND RELEASE.  Notwithstanding  anything herein to the contrary, upon
     any Termination of Employment (other than due to death)

     (a)  the  Executive  shall  execute a release  and waiver in form  mutually
          agreed by  Executive  and the Board of PFGI (which  agreement  neither
          party shall unreasonably withhold) which releases, waives, and forever
          discharges  the  Companies,  their  Affiliates,  and their  respective
          subsidiaries,  affiliates, employees, officers, shareholders, members,
          partners, directors, agents, attorneys,  predecessors,  successors and
          assigns,  from and against any and all claims,  liabilities,  demands,
          causes of  action,  costs,  expenses,  attorneys'  fees,  damages  and
          obligations  of every kind and nature in law,  equity,  or  otherwise,

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          known  and  unknown   suspected   and   unsuspected,   disclosed   and
          undisclosed,  including but not limited to any and all such claims and
          demands directly or indirectly  arising out of or in any way connected
          with the Executive's employment with and services as a director of the
          Companies  and  their   Affiliates;   claims  or  demands  related  to
          compensation  or other  amounts  under any  compensatory  arrangement,
          stock, stock options,  or any other ownership  interests in any of the
          Companies or any Affiliate,  vacation pay,  fringe  benefits,  expense
          reimbursements,  severance benefits, or any other form of compensation
          or equity;  claims pursuant to any federal,  state, local law, statute
          of cause of action  including,  but not limited to, the federal  Civil
          Rights Act of 1964,  as amended;  the federal  Age  Discrimination  in
          Employment  Act of  1967,  as  amended;  the  federal  Americans  with
          Disabilities Act of 1990; tort law, contract law; wrongful  discharge,
          discrimination;   defamation;   harassment;   or  emotional  distress;
          provided  that  Executive's  waiver and release  shall not relieve the
          Companies  from any of the following  obligations,  to the extent they
          are to be  performed  after the date of the release  and  waiver:  (i)
          payment of amounts due under  Sections 6.1, 6.2 or 6.3, as applicable,
          (ii) any  obligations  under the second  sentence of Section  6.4, and
          (iii)  payment of any  gross-up  amount due under  Article  VIII;  and
          provided  further that (x) neither  party shall release the other from
          his or its  obligations  under  Article IX of this  agreement,  to the
          extent  such  obligations  are  to be  performed  after  the  Date  of
          Termination,  and (y) Executive  shall not be precluded from defending
          against Cause Claims (as defined in Section 6.5(b)); and

     (b)  the Company shall execute a release and waiver in form mutually agreed
          by  Executive  and the Board of PFGI (which  agreement  neither  party
          shall  unreasonably  withhold)  which  releases,  waives,  and forever
          discharges the Executive and his executors, administrators, successors
          and  assigns,  from  and  against  any  and all  claims,  liabilities,
          demands,  causes of action, costs, expenses,  attorneys' fees, damages
          and obligations of every kind and nature in law, equity, or otherwise,
          known  and  unknown,   suspected   and   unsuspected,   disclosed  and
          undisclosed,  including but not limited to any and all such claims and
          demands directly or indirectly  arising out of or in any way connected
          with the Executive's employment with and services as a director of the
          Companies  and  their  Affiliates,   but  excluding  any  such  claims
          liabilities,  demands,  causes of action, costs, expenses,  attorneys'
          fees,  damages or  obligations  arising out of or in any way connected
          with events,  acts or conduct  giving rise to or in any way  connected
          with Executive's Termination of Employment for Cause ("Cause Claims"),
          provided, however, that (i) neither party shall release the other from
          his or its  obligations  under  Article IX of this  agreement,  to the
          extent  such  obligations  are  to be  preformed  after  the  Date  of
          Termination,  and (ii) Executive shall not be precluded from defending
          against Cause Claims.

     (c)  Executive  hereby  agrees  that the  execution  of this  Agreement  is
          adequate consideration for the execution of such a release, and hereby
          acknowledges that the Companies would not have executed this Agreement
          had Executive not agreed to execute such a release.

                                  ARTICLE VII.

                             RESTRICTIVE COVENTANTS

7.1  NON-COMPETITION.  Executive  shall  not  at  any  time  during  the  period
     beginning on the Agreement Date and ending on the third  anniversary of the
     Date of  Termination  (whether or not during the Term),  regardless  of the
     reasons for such termination, directly or indirectly, in any capacity:

     (a)  engage or participate  in, become employed by, serve as a director of,
          or render advisory or consulting or other services in connection with,
          any Competitive  Business;  provided,  however, that after the Date of
          Termination  this Section  7.1(a) shall not  preclude  Executive  from
          being an  employee  of,  or  consultant  to,  any  business  unit of a
          Competitive  Business if (i) such  business unit does not qualify as a
          Competitive Business in its own right and (ii) Executive does not have
          any direct or indirect  involvement  in, or  responsibility  for,  any
          operations of such Competitive  Business that cause it to qualify as a
          Competitive Business; or

     (b)  make or retain any financial investment, whether in the form of equity
          or debt, or own any interest, in any Competitive  Business;  provided,
          however, that nothing in this subsection shall restrict Executive from
          making an investment in any  Competitive  Business if such  investment
          (i)  represents no more than 1% of the  aggregate  market value of the
          outstanding  capital stock or debt (as applicable) of such Competitive

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          Business, (ii) does not give Executive any right or ability,  directly
          or  indirectly,  to  control or  influence  the  policy  decisions  or
          management of such Competitive  Business,  and (iii) does not create a
          conflict of interest between  Executive's  duties under this Agreement
          and his interest in such investment.

7.2  NON-SOLICITATION.  Executive  shall  not  at any  time  during  the  period
     beginning on the Agreement Date and ending on the third  anniversary of the
     Date of  Termination  (whether or not during the Term),  regardless  of the
     reasons for such termination, directly or indirectly:

     (a)  other than in connection with the good-faith performance of his duties
          as an officer of any of the Companies, encourage any employee or agent
          of the Companies or any Affiliate to terminate his  relationship  with
          any of the Companies or any Affiliate;

     (b)  solicit the employment of or the engagement as a consultant or advisor
          of, any  employee or agent of any of the  Companies  or any  Affiliate
          (other than by the Company or an Affiliate), or cause or encourage any
          Person to do any of the foregoing;

     (c)  establish (or take preliminary steps to establish) a business with, or
          encourage others to establish (or take preliminary steps to establish)
          a  business  with,  any  employee  or  agent  of  the  Company  or any
          Affiliate; or

     (d)  interfere  with the  relationship  of any of the  Companies  with,  or
          endeavor to entice away from any of the  Companies,  any Person who or
          which at any time during the period  commencing  one year prior to the
          Agreement Date was or is a material client or material supplier of, or
          maintained a material business relationship with, any of the Companies
          or an Affiliate.

7.3  CONFIDENTIALITY.   The  Executive   acknowledges  that  in  the  course  of
     performing  services  for the  Companies  and  Affiliates,  he may  create,
     develop,  learn of, receive or contribute  non-public  information,  ideas,
     processes,  methods, designs, devices,  inventions,  data, models and other
     information  relating  to the  Companies  and  their  Affiliates  or  their
     products, services, businesses, operations, employees or customers, whether
     in tangible or intangible  form, and that the Companies or their Affiliates
     desire to protect and keep secret and confidential, including trade secrets
     and information  from third parties that the Companies or their  Affiliates
     are   obligated   to  keep   confidential   ("CONFIDENTIAL   INFORMATION").
     Confidential  Information  shall not include:  (i)  information  that is or
     becomes  generally  known through no fault of Executive;  (ii)  information
     received  from a third  party  outside of the  Company  that was  disclosed
     without a breach of any  confidentiality  obligation;  or (iii) information
     approved for release by written authorization of the Company. The Executive
     recognizes that all such Confidential Information is the sole and exclusive
     property of the  Companies  and their  Affiliates,  and that  disclosure of
     Confidential  Information  would cause  damage to the  Companies  and their
     Affiliates.  The Executive agrees that, except as required by the duties of
     his  employment  with  any of the  Companies  or any of  their  and/or  its
     Affiliates and except in connection with enforcing the  Executive's  rights
     under this Agreement or if compelled by a court or governmental  agency, in
     each case provided that

     prior written notice is given to PFGI, he will not,  without the consent of
     PFGI, willfully disseminate or otherwise disclose,  directly or indirectly,
     any Confidential Information obtained during his employment with any of the
     Companies or their Affiliates,  and will take all necessary  precautions to
     prevent  disclosure,  to any  unauthorized  individual  or entity inside or
     outside  the  Company,  and will not use the  Confidential  Information  or
     permit its use for the benefit of  Executive  or any other person or entity
     other  than  the  Companies  or the  Affiliates.  These  obligations  shall
     continue  during  and  after  the  termination  of  Executive's  employment
     (whether or not during the Employment Period).

7.4  INTELLECTUAL  PROPERTY.  During  the  employment  period,  Executive  shall
     disclose  immediately  to the Company all ideas,  inventions  and  business
     plans that he makes, conceives,  discovers or develops alone or with others
     during  the  course  of his  employment  with the  Company,  including  any
     inventions,   modifications,   discoveries,   developments,   improvements,
     computer  programs,  processes,  products  or  procedures  (whether  or not
     protectable upon application by copyright,  patent, trademark, trade secret
     or other  proprietary  rights)  ("WORK  PRODUCT")  that:  (i) relate to the
     business of the  Company or any  customer or supplier to the Company or any
     of  the  products  or  services  being  developed,  manufactured,  sold  or
     otherwise  provided  by the  Company  or  that  may  be  used  in  relation
     therewith;  or (ii) result from tasks assigned to Executive by the Company;
     or (iii) result from the use of the premises or personal  property (whether
     tangible or  intangible)  owned,  leased or contracted  for by the Company.

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     Executive agrees that any Work Product shall be the property of the Company
     and, if subject to  copyright,  shall be  considered a "work made for hire"
     within the meaning of the Copyright Act of 1976, as amended (the "ACT"). If
     an to the extent that any such Work Product is found as a matter of law not
     to be a "work  made for hire"  within  the  meaning  of the Act,  Executive
     expressly  assigns to the Company all right,  title and  interest in and to
     the Work  Product,  and all  copies  thereof,  and the  copyright,  patent,
     trademark,  trade  secret  and all  their  proprietary  rights  in the Work
     Product,  without  further  consideration,  free from any  claim,  lien for
     balance due or rights of retention thereto on the part of Executive.

     (a)  The Company hereby  notifies  Executive  that the preceding  paragraph
          does not apply to any  inventions  for which no  equipment,  supplies,
          facility,  or trade  secret  information  of the  Company was used and
          which was developed  entirely on the Executive's own time, unless: (i)
          the  invention  relates (a) to the Company's  business,  or (b) to the
          Company's actual or demonstrably  anticipated research or development,
          or (ii) the invention results form any work performed by the Executive
          for the Company.

     (b)  Executive  agrees that upon disclosure of Work Product to the Company,
          Executive will,  during his employment and at any time thereafter,  at
          the request and cost of the Company,  execute all such  documents  and
          perform all such acts as the Company or its duly authorized agents may
          reasonably  require:  (i) to apply for, obtain and vest in the name of
          the  Company  alone  (unless the Company  otherwise  directs)  letters
          patent,  copyrights  or  other  analogous  protection  in any  country
          throughout  the  world,  and when so  obtained  or vested to renew and
          restore the same;  and (ii) to defend any  opposition  proceedings  in
          respect  of  such  applications  and  any  opposition  proceedings  or
          petitions or  applications  for  revocation  of such  letters  patent,
          copyright or other analogous protection.

     (c)  In the event that the Company is unable,  after reasonable  effort, to
          secure  Executive's  signature  on any letters  patents,  copyright or
          other analogous  protection relating to Work Product,  whether because
          of Executive's  physical or mental  incapacity or for any other reason
          whatsoever,  Executive hereby irrevocably  designates and appoints the
          Company and its duly  authorized  officers and agents as his agent and
          attorney-in-fact,  to act for and on his behalf to executive  and file
          any such  application  or  applications  and to do all other  lawfully
          permitted  acts to further  the  prosecution  and  issuance of letters
          patent,  copyright and other analogous  protection with the same legal
          force and effect as if personally executed by Executive.

7.5  REASONABLENESS OF RESTRICTIVE COVENANTS.

     (a)  Executive  acknowledges that the covenants  contained in Sections 7.1,
          7.2,  7.3  and 7.4  are  reasonable  in the  scope  of the  activities
          restricted,  the geographic area covered by the restrictions,  and the
          duration of the  restrictions,  and that such covenants are reasonably
          necessary  to  protect  the   Companies'   relationships   with  their
          employees, clients and suppliers.  Executive further acknowledges such
          covenants are essential  elements of this  Agreement and that, but for
          such  covenants,  the  Companies  would  not have  entered  into  this
          Agreement.

     (b)  The Companies and Executive have each consulted with their  respective
          legal counsel and have been advised  concerning the reasonableness and
          propriety  of  such  covenants.   Executive   acknowledges   that  his
          observance  of the  covenants  contained in Sections 7.1, 7.2, 7.3 and
          7.4 will not  deprive him of the  ability to earn a  livelihood  or to
          support his dependents.

7.6  RIGHTS TO INJUNCTION; SURVIVAL OF UNDERTAKINGS.

     (a)  In recognition of the necessity of the limited restrictions imposed by
          Sections  7.1,  7.2, 7.3 and 7.4,  the parties  agree that it would be
          impossible  to  measure  solely in money the  damages  that any of the
          Companies  would  suffer  if  Executive  were  to  breach  any  of his
          obligations  under  such  Sections.  Executive  acknowledges  that any
          breach of any provision of such Sections would irreparably  injure the
          Companies.  Accordingly,  Executive  agrees that any of the  Companies
          shall be  entitled,  in addition  to any other  remedies to which such
          Company may be  entitled  under this  Agreement  or  otherwise,  to an
          injunction  to be  issued  by a court of  competent  jurisdiction,  to
          restrain any actual breach, or threatened  breach, of such provisions,

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          and  Executive  hereby waives any right to assert any defense that any
          of the Companies has an adequate remedy at law for any such breach.

     (b)  If a court  determines  that  any of the  covenants  included  in this
          Article  VII are  unenforceable  in whole or in part  because  of such
          covenant's  duration or  geographical  or other scope,  such court may
          modify the duration or scope of such provision, as the case may be, so
          as to cause such covenant as so modified to be enforceable.

     (c)  All  of  the   provisions  of  this  Article  VII  shall  survive  any
          Termination  of Employment  without regard to (i) the reasons for such
          termination or (ii) the expiration of the Employment Period.

     (d)  No  Company  shall  have  any  further  obligation  to pay or  provide
          severance or benefits under Section 6.3 if a court determines that the
          Executive has breached any covenant in this Article VII.

                                  ARTICLE VIII.

                   CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

8.1  TAX  GROSS-UP  PAYMENT.  If at any  time or from  time to time it  shall be
     determined that any payment to Executive  pursuant to this Agreement or any
     other  payment or benefit  ("POTENTIAL  PARACHUTE  PAYMENT")  hereunder  or
     otherwise would be subject to the excise tax imposed by Section 4999 of the
     Code or any similar tax payable  under any United  States  federal,  state,
     local,  foreign or other law ("EXCISE  TAX"),  then Executive shall receive
     and PFGI shall pay or cause to be paid a Tax Gross-Up  Payment with respect
     to all such excise  taxes and other  Taxes;  provided,  however,  that this
     Article  VIII  shall be subject  in its  entirety  to any Change of Control
     agreement with  Executive  entered after the Agreement Date by the Company.
     The Tax Gross-Up  Payment is intended to compensate  Executive for all such
     excise  taxes and any  federal,  state,  local,  foreign  or other  income,
     employment,  or excise  taxes or other  taxes  payable  by  Executive  with
     respect to the Tax Gross-Up Payment.

8.2  LIMITATIONS ON GROSS-UP PAYMENTS.

     (a)  Notwithstanding  any other  provision  of this  Article  VIII,  if the
          aggregate  After-Tax  Amount  (as  defined  below)  of  the  Potential
          Parachute Payments and Tax Gross-Up Payment that, but for this Section
          8.2, would be payable to Executive,  does not exceed 120% of After-Tax
          Floor Amount (as defined below), then no Tax Gross-Up Payment shall be
          made to Executive  and the  aggregate  amount of  Potential  Parachute
          Payments  payable to  Executive  shall be  reduced  (but not below the
          Floor Amount) to the largest amount which would both (i) not cause any
          Excise Tax to be payable by Executive and (ii) not cause any Potential
          Parachute  Payments to be come  nondeductible by the Company by reason
          of Section 280G of the Code (or any successor provision). For purposes
          of the preceding sentence,  Executive shall be deemed to be subject to
          the highest effective after-tax marginal rate of Taxes.

     (b)  For purposes of this Agreement:

          (i)  "AFTER-TAX  AMOUNT" means the portion of a specified  amount that
               would  remain  after  payment  of all Taxes  paid or  payable  by
               Executive in respect of such specified amount; and

          (ii) "FLOOR  AMOUNT"  means the greatest  pre-tax  amount of Potential
               Parachute  Payments  that  could  be  paid to  Executive  without
               causing  Executive  to  become  liable  for any  Excise  Taxes in
               connection therewith; and
          (iii)"AFTER-TAX  FLOOR AMOUNT" means the After-Tax Amount of the Floor
               Amount.

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                                   ARTICLE IX.

                                  MISCELLANEOUS

9.1  APPROVALS. The Companies represent and warrant to Executive they have taken
     all corporate action necessary to authorize this Agreement.

9.2  NO  MITIGATION.  In no event shall  Executive  be  obligated  to seek other
     employment  or take any other  action to mitigate  the  amounts  payable to
     Executive  under any of the  provisions  of this  Agreement,  nor shall the
     amount of any payment hereunder be reduced by any compensation  earned as a
     result of  Executive's  employment  by another  employer,  except  that any
     continued  welfare  benefits  provided  for by  Section  6.3(d)  shall  not
     duplicate  any benefits  that are  provided to Executive  and his family by
     such other employer and shall be secondary to any coverage provided by such
     other employer.

     The  Companies'  obligation  to  make  the  payments  provided  for in this
     Agreement and otherwise perform the obligations hereunder shall not (unless
     Executive  is  terminated  for  Cause) be  affected  by any  circumstances,
     including set-off, counterclaim,  recoupment, defense or other claim, right
     or action, which the Companies may have against Executive.

9.3  ENFORCEMENT.

     (a)  The Company shall  promptly  reimburse  Executive  for all  attorneys'
          fees, costs and expenses  incurred by Executive in connection with the
          negotiation, execution and delivery of this agreement, up to a maximum
          of $18,000. If Executive incurs legal,  accounting,  expert witness or
          other fees, costs or expenses  (including  arbitration  fees, costs or
          expenses) in an effort to secure, preserve,  establish entitlement to,
          or obtain  compensation or benefits under this Agreement,  the Company
          shall promptly  reimburse  Executive for such fees, costs and expenses
          whether or not Executive is  successful;  provided,  however,  that no
          reimbursement shall be made of such expenses if Executive's  assertion
          of rights  was in bad  faith and  Executive  does not  prevail  (after
          exhaustion of all available judicial remedies).

     (b)  If the Companies  fail to pay any amount  provided under any provision
          of this  Agreement  when  due,  the  Executive  shall be  entitled  to
          interest,  compounded  monthly,  on such amount at a rate equal to the
          lesser of (i) (A) the highest rate of interest charged by the relevant
          Company's principal lender on its revolving credit agreements,  or (B)
          in the absence of such a lender,  the prime  commercial  lending  rate
          announced  THE WALL STREET  JOURNAL in effect from time to time during
          the period of such nonpayment, or (ii) the highest legally-permissible
          interest rate allowed to be charged under applicable law.

9.4  INDEMNIFICATION AND INSURANCE.  The Executive shall be indemnified and held
     harmless by the Companies to the greatest extent permitted under applicable
     Iowa law as the same now exists or may  hereafter be amended  (but,  in the
     case of any such amendment,  only to the extent that such amendment permits
     a Company to provide  broader  indemnification  that was permitted prior to
     such amendment) and the Companies'  respective by-laws as such exist on the
     Agreement  Date if the  Executive  was, is, or is  threatened to be, made a
     party to any pending,  completed or threatened action,  suit,  arbitration,
     alternate  dispute  resolution  mechanism,  investigation,   administrative
     hearing or any other proceeding whether civil, criminal,  administrative or
     investigative,  and whether formal or informal,  by reason of the fact that
     the  Executive  is or was,  or had agree to become,  a  director,  officer,
     employee,  agent,  or  fiduciary of a Company or any other entity which the
     Executive  is or was  serving at the  request of a Company  ("PROCEEDING"),
     against all expenses  (including  all reasonable  attorneys'  fees) and all
     claims,  damages,  liabilities  and  losses  incurred  or  suffered  by the
     Executive or to which the  Executive may become  subject for any reason.  A
     Proceeding  shall not include any  proceeding  to the extent it concerns or
     relates  to a  matter  described  in  Section  9.3(a).  Upon  receipt  from
     Executive of (i) a written  request for an advancement  of expenses,  which
     Executive reasonably believes will be subject to indemnification  hereunder
     and (ii) a written undertaking by Executive to repay any such amounts if it
     shall   ultimately  be  determined   that  Executive  is  not  entitled  to
     indemnification  under this  Agreement or otherwise,  the  Companies  shall
     advance such expenses to Executive or pay such expenses for Executive,  all
     in advance of the final disposition of any such matter.  During Executive's
     employment and thereafter,  Companies shall provide Executive with coverage
     under a director's and officer's  liability  insurance policy in amounts no
     less than,  and on terms no less  favorable  than,  those provide to senior
     executive officers and directors of the Companies on the Agreement Date and

                                      185

     in amounts no less than,  and on terms no less  favorable  than  those,  as
     provided to senior  executive  officers and directors of the Companies from
     time to time.

9.5  COOPERATION  WITH REGARD TO LITIGATION.  The Executive  agrees to cooperate
     with the Companies during his employment with any of the Companies (whether
     or not during the Employment  Period) and thereafter  (including  following
     Executive's  termination  of  employment  for any  reason,  whether  or not
     pursuant to this  Agreement)  by making  himself  reasonably  available  to
     testify on behalf of the Companies or their Affiliates, in any action, suit
     or proceeding,  whether civil, criminal,  administrative,  or investigative
     and to assist each  Company or any of its  Affiliates  in any such  action,
     suit,  or proceeding by providing  information  and meeting and  consulting
     with the Board of such Company or  Affiliate or counsel or  representatives
     or counsel to the Company or its Affiliates, as reasonably requested by the
     Board or such counsel. The Executive shall be entitled to reimbursement for
     any expenses (including legal fees) reasonably incurred by the Executive in
     connection  with his  compliance  with the  foregoing  covenant;  provided,
     however,  that  during the  Employment  Period the  Executive  shall not be
     reimbursed for his time spent in connection  with his  compliance  with the
     foregoing  covenant.  The  Companies  agree to pay  Executive a per diem of
     $3,500 per day for each day of service (including travel days) performed by
     Executive  in  accordance  with this Section  after  Executive is no longer
     employed by the Companies.

9.6  BENEFICIARY.  If  Executive  dies  prior to  receiving  all of the  amounts
     payable  to him in  accordance  with  the  terms  and  conditions  of  this
     Agreement,  such amounts shall be paid to the  beneficiary  ("BENEFICIARY")
     designated by Executive in writing to the Company  during his lifetime,  or
     if no such Beneficiary is designated,  to Executive's estate. Such payments
     shall be made in a lump sum to the extent so payable and, to the extent not
     payable in a lump sum, in accordance with the terms of this Agreement. Such
     payments  shall not be less than the  amount  payable  to  Executive  as if
     Executive  had lived to the date of payment and were the payee.  Executive,
     without the consent of any prior Beneficiary, may change his designation of
     Beneficiary or Beneficiaries at any time or from time to time by submitting
     to the Company a new designation in writing.

9.7  ASSIGNMENT;  SUCCESSORS. This Agreement is personal to Executive and he may
     not assign his duties or  obligations  under it. No Company  may assign its
     respective  rights and obligations  under this Agreement  without the prior
     written  consent  of  Executive,  except to a  successor  to the  Company's
     business,  which expressly assumes the Company's  obligations  hereunder in
     writing.  This Agreement  shall be binding upon and inure to the benefit of
     Executive, his estate and Beneficiaries, the Companies and their successors
     and permitted  assigns.  Each Company shall require any successor to all or
     substantially  all of the business  and/or assets of such Company,  whether
     direct or indirect,  by purchase,  merger,  consolidation,  acquisition  of
     stock,  or  otherwise,  expressly  to  assume  and  agree to  perform  this
     Agreement in the same manner and to the same extent as such  Company  would
     be required to perform if no such succession had taken place.

9.8  NON-ALIENATION.  Except as is otherwise expressly provided herein, benefits
     payable  under  this  Agreement  shall  not be  subject  in any  manner  to
     anticipation,  alienation, sale, transfer, assignment, pledge, encumbrance,
     charge,  garnishment,  execution or levy of any kind,  either  voluntary or
     involuntary,  prior to actually being  received by Executive,  and any such
     attempt to  dispose of any right to  benefits  payable  hereunder  shall be
     void.

9.9  SEVERABILITY.  If all or any  part  of this  Agreement  is  declared  to be
     unlawful or invalid,  such  unlawfulness  or invalidity  shall not serve to
     invalidate  any portion of this  Agreement  not  declared to be unlawful or
     invalid.  Any  provision  so declared to be unlawful or invalid  shall,  if
     possible,  be  construed in a manner which will give effect to the terms of
     such provision to the fullest extent  possible while  remaining  lawful and
     valid.

9.10 AMENDMENT;  WAIVER.  This Agreement shall not be amended or modified except
     by written  instrument  executive  by PFGI and  Executive.  A waiver of any
     term, covenant or condition contained in this Agreement shall not be deemed
     a waiver of any other term,  covenant or  condition,  and any waiver of any
     default  in any such  term,  covenant  or  condition  shall not be deemed a
     waiver of any later  default  thereof  or of any other  term,  covenant  or
     condition.

9.11 ARBITRATION.  Any  dispute,  controversy  or  claim  arising  out  of or in
     connection  with or  relating  to this  Agreement  or any breach or alleged
     breach thereof shall be submitted to and settled by binding  arbitration in
     Des Moines,  Iowa, in accordance with the Commercial  Arbitration  Rules of
     the American  Arbitration  Association  (or at any other place or under any

                                      186

     other form of arbitration  mutually acceptable to the parties so involved).
     Any  dispute,  controversy  or  claim  submitted  for  resolution  shall be
     submitted to three (3) arbitrators, each of whom is a nationally recognized
     executive  compensation  specialist.  The Company  involved in the dispute,
     controversy  or claim,  or PFGI if more than one  Company  is so  involved,
     shall select one arbitrator,  the Executive shall select one arbitrator and
     the third arbitrator  shall be selected by the first two  arbitrators.  Any
     award  rendered  shall be final  and  conclusive  upon  the  parties  and a
     judgment  thereon may be entered in the highest court of a forum,  state or
     federal,  having  jurisdiction.  The expenses of the  arbitration  shall be
     borne  according  to Section  9.3,  except  that in the  discretion  of the
     arbitrators any award may include the fees and costs of a party's attorneys
     if the  arbitrator  expressly  determines  that the party against whom such
     award  is  entered  has  caused  the  dispute,  controversy  or claim to be
     submitted  to  arbitration  in  bad  faith  or  as a  dilatory  tactic.  No
     arbitration  shall be commenced after the date when institution of legal or
     equitable proceedings based upon such subject matter would be barred by the
     applicable statute of limitations. Notwithstanding anything to the contrary
     contained in this Section 9.11 or elsewhere in this Agreement, either party
     may bring an  action in the Iowa  District  Court for Polk  County,  or the
     United  State  District  Court  for  the  Southern  District  of  Iowa,  if
     jurisdiction  there lies,  in order to maintain  the status quo ante of the
     parties.   The  "status  quo  ante"  is  defined  as  the  last  peaceable,
     uncontested status between the parties. However, neither the party bringing
     the action nor the party  defending the action  thereby waives its right to
     arbitration  of any  dispute,  controversy  or claim  arising  out of or in
     connection or relating to this Agreement.  Notwithstanding  anything to the
     contrary  contained in this  Section  9.11 or elsewhere in this  Agreement,
     either  party  may  seek  relief  in  the  form  of  specific  performance,
     injunctive  or other  equitable  relief in order to enforce the decision of
     the  arbitrator.  The  parties  agree  that  in any  arbitration  commenced
     pursuant to this Agreement, the parties shall be entitled to such discovery
     (including  depositions,  requests  for the  production  of  documents  and
     interrogatories) as would be available in a federal district court pursuant
     to Rules 26  through 37 of the  Federal  Rules of Civil  Procedure.  In the
     event that  either  party fails to comply  with its  discovery  obligations
     hereunder,  the arbitrator(s) shall have full power and authority to compel
     disclosure or impose  sanctions to the full extent of Rule 37, Fed. R. Civ.
     P.

9.12 NOTICES.  All notices  hereunder shall be in writing and delivered by hand,
     by   nationally-recognized   delivery  service  that  guarantees  overnight
     delivery,  or by first-class,  registered or certified mail, return receipt
     requested, postage prepaid, addressed as follows:

         If to a Company, to:       Principal Financial Group, Inc.
                                    711 High Street
                                    Des Moines, Iowa  50392
                                    Attention:  Karen Shaff
                                    Facsimile No.:  (515) 235-9852

         With Copy to:              Pamela Baker, Esq.
                                    Sonnenschein Nath & Rosenthal
                                    8000 Sears Tower
                                    Chicago, Illinois  60606
                                    Facsimile No.:   (312) 876-7934

         If to Executive, to:       (at his most recent home address or
                                    facsimile number on file with the Company)

         With copy to:              Susan J. Daley
                                    Altheimer & Gray
                                    10 South Wacker Drive
                                    Suite 4000
                                    Chicago, Illinois 60606
                                    Facsimile No.:   (312) 715-4800

Either  party may from time to time  designate a new address by notice  given in
accordance with this Section.  Notice shall be effective when actually  received
by the addressee.

                                      187

9.13 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each
     of which shall be deemed to be an original,  but all of which together will
     constitute one and the same instrument.

9.14 CAPTIONS.  The captions of this  Agreement are not a part of the provisions
     hereof and shall have no force or effect.

9.15 ENTIRE  AGREEMENT.  This Agreement forms the entire  agreement  between the
     parties  hereto  with  respect  to  the  subject  matter  contained  in the
     Agreement  and  shall   supersede  all  prior   agreements,   promises  and
     representations  regarding  employment,  compensation,  severance  or other
     payments  contingent upon termination of employment,  whether in writing or
     otherwise.

9.16 APPLICABLE  LAW.  This  Agreement  shall be  interpreted  and  construed in
     accordance with the laws of the State of Iowa, without regard to its choice
     of law principles.

9.17 SURVIVAL  OF  EXECUTIVE'S  RIGHTS.  All of  Executive's  rights  hereunder,
     including  his rights to  compensation  and benefits,  and his  obligations
     under Article VIII hereof,  shall survive the  termination  of  Executive's
     employment or the termination of this Agreement.

9.18 JOINT AND SEVERAL LIABILITY.  The obligations of the Companies to Executive
     under  this  Agreement  shall  be  joint  and several.

IN WITNESS  WHEREOF,  the parties have executed this Agreement on the date first
above written.

                          PRINCIPAL FINANCIAL GROUP, INC.

                          By:      ___________________________________________
                          Its:     Chairman, Human Resources Committee of the
                                   Board of Directors

                          PRINCIPAL LIFE INSURANCE COMPANY

                          By:      ___________________________________________
                          Its:     Chairman, Human Resources Committee of the
                                   Board of Directors

                          PRINCIPAL FINANCIAL SERVICES, INC.

                          By:      ___________________________________________
                          Its:     Chairman, Human Resources Committee of the
                                   Board of Directors

                          J. BARRY GRISWELL

                          /s/ J. BARRY GRISWELL
                          -------------------------------------------

                                      188

                                                                   EXHIBIT 10.9

                          CHANGE-OF-CONTROL SUPPLEMENT

                      AND AMENDMENT TO EMPLOYMENT AGREEMENT

                                       FOR

                                J. BARRY GRISWELL

                                      189

Article I. Certain Definitions

   1.1   Accrued LTIP Bonus
   1.2   Accrued Obligations
   1.3   Annual Performance Period
   1.4   Article
   1.5   Beneficial Owner
   1.6   Board
   1.7   Bonus Plan
   1.8   Cause
   1.9   Change of Control
   1.10  Company
   1.11  Company Certificate
   1.12  Consummation Date
   1.13  Continuity of Ownership
   1.14  Effective Date
   1.15  Employment Agreement
   1.16  Exchange Act
   1.17  Excise Taxes
   1.18  Good Reason
   1.19  Gross-Up Multiple
   1.20  Gross-Up Payment
   1.21  Imminent Control Change
   1.22  Imminent Control Change Period
   1.23  including
   1.24  IRS
   1.25  IRS Claim
   1.26  LTIP
   1.27  LTIP Award
   1.28  LTIP Performance Period
   1.29  LTIP Target Award
   1.30  LTIP Outstanding Award
   1.31  Lump Sum Value
   1.32  Maximum Annuity
   1.33  Merger of Equals
   1.34  Merger of Equals Cessation Date
   1.35  New LTIP
   1.36  Notice of Consideration
   1.37  PFGI Incumbent Directors
   1.38  Plans
   1.39  Post-Change Employment Period
   1.40  Post-Merger of Equals Period
   1.41  Potential Parachute Payment
   1.42  Pro-rata Annual Bonus
   1.43  Pro-rata LTIP Bonus
   1.44  Refund Claim
   1.45  Reorganization Transaction
   1.46  Restricted Shares
   1.47  SEC
   1.48  SEC Person
   1.49  Section
   1.50  SERP
   1.51  tock Options
   1.52  Supplement Date
   1.53  Supplement Term
   1.54  Surviving Corporation
   1.55  Target Annual Bonus

                                      190

   1.56  Taxes
   1.57  Termination Date
   1.58  Termination of Employment
   1.59  25% Owner
   1.60  Voting Securities

Article II. Post-Change Employment Period
   2.1   Position and Duties
   2.2   Compensation
   2.3   Stock Incentive Awards
   2.4   Unfunded Deferred Compensation
   2.5   Pro-rata Annual Bonus
   2.6   Pro-rata LTIP Bonus

Article III. Termination of Employment
   3.1   Disability
   3.2   Death
   3.3   Termination for Cause
   3.4   Good Reason

Article IV. Company's Obligations Upon Certain Terminations of Employment
   4.1   Termination During the Post-Change Employment Period
   4.2   Termination During a Post-Merger of Equals Period
   4.3   Termination During an Imminent Control Change Period (with no Change
         of Control)
   4.4   Termination During an Imminent Control Change Period (which Culminates
         in a Change of Control)
   4.5   Waiver and Release
   4.6   Termination by the Company for Cause
   4.7   Termination by Executive Other Than for Good Reason
   4.8   Termination by the Company for Disability
   4.9   If upon Death
   4.10  Executive's Election to Waive

Article V. Certain Additional Payments by the Company
   5.1   Gross-Up Payment
   5.2   Limitation on Gross-Up Payments
   5.3   Additional Gross-up Amounts
   5.4   Amount Increased or Contested
   5.5   Refunds

Article VI. Expenses, Interest and Dispute Resolution
   6.1   Legal Fees and Other Expenses
   6.2   Interest
   6.3   Binding Arbitration

Article VII. No Set-off or Mitigation; No Double Payment
   7.1   No Set-off by Company
   7.2   No Mitigation
   7.3   No Double Payment

Article VIII. Non-Exclusivity of Rights
   8.1   Waiver of Certain Other Rights
   8.2   Other Rights
   8.3   No Right to Continued Employment

                                      191

Article IX. Miscellaneous
   9.1   No Assignability
   9.2   Successors
   9.3   Payments to Beneficiary
   9.4   Non-Alienation of Benefits
   9.5   Severability
   9.6   Amendments
   9.7   Notices
   9.8   Continuing Validity of Employment Agreement
   9.9   Counterparts
   9.10  Governing Law
   9.11  Captions
   9.12  Number and Gender
   9.13  Tax Withholding
   9.14  Waiver
   9.15  Joint and Several Liability
   9.16  Entire Agreement

                                      192

                          CHANGE-OF-CONTROL SUPPLEMENT

                      AND AMENDMENT TO EMPLOYMENT AGREEMENT

                                       FOR

                                J. BARRY GRISWELL

THIS  CHANGE  OF  CONTROL  SUPPLEMENT  and  AMENDMENT  TO  EMPLOYMENT  AGREEMENT
("SUPPLEMENT AND AGREEMENT")  dated as of April 1, 2004 (the "SUPPLEMENT  DATE")
is made by and among Principal  Financial Group,  Inc., a Delaware  corporation,
(together with all successors  thereto, " PFGI"),  Principal Financial Services,
Inc.,  an Iowa  corporation,  and  Principal  Life  Insurance  Company,  an Iowa
corporation  (together  with  all  successors  thereto,  "LIFE")  (each  of  the
foregoing   referred  to   individually   as  a  "COMPANY"  or  collectively  as
"COMPANIES"), and J. Barry Griswell ("EXECUTIVE"). This Supplement and Agreement
supersedes  the  Change  of  Control  Supplement  and  Amendment  to  Employment
Agreement between Principal Mutual Holding Company,  Principal  Financial Group,
Inc., Principal Financial Services, Inc. and Principal Life Insurance Company
and Executive dated October 19, 2000.

                                    RECITALS

The Companies have  determined that it is in the best interests of the Companies
and their  stockholders  to assure that the  Companies  will have the  continued
service of Executive.  The Companies also believe it is imperative to reduce the
distraction  of  Executive  that would  result from the  personal  uncertainties
caused by a pending  or  threatened  change of  control  of PFGI,  to  encourage
Executive's  full  attention  and  dedication to the  Companies,  and to provide
Executive with  compensation and benefits  arrangements upon a change of control
which  ensure that the  expectations  of  Executive  will be  satisfied  and are
competitive  with those of  similarly-situated  businesses.  This Supplement and
Amendment is intended to accomplish these  objectives,  and to amend Executive's
Employment  Agreement  with  the  Companies  dated as of  April  1,  2004  (such
agreement  as  amended  from  time to  time,  and any  successors  thereto,  the
"EMPLOYMENT  AGREEMENT") in order to coordinate it with certain  provisions that
apply in the event of a Change of Control or IMMINENT CHANGE OF CONTROL.

                                   ARTICLE I.

                               CERTAIN DEFINITIONS
As used in this  Supplement and Amendment,  the terms specified below shall have
the following meanings:

1.1  "ACCRUED  LTIP BONUS"  means the amount of any LTIP Bonus earned but either
     deferred or not paid on or prior to the  Effective  Date,  Merger of Equals
     Cessation Date, or Termination Date, as applicable.

1.2  "ACCRUED OBLIGATIONS" means, as of any date, the sum of Executive's Accrued
     Base Salary,  Accrued  Annual  Bonus,  Accrued LTIP Bonus,  any accrued but
     unpaid paid time off, and any other amounts and benefits which are then due
     to be paid or provided to Executive  by the Company,  but have not yet been
     paid or provided (as applicable).

1.3  "ANNUAL PERFORMANCE PERIOD" -- see Section 2.2(b).

1.4  "ARTICLE" means, unless the context otherwise requires,  an article of this
     Supplement and Amendment.

                                      193

1.5  "BENEFICIAL  OWNER"  means  such term as  defined  in Rule 13d-3 of the SEC
     under the Exchange Act.

1.6  "BOARD"  means  the  Board of  Directors  of PFGI or,  from and  after  the
     effective date of a Reorganization  Transaction,  the Board of Directors of
     the Surviving Corporation.

1.7  "BONUS PLAN" -- see Section 2.2(b).

1.8  "CAUSE" -- see Section 3.3.

1.9  "CHANGE  OF  CONTROL"  means,  except  as  otherwise  provided  below,  the
     occurrence of any one or more of the following:

     (a)  any SEC  Person  becomes  the  Beneficial  Owner of 25% or more of the
          common stock of PFGI or of Voting Securities  representing 25% or more
          of the combined voting power of all Voting Securities of PFGI (such an
          SEC Person, a "25% OWNER"); or

     (b)  the PFGI Incumbent Directors  (determined using the Supplement Date as
          the  baseline  date)  cease for any  reason to  constitute  at least a
          majority of the Board; or

     (c)  consummation of a merger,  reorganization,  consolidation,  or similar
          transaction  (any of the foregoing,  a  "REORGANIZATION  TRANSACTION")
          where the Continuity of Ownership is not more than 60%; or

     (d)  approval by the  stockholders  of PFGI, and  consummation of a plan or
          agreement for the sale or other  disposition  of all or  substantially
          all of the  consolidated  assets of PFGI or a plan of  liquidation  of
          PFGI.

     Notwithstanding  the occurrence of any of the foregoing events, a Change of
     Control  shall not occur with respect to  Executive  if, in advance of such
     event,  Executive  agrees in writing that such event shall not constitute a
     Change of Control.

1.10 "COMPANY"  -  see  the  introductory   paragraph  to  this  Supplement  and
     Amendment.

1.11 "COMPANY CERTIFICATE" -- see Section 5.4(a).

1.12 "CONSUMMATION  DATE" means the first date after an Imminent  Control Change
     upon which an  Effective  Date  occurs,  provided,  however that one of the
     following is satisfied:

     (a)  the Imminent Control Change has not lapsed; or

     (b)  the Imminent  Control Change in effect upon such Effective Date is the
          last Imminent  Control Change in a series of Imminent  Control Changes
          unbroken  by any  period  of time  between  the  lapse of an  Imminent
          Control Change and the occurrence of a new Imminent Control Change.

1.13 "CONTINUITY    OF    OWNERSHIP"    of    a    stated    percentage    means

     (a)  the Persons who were the direct or indirect  owners of the outstanding
          common stock and Voting  Securities  of PFGI  immediately  before such
          Reorganization  Transaction became, immediately after the consummation
          of such Reorganization  Transaction,  the direct or indirect owners of

                                      194

          both the stated percentage of the then-outstanding common stock of the
          Surviving  Corporation and Voting  Securities  representing the stated
          percentage of the combined voting power of the then-outstanding Voting
          Securities of the Surviving  Corporation,  in  substantially  the same
          respective  proportions as such Persons' ownership of the common stock
          and Voting Securities of PFGI immediately  before such  Reorganization
          Transaction.

1.14 "EFFECTIVE  DATE" means the date on which a Change of Control  first occurs
     during the Supplement Term.

1.15 "EMPLOYMENT  AGREEMENT" - see the introductory paragraph of this Supplement
     and Amendment.

1.16 "EXCHANGE  ACT" means the  Securities  Exchange  Act of 1934,  as  amended.

1.17 "EXCISE TAXES" -- see Section 5.1.

1.18 "GOOD REASON" -- see Section 3.4.

1.19 "GROSS-UP MULTIPLE" -- see Section 5.1.

1.20 "GROSS-UP PAYMENT" -- see Section 5.1.

1.21 "IMMINENT  CONTROL CHANGE" means, as of any date on or after the Supplement
     Date and prior to the Effective  Date, the occurrence of any one or more of
     the following:

     (a)  PFGI  enters  into  an  agreement  the  consummation  of  which  would
          constitute a Change of Control;

     (b)  Any SEC  Person  commences  a "tender  offer" (as such term is used in
          Section  14(d) of the  Exchange  Act) or  exchange  offer,  which,  if
          consummated, would result in a Change of Control; or

     (c)  Any SEC Person files with the SEC a preliminary  or  definitive  proxy
          solicitation  or  election  contest  to  elect or  remove  one or more
          members of the Board, which, if consummated or effected,  would result
          in a Change of Control;

          provided,  however,  that an  Imminent  Control  Change will lapse and
          cease to qualify as an Imminent Control Change:

               (i)  With  respect to an Imminent  Control  Change  described  in
                    clause (a) of this  definition,  the date such  agreement is
                    terminated, cancelled or expires without a Consummation Date
                    occurring;

               (ii) With  respect to an Imminent  Control  Change  described  in
                    clause (b) of this definition, the date such filing or other
                    certification   is  withdrawn,   expires  or  is  denied  or
                    otherwise  rejected by the relevant state regulators without
                    a Consummation Date occurring;

               (iii)With  respect to an Imminent  Control  Change  described  in
                    clause (c) of this definition, the date such tender offer or
                    exchange   offer  is  withdrawn  or  terminates   without  a
                    Consummation Date occurring;

                                      195

               (iv) With  respect to an Imminent  Control  Change  described  in
                    clause (d) of this definition,  (1) the date the validity of
                    such proxy  solicitation  or election  contest expires under
                    relevant  state  corporate  law,  or (2) the date such proxy
                    solicitation or election contest culminates in a stockholder
                    vote, in either case without a Consummation  Date occurring;
                    or

               (v)  The date a majority of the PFGI  Incumbent  Directors make a
                    good  faith   determination  that  any  event  or  condition
                    described in clause (a), (b), (c) or (d) of this  definition
                    no longer  constitutes an Imminent Control Change,  provided
                    that such determination may not be made prior to the six (6)
                    month anniversary of the occurrence of such event.

1.22 "IMMINENT CONTROL CHANGE PERIOD" means the period commencing on the date of
     an  Imminent  Control  Change (or the first  Imminent  Control  Change in a
     series of Imminent  Control Changes  unbroken by any period of time between
     the  lapse  of an  Imminent  Control  Change  and the  occurrence  of a new
     Imminent  Control  Change)  and  ending  on the  Consummation  Date,  or if
     earlier,  the date an Imminent  Control Change lapses (without the prior or
     concurrent occurrence of a new Imminent Control Change).

1.23 "INCLUDING" means including without limitation.

1.24 "IRS" means the Internal  Revenue  Service of the United States of America.

1.25 "IRS CLAIM" -- see Section 5.4.

1.26 "LTIP" means the Long-Term  Performance  Plan as Amended and Restated as of
     January 1, 2001, and as amended from time to time.

1.27 "LTIP AWARD" means an incentive compensation  opportunity granted under the
     LTIP or New LTIP.

1.28 "LTIP  PERFORMANCE  PERIOD"  means any  performance  period  designated  in
     accordance  with any LTIP or New LTIP  approved by the Board of Life or any
     committee of the Board of Life.

1.29 "LTIP TARGET AWARD"  means,  in respect of any LTIP Award under a New LTIP,
     the amount which Executive would have been entitled to receive for the LTIP
     Performance  Period  corresponding  to such LTIP  Award if the  performance
     goals  established  pursuant to such LTIP Award were achieved at the target
     level (currently 100%) as of the end of the LTIP Performance Period.

1.30 "LTIP  OUTSTANDING  AWARD"  - see  definition  of  "Pro-rata  LTIP  Bonus."

1.31 "LUMP SUM VALUE" of an annuity  payable  pursuant to a defined benefit plan
     (whether or not qualified  under Section 401(a) of the Code) means, as of a
     specified  date, the present value of such annuity,  as  determined,  as of
     such date,  under generally  accepted  actuarial  principles  using (i) the
     applicable   interest  rate,   mortality   tables  and  other  methods  and
     assumptions  that the Pension Benefit Guaranty  Corporation  ("PBGC") would
     use in  determining  the value of an immediate  annuity on the  Termination
     Date or (ii) if such interest rate and mortality  assumptions are no longer
     published by the PBGC, interest rate and mortality  assumptions  determined
     in a manner as  similar  as  practicable  to the manner by which the PBGC's
     interest rate and mortality  assumptions were determined  immediately prior
     to the PBGC's  cessation  of  publication  of such  assumptions;  provided,
     however,  that  if  such  defined  benefit  plan  provides  for a lump  sum
     distribution and such lump-sum  distribution either (x) is the only payment
     method  available under such plan or (y) provides for a greater amount than
     the Lump Sum Value of the Maximum  Annuity  available under such plan, then
     "Lump Sum Value" shall mean such lump sum amount.

1.32 "MAXIMUM  ANNUITY"  means, in respect of a defined benefit plan (whether or
     not qualified  under Section  401(a) of the Code),  an annuity  computed in
     whatever manner  permitted under such plan (including  frequency of annuity
     payments, attained age upon commencement of annuity payments, and nature of
     surviving spouse benefits, if any) that yields the greatest Lump Sum Value.

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1.33 "MERGER OF EQUALS" means a Change of Control  consisting of, as of any date
     on or  after  the  Supplement  Date,  a  Reorganization  Transaction  that,
     notwithstanding  the fact that such  transaction also qualifies as a Change
     of Control, satisfies all of the following:

     (a)  consummation of such Reorganization  Transaction results in Continuity
          of Ownership of at least 40%, but not more than 60%; and

     (b)  an  SEC  Person  does  not  become  a  25%  Owner  of  the   Surviving
          Corporation; and

     (c)  PFGI  Incumbent  Directors  (determined  using  the  date  immediately
          preceding the Effective  Date as the baseline  date),  throughout  the
          period  beginning  on the  Effective  Date and  ending  on the  second
          anniversary  of the Effective  Date,  continue to constitute  not less
          than

          (i)  a majority of the Board,  if subsection (a) of this definition is
               satisfied  because  the  Reorganization  Transaction  resulted in
               Continuity  of  Ownership of at least 50%, but not more than 60%;
               or

          (ii) one (1) member less than a majority of the Board,  if  subsection
               (a) of this  definition is satisfied  because the  Reorganization
               Transaction  resulted in Continuity of Ownership of at least 40%,
               but less than 50%; and

     (d)  the person  who was the Chief  Executive  Officer of PFGI  immediately
          prior to the first to occur of the (x) the day prior to the  beginning
          of the  Imminent  Control  Change  Period  or (y) the day prior to the
          Effective  Date  shall  serve as the Chief  Executive  Officer  of the
          Surviving Corporation at all times during the period commencing on the
          Effective  Date and ending on the first  anniversary  of the Effective
          Date;

     provided,  however,  that a Merger of Equals shall cease to be considered a
     Merger of Equals and shall  instead  qualify as a Change of Control that is
     not a Merger of Equals from and after the first date (the "MERGER OF EQUALS
     CESSATION DATE") as of which:

          (i)  during the Post-Change Employment Period the conditions of any of
               clause (b) or clause (c) or clause (d) of this  definition  shall
               not be satisfied; or

          (ii) prior to the first anniversary of the Effective Date, the Company
               shall make a filing with the SEC, issue a press release,  or make
               a public  announcement  to the effect that PFGI or the  Surviving
               Corporation  is seeking or intends to seek a replacement  for its
               Chief Executive  Officer,  whether such  replacement is to become
               effective before or after such first anniversary.

1.34 "MERGER  OF EQUALS  CESSATION  DATE" - see the  definition  of  "Merger  of
     Equals."

1.35 "NEW LTIP" - see definition of "Pro-rata LTIP Bonus."

1.36 "NOTICE   OF    CONSIDERATION"    --   see    Section    3.3    (a)(ii)(2).

1.37 "PFGI  INCUMBENT  DIRECTORS"  means,  as of any  specified  baseline  date,
     individuals  then  serving as members of the Board who were  members of the
     Board as of the date  immediately  preceding such baseline  date;  provided
     that any  subsequently-appointed  or  elected  member  of the  Board  whose
     election, or nomination for election by members, or by stockholders of PFGI
     if PFGI  is a stock  company  at the  relevant  time,  or  stockholders  or
     members, as applicable,  of the Surviving Corporation,  as applicable,  was
     approved  by a vote  or  written  consent  of at  least a  majority  of the
     directors  then   comprising  the  PFGI  Incumbent   Directors  shall  also
     thereafter  be  considered a PFGI  Incumbent  Director,  unless the initial
     assumption of office of such subsequently-elected or appointed director was
     in  connection  with an Imminent  Control  Change but only if such Imminent

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     Control  Change was triggered by the  occurrence  of an event  described in
     subsection (d) of the definition of Imminent Control Change.

1.38 "PLANS"  means plans,  programs,  policies,  practices or procedures of the
     Company.

1.39 "POST-CHANGE   EMPLOYMENT  PERIOD"  means  the  period  commencing  on  the
     Effective Date and ending on the second anniversary of the Effective Date.

1.40 "POST-MERGER OF EQUALS PERIOD" means the period  commencing on an Effective
     Date of a Merger of Equals  and  ending on the first to occur of the Merger
     of Equals Cessation Date or the end of the Post-Change Employment Period.

1.41 "POTENTIAL PARACHUTE PAYMENT" -- see Section 5.1.

1.42 "PRO-RATA   ANNUAL   BONUS"  on  and  after  the   Effective   Date  means,
     notwithstanding  Section 1.31 of the Employment Agreement,  an amount equal
     to the product of  Executive's  Target Annual Bonus (for the fiscal year in
     which the Effective  Date,  Merger of Equals  Cessation Date or Termination
     Date occurs,  as applicable,  but disregarding any reduction in such Target
     Annual  Bonus  that  would  qualify  as Good  Reason if  Executive  were to
     terminate  employment on account  thereof)  multiplied  by a fraction,  the
     numerator of which equals the number of days from and  including  the first
     day of such fiscal year through and including the Effective Date, Merger of
     Equals  Cessation  Date  or  Termination  Date,  as  applicable,   and  the
     denominator of which equals 365.

1.43 "PRO-RATA  LTIP BONUS"  means an amount  equal to the sum of the  following
     amounts,  calculated  separately  for each  LTIP  Award  for which the LTIP
     Performance Period has not ended as of the Effective Date, Merger of Equals
     Cessation Date, or Termination Date, as applicable:

     (a)  For any LTIP Award  that was  granted  under the LTIP,  the sum of the
          following  amounts  (recalculated  as of the applicable  date for each
          such LTIP Award):

          (i)  Executive's  LTIP  Outstanding  Award  (as  defined  below)  with
               respect to any LTIP  Performance  Period which began prior to the
               calendar year of the Effective Date,  Merger of Equals  Cessation
               Date or Termination Date, as applicable; and

          (ii) Executive's  LTIP  Outstanding  Award  (as  defined  below)  with
               respect  to  any  LTIP  Performance  Period  which  BEGAN  in the
               calendar  year in which  the  Effective  Date,  Merger  of Equals
               Cessation  Date  or  Termination  Date,  as  applicable,  occurs,
               multiplied  by a  fraction,  the  numerator  of which  equals the
               number of days from and  including the first day of such calendar
               year through and including the Effective  Date,  Merger of Equals
               Cessation  Date  or  Termination  Date,  as  applicable,  and the
               denominator of which equals 365.

     (b)  For any LTIP  Award that was  granted  under a new or  successor  plan
          replacing or supplementing the LTIP ("New LTIP"), an amount calculated
          by adding  together the amounts  determined by  multiplying  each LTIP
          Target Award by a fraction,  the  numerator of which equals the number
          of days  from and  including  the  beginning  of the LTIP  Performance
          Period  applicable to such LTIP Target Award through and including the
          Effective Date,  Merger of Equals Cessation Date or Termination  Date,
          as  applicable,  and the  denominator  of which  equals the  aggregate
          number of days in such LTIP Performance Period.

         "LTIP  OUTSTANDING  AWARD"  means,  in respect of any LTIP  Award,  the
         amount which Executive would have been entitled to receive for the LTIP
         Performance Period applicable to such LTIP Award, which amount is equal
         to the  product  of (x) the  number of  Initial  Performance  Units (as

                                      198

         defined in the LTIP) multiplied by (y) an amount determined by applying
         the formula  described as the "Start  Imputed  Value" in the LTIP,  but
         determining  "Average Return on Equity" and "Equity of the consolidated
         Principal  Financial Group" as of December 31 of the year preceding the
         year in which the applicable  determination date occurs, and not taking
         into account any value for any unfinished year in the award cycle,  not
         taking into account any performance  scores,  multipliers or adjustment
         factors, and not prorated for any unfinished year in the award cycle.

1.44 "REFUND CLAIM" -- see Section 5.4.

1.45 "REORGANIZATION TRANSACTION" -- see clause (c) of the definition of "Change
     of Control."

1.46 "RESTRICTED SHARES" -- see Section 2.3.

1.47 "SEC" means the United States Securities and Exchange Commission.

1.48 "SEC  PERSON"  means any  person (as such term is used in Rule 13d-5 of the
     SEC under the  Exchange  Act) or group (as such term is defined in Sections
     3(a)(9) and 13(d)(3) of the Exchange  Act),  other than an Affiliate or any
     employee  benefit  plan  (or  any  related  trust)  of  PFGI  or any of its
     Affiliates.

1.49 "SECTION" means, unless the context otherwise  requires,  a section of this
     Supplement and Amendment.

1.50 "SERP" means a supplemental executive retirement Plan that is not qualified
     under  Section  401(a) of the Code,  including the  Supplemental  Executive
     Retirement Plan for Employees (or any successor plan).

1.51 "STOCK OPTIONS" -- see Section 2.3.

1.52 "SUPPLEMENT  DATE" - see the introductory  paragraph of this Supplement and
     Amendment.

1.53 "SUPPLEMENT  TERM" means the period  commencing on the Supplement  Date and
     ending on the latest of (a) the third  anniversary of the Supplement  Date,
     (b) the second  anniversary of an Effective Date occurring  within one year
     of the  Supplement  Date,  or (c) last day the  Employment  Agreement is in
     effect. An Expiration Notice with respect to the Employment Agreement given
     on or after  the first  anniversary  of the  Supplement  Date  shall  apply
     equally to this Supplement and Amendment. Notwithstanding the foregoing, if
     an  Effective  Date  or  an  Imminent  Control  Change  occurs  before  the
     Expiration  Date specified in an Expiration  Notice,  then such  Expiration
     Notice shall be void and of no further effect;  provided,  however, if such
     Imminent  Control  Change does not culminate in a Consummation  Date,  then
     such Expiration Notice shall be reinstated and the Supplement and Amendment
     and Employment  Agreement shall expire on the date originally  specified as
     the  Expiration  Date, or if later,  the date the Imminent  Control  Change
     lapses.

1.54 "SURVIVING   CORPORATION"   means   the   corporation   resulting   from  a
     Reorganization  Transaction or, if securities  representing at least 50% of
     the  aggregate  voting  power  of  such  resulting  corporation,  (if  such
     corporation is a stock company at the relevant time), or of the mutual life
     insurance  holding company  policies (if such  corporation is a mutual life
     insurance  holding company at the relevant time) are directly or indirectly
     owned by another corporation, such other corporation.

1.55 "TARGET  ANNUAL  BONUS"  solely for the  purposes  of this  Supplement  and
     Amendment,  means,  as of a certain date, an amount equal to the product of
     Base Salary determined as of such date multiplied by the percentage of such
     Base Salary to which Executive would have been entitled  immediately  prior
     to such date  under any Bonus Plan for the  Annual  Performance  Period for
     which such Annual  Bonus is awarded if the  performance  goals  established

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     pursuant  to such Bonus Plan were  achieved at the 100% level as of the end
     of the Annual Performance Period; provided,  however, that any reduction in
     Executive's  Base Salary or Annual Bonus that would  qualify as Good Reason
     shall be disregarded for purposes of this definition.

1.56 "TAXES" means the  incremental  federal,  state,  local and foreign income,
     employment, excise and other taxes payable by Executive with respect to any
     applicable item of income.

1.57 "TERMINATION  DATE"  means  the  date  of  the  receipt  of the  Notice  of
     Termination by Executive (if such Notice is given by the Company) or by the
     Company (if such Notice is given by Executive), or any later date, not more
     than 15 days after the giving of such  Notice,  specified in such notice as
     of which  Executives'  employment shall be terminated;  provided,  however,
     that:

          (i)  if  Executive's  employment  is  terminated by reason of death or
               Disability, the Termination Date shall be the date of Executive's
               death or the date of the  Disability  (as  described  in  Section
               3.1(b)), as applicable; and

          (ii) if no Notice of Termination is given,  the Termination Date shall
               be the last date on which Executive is employed by the Company.

1.58 "TERMINATION OF EMPLOYMENT" means any termination of Executive's employment
     with the Company,  whether such  termination is initiated by the Company or
     by Executive.

1.59 "25% OWNER" -- see paragraph (a) of the  definition of "Change of Control."

1.60 "VOTING  SECURITIES" for purposes of this  Supplement and Amendment  means,
     notwithstanding  Section 1.41 of the Employment  Agreement (defining Voting
     Securities)  (a)  with  respect  to  a  corporation,   securities  of  such
     corporation  that  are  entitled  to  vote  generally  in the  election  of
     directors  of such  corporation,  and (b) with  respect  to a  mutual  life
     insurance  company or mutual life insurance  holding  company,  policies of
     such  company  entitled to vote  generally  in the election of directors of
     such company.

                                  ARTICLE II.

        POST-CHANGE EMPLOYMENT PERIOD AND IMMINENT CONTROL CHANGE PERIOD

2.1  POSITION AND DUTIES.

     (a)  CHANGE  OF  CONTROL  AND  MERGER OF  EQUALS.  During  the  Post-Change
          Employment Period,  (including any portion thereof that qualifies as a
          Merger of  Equals),  the  provisions  of Article II of the  Employment
          Agreement shall continue to apply,  except that  Executive's  services
          shall be performed at the location  where the  Executive  was employed
          immediately  before the Effective  Date (or if the Effective  Date was
          the  Consummation  Date of an  Imminent  Control  Change,  before  the
          beginning  of  such  Imminent  Control  Change  Period)  or any  other
          location no more than 50 miles from such former location.

     (b)  IMMINENT  CONTROL  CHANGE PERIOD.  During any Imminent  Control Change
          Period, the provisions of Article II of the Employment Agreement shall
          continue to apply.

2.2  COMPENSATION.

     (a)  BASE  SALARY.  During  an  Imminent  Control  Change  Period  and  the
          Post-Change  Employment  Period  (including  any portion  thereof that
          qualifies as a Merger of Equals), the provisions of Section 4.1 of the
          Employment Agreement (Salary) shall continue to apply. Any increase in

                                      200

          base  Salary  shall not limit or reduce  any other  obligation  of the
          Company to Executive under this Supplement and Amendment.

     (b)  ANNUAL BONUS.

          (i)  CHANGE OF CONTROL  AND MERGER OF EQUALS.  During the  Post-Change
               Employment  Period  (including any portion thereof that qualifies
               as a Merger of  Equals),  the  provisions  of Section  4.2 of the
               Employment  Agreement  (Annual  Bonus)  shall  continue to apply,
               unless modified by Section 2.2(b)(ii) below, provided that on and
               after the Effective Date,  Executive's bonus opportunity shall be
               no less than and target performance goals shall be no higher than
               those in effect  immediately prior to the Effective Date for each
               Annual  Performance  Period  which ends  during  the  Post-Change
               Employment Period.  "ANNUAL PERFORMANCE PERIOD" means each period
               of  time   designated  in   accordance   with  any  annual  bonus
               arrangement,   including   the   Principal   Incentive  Pay  Plan
               ("PrinPay")  and any successor  thereto,  (a BONUS PLAN" which is
               based upon performance  approved by the Board or any committee of
               the  Board,  or in the  absence  of any  Bonus  Plan or any  such
               designated period of time, each calendar year.

          (ii) IMMINENT CONTROL CHANGE PERIOD. During an Imminent Control Change
               Period, the provisions of Section 4.2 of the Employment Agreement
               (Annual Bonus) shall continue to apply; provided however, that if
               the Imminent  Control Change Period  culminates in a Consummation
               Date, then, in determining whether the Executive's Termination of
               Employment is for "Good Reason" shall be determined as though the
               provisions  of Sections  2.2(b)(i)  applied  commencing  with the
               first day of the Imminent Control Change Period.

     (c)  OTHER COMPENSATION AND BENEFITS.

          (i)  IMMINENT CONTROL CHANGE PERIOD,  POST-CHANGE  EMPLOYMENT  PERIOD,
               MERGER OF EQUALS.  During an IMMINENT  CONTROL  CHANGE Period and
               the Post Change  Employment Period (including any portion thereof
               that  qualifies as a Merger of Equals) the provisions of Sections
               4.3  (Long-Term   Incentive   Plan  Bonus  and  Other   Incentive
               Compensation),  4.4 (Savings and Retirement  Plans) and Article V
               (Other  Benefits) of the Employment  Agreement  shall continue to
               apply; provided that on and after the Effective Date, Executive's
               compensation and benefits shall not be materially less favorable,
               in the  aggregate,  than  the  most  favorable  compensation  and
               benefits provided by the Company to Executive (including any such
               compensation and benefits provided under Plans) at any during the
               90-day period immediately before the Effective Date. In addition,
               during the Post-Change  Employment  Period (including any portion
               thereof that qualifies as a Merger or Equals):

          (1)  LTIP  AWARDS.  LTIP Awards shall be granted to Executive at least
               as frequently as LTIP Awards were granted  during the  three-year
               period  immediately  preceding  the Effective  Date,  with target
               payments no less than the average  (expressed  as a percentage of
               Executive's  Base  Salary  in  effect  at  the  beginning  of the
               applicable  Performance  Period) of the  Executive's  LTIP Awards
               outstanding  immediately prior to the Effective Date, with target
               performance   goals   substantially   comparable  to  the  target
               performance  goals under  Executive's LTIP Awards  outstanding on
               the Effective Date; and

          (2)  OFFICE AND  SUPPORT  STAFF.  Executive  shall be  entitled  to an
               office  or  offices  of a size and  with  furnishings  and  other
               appointments,   and  to  secretarial  and  other   assistance  in

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               accordance  with the most favorable  Plans in effect prior to the
               Change of Control or Imminent Control Change.

2.3  STOCK INCENTIVE AWARDS.

     (a)  CHANGE OF  CONTROL  THAT IS NOT A MERGER OF EQUALS.  On the  Effective
          Date,  except as  provided in Section  2.3(b) or (c) below,  Executive
          shall (i) become fully vested in, and may thereafter exercise in whole
          or in part,  in accordance  with the terms  thereof,  all  outstanding
          stock options,  stock appreciation rights, or similar incentive awards
          (collectively,  "STOCK  Options")  and (ii) become fully vested in all
          shares of  restricted  stock or  restricted  stock  units and  similar
          awards ("RESTRICTED  SHARES").  Notwithstanding the foregoing,  if the
          Effective  Date is a  Reorganization  Transaction  and if so  provided
          under the agreement pursuant to which the  Reorganization  Transaction
          is  effected,   then  all  Executive's  Stock  Options  shall  (x)  be
          extinguished for such  consideration as is provided for vested options
          under such  agreement or (y) be converted into options to purchase the
          stock of the Surviving  Corporation,  and such converted options shall
          be  subject  to the  same  option  terms  and  restrictions  as  those
          applicable on the Effective Date.

     (b)  MERGER  OF  EQUALS.  Section  2.3(a)  shall not apply in the case of a
          Merger  of Equals  unless  there  occurs a Merger of Equals  Cessation
          Date,  at which time Section  2.3(a) shall be applied by  substituting
          the Merger of Equals  Cessation  Date for the Effective  Date wherever
          such term appears.

     (c)  IMMINENT CONTROL CHANGE PERIOD. Section 2.3(a) and (b) shall not apply
          during      an       Imminent       Control       Change       Period.

2.4  UNFUNDED DEFERRED COMPENSATION.

     (a)  CHANGE OF  CONTROL  THAT IS NOT A MERGER OF EQUALS.  On the  Effective
          Date,  except as  provided in Section  2.4(b) or (c) below,  Executive
          shall become fully vested in all benefits previously accrued under any
          deferred   compensation   Plan  (including  a  SERP  and  any  defined
          contribution  excess plan) that is not qualified  under Section 401(a)
          of the Code.  To the extent not so provided  under such  non-qualified
          Plan,  within ten business days after the Effective  Date, the Company
          shall pay or cause to be paid to  Executive  a  lump-sum  cash  amount
          equal to:

          (i)  the sum of the Lump-Sum Values of all Maximum  Annuities that are
               payable pursuant to all such non-qualified plans that are defined
               benefit Plans, plus

          (ii) the sum of Executive's  account balances under all  non-qualified
               plans that are defined contribution Plans.

     (b)  MERGER  OF  EQUALS.  Section  2.4(a)  shall not apply in the case of a
          Merger  of Equals  unless  there  occurs a Merger of Equals  Cessation
          Date,  at which time Section  2.4(a) shall be applied by  substituting
          the Merger of Equals  Cessation  Date for the Effective  Date wherever
          such term appears.

     (c)  IMMINENT CONTROL CHANGE PERIOD. Section 2.4(a) and (b) shall not apply
          during      an       Imminent       Control       Change       Period.

Executive  shall  have the  opportunity  to waive the  accelerated  vesting  and
lump-sum  payment at any time prior to the earlier of (i) the 15th day after the
date of an  Imminent  Control  Change  or (ii) the 30th day prior to a Change of
Control which is not preceded by an Imminent Control Change; provided,  however,
that  in no  event  shall  the  waiver  be  allowed  on the  Effective  Date  or
thereafter.
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2.5  PRO-RATA ANNUAL BONUS.

     (a)  CHANGE OF CONTROL  THAT IS NOT A MERGER OF EQUALS.  Except as provided
          in Section  2.5(b) or (c) below,  to the extent not so provided by the
          Bonus  Plan,  the Company  shall pay or cause to be paid to  Executive
          within ten business  days after the  Effective  Date, a lump-sum  cash
          payment equal to the Pro-rata  Annual Bonus,  in  satisfaction  of the
          Company's  obligations  under the Bonus Plan for periods  prior to the
          Effective Date.

     (b)  MERGER  OF  EQUALS.  Section  2.5(a)  shall not apply in the case of a
          Merger of Equals unless (i) there occurs a Merger of Equals  Cessation
          Date,  at which time Section  2.5(a) shall be applied by  substituting
          the Merger of Equals Cessation Date for the Effective Date.

     (c)  IMMINENT CONTROL CHANGE PERIOD. Section 2.5(a) and (b) shall not apply
          during      an       Imminent       Control       Change       Period.

2.6  PRO-RATA LTIP BONUS.

     (a)  CHANGE OF CONTROL  THAT IS NOT A MERGER OF EQUALS.  Except as provided
          in Section  2.6(b) or (c) below,  to the extent not so provided by the
          LTIP or New LTIP, as applicable,  the Company shall pay or cause to be
          paid to Executive, within ten business days after the Effective Date a
          lump-sum  cash payment equal to the sum of (i) the Pro-rata LTIP Bonus
          and (ii) all Accrued LTIP Bonuses,  in  satisfaction  of the Company's
          obligations  under  the LTIP and New  LTIP  for  periods  prior to the
          Effective Date.

     (b)  MERGER  OF  EQUALS.  Section  2.6(a)  shall not apply in the case of a
          Merger  of Equals  unless  there  occurs a Merger of Equals  Cessation
          Date,  at which time Section  2.6(a) shall be applied by  substituting
          the Merger of Equals Cessation Date for the Effective Date.

     (c)  IMMINENT CONTROL CHANGE PERIOD. Section 2.6(a) and (b) shall not apply
          during      an       Imminent       Control       Change       Period.

                                  ARTICLE III.

                            TERMINATION OF EMPLOYMENT

3.1  DISABILITY.  The  provisions  of this  Section  3.1 and  Section  4.8 shall
     supersede  the  provisions  of  Section  1.16 of the  Employment  Agreement
     (definition of  "Disability")  and Section 6.2 of the Employment  Agreement
     (Termination  for Retirement,  Death or Disability)  during the Post-Change
     Employment Period or any Imminent Control Change Period but only insofar as
     such Section 6.2 applies to termination for Disability.

     (a)  During  the  Post-Change  Employment  Period or any  Imminent  Control
          Change Period, the Company may terminate Executive's employment at any
          time  because of  Executive's  Disability  by giving  Executive or his
          legal representative,  as applicable, (i) written notice in accordance
          with Section 9.7 of the Company's  intention to terminate  Executive's
          employment  pursuant  to this  Section  and  (ii) a  certification  of
          Executive's  Disability by a physician  selected by the Company or its
          insurers,  subject to the consent of  Executive or  Executive's  legal
          representative,  which consent shall not be  unreasonably  withheld or
          delayed.  Executive's employment shall terminate effective on the 30th
          day after  Executive's  receipt of such  notice  (which  such 30th day
          shall be deemed to be the date of the Disability) unless,  before such
          30th day,  Executive  shall have resumed the full-time  performance of
          Executive's duties.

     (b)  "DISABILITY"  means  any  medically  determinable  physical  or mental
          impairment  that has lasted for a  continuous  period of not less than

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          six  months  and can be  expected  to be  permanent  or of  indefinite
          duration,  and that  renders  Executive  unable to perform  the duties
          required under this Supplement and Amendment.

3.2  DEATH.   Executive's   employment   shall  terminate   automatically   upon
     Executive's  death  during the  Post-Change  Employment  Period or Imminent
     Control Change Period.

3.3  TERMINATION FOR CAUSE.

     (a)  POST  CHANGE  EMPLOYMENT  PERIOD.  During the  Post-Change  Employment
          Period  (including any portion thereof that qualifies as a Post-Merger
          of Equals Period),  the Company may terminate  Executive's  employment
          for  Cause  solely  in  accordance  with  all of the  substantive  and
          procedural  provisions  of this  Section  3.3(a).  Section 1.11 of the
          Employment  Agreement  (definition  of "Cause") and Section 6.1 of the
          Employment  Agreement  (Termination  for Cause or Other  than for Good
          Reason, etc.) shall be inapplicable during any Post-Change  Employment
          Period,  insofar  as it  relates  to the  material  contained  in this
          Section 3.3 and Section 4.6, except as otherwise provided herein.

          (i)  DEFINITION OF CAUSE. For purposes of this section 3.3(a), "Cause"
               means any one or more of the following:

          (1)  Executive's  conviction  of,  plea of guilty  to, or plea of nolo
               contendere   to  a   felony   or   misdemeanor   (other   than  a
               traffic-related  felony  or  misdemeanor)  that  involves  fraud,
               dishonesty or moral turpitude;

          (2)  Executive's  willful and intentional  material  misconduct in the
               performance  or gross  neglect  of his  duties  that  results  in
               substantial financial detriment to a Company or any Affiliate;

          (3)  Executive's habitual neglect of duties (other than resulting from
               Executive's  incapacity  due to physical or mental  illness other
               than   habitual  use  or  addiction  to  alcohol  or   controlled
               substances) which results in substantial  financial  detriment to
               any of the Companies or Affiliate; or

          (4)  Executive's  willful  and  intentional  material  breach  of  the
               Employment Agreement or this Supplement and Amendment;

          provided,  however,  that for  purposes of clauses  (2),  (3) and (4),
          Cause shall not include any one or more of the following:

                    (A)  Executive's bad judgment

                    (B)  Executive's negligence, other than Executive's habitual
                         neglect of duties or gross negligence;

                    (C)  any act or omission believed by Executive in good faith
                         to have been in or not  opposed to the  interest of the
                         Company (without intent of Executive to gain,  directly
                         or  indirectly,  a profit  to which  Executive  was not
                         legally entitled); or

                    (D)  failure  to  meet  performance  goals,   objectives  or
                         measures  following  good  faith  efforts  to meet such
                         goals, objectives or measures; and

               further provided that, if a breach of the Employment Agreement or
               this  Supplement  and Amendment  involved an act, or a failure to
               act,  which was done, or omitted to be done, by Executive in good
               faith and with a  reasonable  belief  that  Executive's  act,  or

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               failure to act,  was in the best  interests of the Company or was
               required by applicable  law or  administrative  regulation,  such
               breach  shall  not  constitute  Cause if,  within  30 days  after
               Executive   is  given   written   notice  of  such   breach  that
               specifically refers to this Section,  Executive cures such breach
               to the fullest extent that it is curable.

          (ii) PROCEDURAL  REQUIREMENTS  FOR TERMINATION FOR CAUSE.  The Company
               shall strictly observe each of the following procedures:

          (1)  BOARD  MEETING.  A meeting  of the Board  shall be called for the
               stated  purpose  of  determining   whether  Executive's  acts  or
               omissions  constitute  Cause and,  if so,  whether  to  terminate
               Executive's employment for Cause.

          (2)  NOTICE OF CONSIDERATION.  Not less than 30 days prior to the date
               of such  meeting the Company  shall  provide  Executive  and each
               member of the Board written notice (a "NOTICE OF  CONSIDERATION")
               of (x) a detailed description of the acts or omissions alleged to
               constitute Cause, (y) the date, time and location of such meeting
               of the Board, and (z) Executive's rights under clause (3) below.

          (3)  OPPORTUNITY  TO  PRESENT  RESPONSE.   Executive  shall  have  the
               opportunity with or without counsel, at Executive's  election, an
               opportunity  to be heard and present  arguments  and  evidence on
               Executive's  behalf at such a meeting  and / or to present to the
               Board a written response to the Notice of Consideration.

          (4)  CAUSE DETERMINATION. Executive's employment may be terminated for
               Cause only if (x) the acts or  omissions  specified in the Notice
               of  Consideration  did in fact occur and do  constitute  Cause as
               defined  in  this  Section,   (y)  the  Board  makes  a  specific
               determination  to such effect and to the effect that  Executive's
               employment should be terminated for Cause ("CAUSE DETERMINATION")
               and (z) the Company  thereafter  provides Executive with a Notice
               of Termination  which  specifies in specific  detail the basis of
               such  Termination  of Employment for Cause and which Notice shall
               be  consistent  with  the  reasons  set  forth in the  Notice  of
               Consideration.   The  Cause   Determination   shall  require  the
               affirmative vote of at least 66-2/3% of the members of the Board.

     (b)  IMMINENT CONTROL CHANGE PERIOD. Except as provided below, this Section
          3.3  shall  not apply  during  any  Imminent  Control  Change  Period.
          Instead,  the terms of 6.1 of the Employment  Agreement shall govern a
          termination  of Executive for Cause during an Imminent  Control Change
          Period. However, in the case of an Imminent Control Change Period that
          culminates in a  Consummation  Date,  no  termination  of  Executive's
          employment  during such Imminent Control Change Period shall be deemed
          to have been for  Cause  unless  all the  substantive  and  procedural
          provisions of Section 3.3(b) shall have been satisfied:

          (i)  DEFINITION OF CAUSE. For purposes of this Section 3.3(b), "Cause"
               shall have the meaning ascribed to it in Section 3.3(a).

          (ii) PROCEDURAL  REQUIREMENTS FOR TERMINATION FOR CAUSE. To qualify as
               a termination  for Cause, a termination by the Company during the
               Imminent Control Change Period shall have strictly  complied with
               the procedures set forth in Section 3.3(a)(ii),  substituting the
               phrase  Imminent  Control Change Period for Post-Merger of Equals
               Period wherever it appears.

     (c)  STANDARD  OF  REVIEW.  If the  Notice  of  Consideration  is  given to
          Executive  during an Imminent  Control  Change  Period or  Post-Change
          Employment Period, then in the event that the existence of Cause shall
          become an issue in any action or  proceeding  between  the Company and
          Executive, the Company shall,  notwithstanding the Cause determination
          referenced  in clause 4(y) of Section  3.3(a)(ii),  have the burden of
          establishing that the actions or omissions  specified in the Notice of

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          Consideration  did in fact occur and do constitute  Cause and that the
          Company  has  satisfied  the   procedural   requirements   of  Section
          3.3(a)(ii).

3.4  GOOD  REASON.  During the  Post-Change  Employment  Period  (including  any
     portion thereof that is a Post Merger of Equals Period),  the Executive may
     terminate his  employment  for Good Reason  solely in  accordance  with the
     substantive and procedural  provisions of this Section 3.4. Section 1.20 of
     the Employment  Agreement  (definition of "Good Reason") and Section 6.3 of
     the  Employment  Agreement  (Termination  Without Cause or for Good Reason)
     shall be inapplicable during any Post-Change  Employment Period, insofar as
     it relates to the  material  contained  in this Section 3.4 and Article IV,
     except as otherwise provided herein.

     (A)  CHANGE OF  CONTROL  AND A MERGER OF EQUALS.  During  the Post  -Change
          Employment  Period  (including any portion thereof that is a Merger of
          Equals),  Executive may terminate  his  employment  for Good Reason in
          accordance with the  substantive and procedural  provisions of Section
          3.4(a).

          (i)  GOOD REASON  DEFINITION.  For  purposes of this  Section  3.4(a),
               "Good  Reason"  means  the  occurrence  of any one or more of the
               following actions or omissions during the Post-Change Employment:

          (1)  any act or omission that would  constitute Good Reason as defined
               in Section 1.20 of the Employment Agreement;

          (2)  failure to pay  Executive's  Base Salary in  violation of Section
               2.2(a) or any failure to increase  Executive's Base Salary to the
               extent, if any, required by such Section;

          (3)  any failure to pay  Executive's  Annual Bonus or any reduction in
               Executive's  bonus  opportunity,  in either case in  violation of
               Section 2.2(b);

          (4)  requiring  Executive to be based at any office or location  other
               than the location specified in Section 2.1(a);

          (5)  any other material  breach of this Supplement or Amendment by the
               Company;

          (6)  any  Termination of Employment by the Company that purports to be
               for  Cause,  but  is  not  in  full  compliance  with  all of the
               substantive  and procedural  requirements  of this Supplement and
               Amendment (any such purported  termination  shall be treated as a
               Termination of Employment  without Cause for all purposes of this
               Supplement and Amendment); or

          (7)  the failure at any time of a successor to the Company  explicitly
               to assume and agree to be bound by this Supplement and Amendment.

          (ii) DETERMINATION  OF GOOD REASON.  Any reasonable  determination  by
               Executive  that any of the events  specified  in  subsection  (i)
               above  has  occurred  and   constitutes   Good  Reason  shall  be
               conclusive  and  binding  for all  purposes,  unless the  Company
               establishes  that Executive did not have any reasonable basis for
               such determination.

     (b)  IMMINENT CONTROL CHANGE PERIOD. Except as provided below, this Section
          3.4  shall  not apply  during  any  Imminent  Control  Change  Period.
          Instead,  the  terms  of  Section  6.3  of  the  Employment  Agreement
          (Termination  Without  Cause  or  for  Good  Reason)  shall  govern  a
          termination  by Executive For Good Cause during an Imminent  Change of
          Control  Period.  However,  in the case of an Imminent  Control Change
          Period that  culminates  in a  Consummation  Date, no  termination  of
          Executive's employment during the Imminent Control Change Period shall

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          be deemed to have been for Good Reason unless all the  substantive and
          procedural   provisions  of  this  Section   3.4(b)  shall  have  been
          satisfied:

          (i)  DEFINITION OF GOOD REASON.  For purposes of this Section  3.4(b),
               "Good   Reason"  shall  have  the  same  meaning  as  in  Section
               3.4(a)(i),  except that the act or omission  shall have  occurred
               during the Imminent Control Change Period.

          (ii) DETERMINATION OF GOOD REASON.  Executive's  determination that an
               event constituting Good Reason as defined in Section 3.4(a)(i)(2)
               - (7) has occurred during an Imminent Control Change Period shall
               not be entitled to any presumptive validity or other deference by
               a court.

     (c)  NOTICE BY EXECUTIVE.  In the event of any Termination of Employment by
          Executive for Good Reason during a Post-Change  Employment  Period (or
          during an Imminent Control Change Period if Executive intends to claim
          benefits  hereunder in the event the Imminent  Control  Change  Period
          culminates  in a  Consummation  Date),  Executive  shall  as  soon  as
          practicable  thereafter notify the Company of the events  constituting
          such Good Reason by a Notice of  Termination.  A delay in the delivery
          of such Notice of  Termination or a failure by Executive to include in
          the Notice of Termination any fact or circumstance  which  contributes
          to a showing  of Good  Reason  shall not waive any right of  Executive
          under  this  Supplement  and  Amendment  or  preclude  Executive  from
          asserting  such fact or  circumstance  in enforcing  rights under this
          Supplement  and  Amendment;  provided  that no act or  omission by the
          Company shall  qualify as Good Reason if  Executive's  Termination  of
          Employment  occurs more than 12 months after  Executive  first obtains
          actual knowledge of such act or omission.

                                  ARTICLE IV.

          COMPANY'S OBLIGATIONS UPON CERTAIN TERMINATIONS OF EMPLOYMENT

4.1  TERMINATION  DURING  THE  POST-CHANGE  EMPLOYMENT  PERIOD.  If,  during the
     Post-Change  Employment  Period (other than during a Post-Merger  of Equals
     Period) the Company terminates  Executive's employment other than for Cause
     or Disability,  or Executive terminates employment for Good Reason, Section
     6.3 of the  Employment  Agreement  (Termination  Without  Cause or for Good
     Reason) shall not apply,  and the Company's  sole  obligations to Executive
     under Articles II and IV shall be as follows:

     (a)  SEVERANCE  PAYMENTS.  The Company shall pay or provide  Executive,  in
          addition to all vested rights arising from  Executive's  employment as
          specified  in Article II, a lump-sum  cash amount  equal to the sum of
          the  following,  no more than ten business days after the  Termination
          Date:

          (i)  ACCRUED OBLIGATIONS. All Accrued Obligations;

          (ii) PRORATED  ANNUAL  BONUS  FOR  YEAR  OF  TERMINATION.  Executive's
               Pro-rata  Annual Bonus reduced (but not below zero) by the amount
               of any  Annual  Bonus  paid  to  Executive  with  respect  to the
               Company's  fiscal  year in which  the  Termination  Date  occurs,
               whether paid under Section 2.5 or otherwise;

          (iii)PRORATED  LTIP BONUS.  Executive's  Pro-rata  LTIP Bonus  reduced
               (but not  below  zero) by the  amount of any LTIP  Bonus  paid to
               Executive  with  respect  to the  LTIP  Performance  Periods  not
               completed  as of the  Termination  Date,  whether such amount was
               paid under Section 2.6 or otherwise;

          (iv) ADDITIONAL LTIP AMOUNT.  For each LTIP Performance Period that is
               unexpired  as of the  Date of  Termination,  Executive  shall  be
               treated  as he would be  treated  under the LTIP in effect on the

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               effective date of the  Employment  Agreement if (1) he terminated
               employment  at age 57 other  than for  cause (as  defined  in the
               LTIP) and (2) he  retired  ("LTIP  Benefit");  provided  that the
               discretion of the Committee shall not be exercised so as to treat
               Executive less favorably than other members of Senior Management;
               provided  further that if such payment  cannot be provided  under
               the  terms  of the  LTIP or New  LTIP,  as  applicable,  then the
               Company shall pay amounts equal to such LTIP benefit,  reduced by
               amounts   actually  payable  under  the  LTIP  or  New  LTIP,  as
               applicable,  at the same time as they  otherwise  would have been
               paid;

          (v)  DEFERRED PENSIONS AND PENSION ENHANCEMENTS. The sum of

          (1)  all amounts previously deferred by, or accrued to the benefit of,
               Executive under any defined contribution  non-qualified plans (as
               described in Section 2.4),  whether vested or unvested,  together
               with any  accrued  earnings  thereon,  to the  extent  that  such
               amounts and earnings have not been previously paid by the Company
               (whether  pursuant to Section 2.4 or  otherwise)  or are provided
               under the terms of such non-qualified Plan; plus

          (2)  an amount equal to the positive difference, if any, between:

          (A)  the sum of the Lump-Sum Values of each Maximum Annuity that would
               be payable to Executive  under any defined  benefit Plan (whether
               or not qualified under Section 401(a)) if Executive had:

          (1)  become fully vested in all such previously-unvested benefits,

          (2)  accrued a number of years of service (for purposes of determining
               the  amount of such  benefits,  entitlement  to early  retirement
               benefits,  and all other purposes of such defined  benefit plans)
               that is three years  greater  than the number of years of service
               actually accrued by Executive as of the Termination Date, and

          (3)  received the lump-sum severance benefits specified in Section 4.1
               (a)  (excluding  LTIP Bonuses and any amounts in respect of Stock
               Options  or  Restricted  Shares,  if  any,  including   severance
               multiples  thereof)  as  covered  compensation  in equal  monthly
               installments  during  the  period of three  years  following  the
               Termination Date,

          minus

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          (B)  the  sum of (x)  the  Lump-Sum  Values  of  the  Maximum  Annuity
               benefits actually payable to Executive under each defined benefit
               Plan that is qualified  under Section  401(a) of the Code and (y)
               the  aggregate  amounts  previously  paid  (whether  pursuant  to
               Section 2.4 or otherwise) to Executive  under the defined benefit
               Plans (whether or not qualified under Section 401(a) of the Code)
               described in clause (A) of this Section 4.1(a)(v)(2).

     Notwithstanding  the  foregoing,  the amount  payable  under  this  Section
     4.1(a)(v)(2)  with respect to the SERP and the  Principal  Pension Plan for
     Employees  in the  aggregate,  shall not be less  than the  amount to which
     Executive  would be entitled as of the Date of  Termination  under  Section
     6.3(f) of the Employment  Agreement  (providing for certain benefits if the
     Date of Termination occurs prior to the Executive's 57th birthday).

          (vi) MULTIPLE  OF SALARY AND  BONUS.  An amount  equal to three  (3.0)
               times the sum of (x) Base Salary and (y) the Target Annual Bonus,
               each determined as of the Termination  Date;  provided,  however,
               that any  reduction  in  Executive's  Base Salary or Annual Bonus
               that  would  qualify  as Good  Reason  shall be  disregarded  for
               purposes of this clause (vi); and

          (vii)UNVESTED  DEFINED  CONTRIBUTION  PLAN.  To the  extent  not  paid
               pursuant to Section 4.1(a)(v),  an amount equal to the sum of the
               value of the unvested portion of Executive's  accounts or accrued
               benefits under any unqualified or qualified defined  contribution
               retirement  plan  maintained by the Company as of the Termination
               Date and forfeited by Executive by reason of the  Termination  of
               Employment.

          (b)  CONTINUATION OF WELFARE BENEFITS.  Until the third anniversary of
               the Termination  Date or such later date as any Plan may specify,
               the  Company   shall   continue  to  provide  to  Executive   and
               Executive's   family   welfare   benefits   (including   medical,
               prescription, dental, disability, salary continuance,  individual
               life, group life,  accidental death and travel accident insurance
               plans and  programs)  which are at least as favorable as the most
               favorable  Plans of the Company  applicable  to members of Senior
               Management who are actively  employed after the Termination  Date
               and  their  families.  The  cost  of  such  welfare  benefits  to
               Executive  shall not exceed the cost of such benefits to actively
               employed   members  of  Senior   Management  of  the  Company  as
               applicable from time to time.

         If the  Date  of  Termination  occurs  prior  to the  Executive's  57th
         birthday,  Executive  shall be entitled to the benefits  equivalent  to
         those payable under the  Principal  Welfare  Benefit Plan for Employees
         calculated  under the terms of such plan as if the Date of  Termination
         occurred after  Executive's 57th birthday,  reduced by amounts actually
         payable  under  such  plan,  and if  either  Executive  or the  Company
         reasonably  believes it is likely that such benefits cannot be provided
         on a tax-favored basis, the Company shall pay the cost of the insurance
         premium for such benefits.

         Executive's  rights under this Section shall be in addition to, and not
         in lieu of, any  post-termination  continuation  coverage or conversion
         rights  Executive  may  have  pursuant  to  applicable  law,  including
         continuation coverage required by Section 4980 of the Code.

     (c)  OUTPLACEMENT.  The Company shall pay on behalf of Executive reasonable
          fees and costs charged by the outplacement  firm selected by Executive
          to provide  outplacement  services to Executive  after the Termination
          Date,  within ten business days of its receipt of an invoice therefor,
          subject to a maximum of $30,000.

     (d)  INDEMNIFICATION,  DIRECTORS' AND OFFICERS'  LIABILITY  INSURANCE.  The
          provisions of Section 9.4 of the Employment Agreement (Indemnification
          and Insurance) shall continue to apply after the Effective Date.

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     (e)  STOCK  INCENTIVE   AWARDS.   Immediately   prior  to  the  Executive's
          Termination of Employment, Executive shall (i) become fully vested in,
          and may  thereafter  exercise in whole or in part, in accordance  with
          the terms thereof, all outstanding Stock Options and (ii) become fully
          vested in all Restricted Shares.

4.2  TERMINATION DURING A POST-MERGER OF EQUALS PERIOD. If, during a Post-Merger
     of Equals Period, the Company terminates  Executive's employment other than
     for Cause or  Disability,  or if Executive  terminates  employment for Good
     Reason,  Section 6.3 of the Employment Agreement (Termination Without Cause
     or for Good Reason) shall not apply,  and the Company's sole obligations to
     Executive under Articles II and IV shall be as follows:

     (a)  SEVERANCE  PAYMENTS.  The Company shall pay or provide  Executive,  in
          addition to all vested rights arising from  Executive's  employment as
          specified in Article II, a lump-sum  cash amount,  no more than thirty
          business  days  after the  Termination  Date,  equal to the sum of all
          amounts described in Section 4.1(a).

     (b)  CONTINUATION OF WELFARE  BENEFITS.  Until the third anniversary of the
          Termination  Date or such  later  date as any  Plan may  specify,  the
          Company shall continue to provide to Executive and Executive's  family
          welfare  benefits with the same scope and cost as described in Section
          4.1(b).

         If the  Date  of  Termination  occurs  prior  to the  Executive's  57th
         birthday,  Executive  shall be entitled to the benefits  equivalent  to
         those payable under the  Principal  Welfare  Benefit Plan for Employees
         calculated  under the terms of such plan as if the Date of  Termination
         occurred after  Executive's 57th birthday,  reduced by amounts actually
         payable  under  such  plan,  and if  either  Executive  or the  Company
         reasonably  believes it is likely that such benefits cannot be provided
         on a tax-favored basis, the Company shall pay the cost of the insurance
         premium for such benefits.

         Executive's  rights under this Section shall be in addition to, and not
         in lieu of, any  post-termination  continuation  coverage or conversion
         rights  Executive  may  have  pursuant  to  applicable  law,  including
         continuation coverage required by Section 4980 of the Code.

     (c)  OUTPLACEMENT.  The Company shall pay on behalf of Executive reasonable
          fees and  costs  charged  by the  outplacement  firm  selected  by the
          Company  to  provide  outplacement  services  to  Executive  after the
          Termination  Date,  within  ten  business  days of its  receipt  of an
          invoice therefor, subject to a maximum of $30,000.

     (d)  INDEMNIFICATION,  DIRECTORS' AND OFFICERS'  LIABILITY  INSURANCE.  The
          provision of Section 9.4 of the Employment Agreement  (Indemnification
          and Insurance)  shall continue to apply during a Post-Merger of Equals
          Period.

     (e)  STOCK  INCENTIVE   AWARDS.   Immediately   prior  to  the  Executive's
          Termination of Employment, Executive shall (i) become fully vested in,
          and may  thereafter  exercise in whole or in part, in accordance  with
          the terms thereof, all outstanding Stock Options and (ii) become fully
          vested in all Restricted Shares.

4.3  TERMINATION  DURING AN IMMINENT  CONTROL  CHANGE  PERIOD (WITH NO CHANGE OF
     CONTROL).  If,  during an  Imminent  Control  Change  Period,  the  Company
     terminates  Executive's employment other than for Disability and other than
     for a reason that would constitute Cause if there were a Change of Control,
     or if Executive  terminates  employment for a reason that would  constitute
     Good  Reason if there  were a Change  of  Control,  and in either  case the
     Imminent  Control Change Period does not culminate in a Consummation  Date,
     the applicable terms of the Employment Agreement shall govern, except that:

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     (a)  CONTINUATION OF WELFARE  BENEFITS.  Until the earlier of (i) the third
          anniversary  of the  Termination  Date or  (ii)  the  last  day of the
          Imminent  Control  Change  Period  (or such later date as any Plan may
          specify), if it would provide greater benefits to Executive than under
          the  Employment  Agreement,  the Company shall  continue to provide to
          Executive and Executive's  family welfare benefits with the same scope
          and cost as described in Section  6.3(d) of the  Employment  Agreement
          (Termination Without Cause or for Good Reason).

     (b)  OUTPLACEMENT.  The Company shall pay on behalf of Executive reasonable
          fees and  costs  charged  by the  outplacement  firm  selected  by the
          Company  to  provide  outplacement  services  to  Executive  after the
          Termination  Date,  within  ten  business  days of its  receipt  of an
          invoice  therefor,  subject to a maximum of $30,000.  All outplacement
          amounts payable on account of a Termination Date which occurred during
          an Imminent  Change of Control Period will be reduced,  (but not below
          zero) by  outplacement  amounts  paid to  Executive on account of such
          Termination Date but before payment pursuant to this Section 4.3(b).

     (c)  STOCK  INCENTIVE  AWARDS.  In addition to vesting in  accordance  with
          Section 6.3(g) of the Employment Agreement,  Executive's Stock Options
          (whether vested prior to or upon such Termination Date) will:

          (i)  not expire  (unless such Stock  Options would have so expired had
               Executive  remained  an  employee  of  the  Company)  during  the
               Imminent Control Change Period; and

          (ii) continue  to be  exercisable  after the  Termination  Date to the
               extent  provided in the applicable  grant  agreement or Plan, and
               thereafter,  such Stock Options shall not be  exercisable  during
               the Imminent Control Change Period.

                  Upon the date the Imminent  Control  Change  lapses  without a
                  Consummation  Date  Executive's  vested  Stock  Options may be
                  exercised,  in whole  or in part,  during  the  30-day  period
                  following the lapse of the Imminent Control Change, (but in no
                  case shall Stock Options remain  exercisable after the date on
                  which such Stock  Options  would have expired if Executive had
                  remained an employee of the Company).

4.4  TERMINATION DURING AN IMMINENT CONTROL CHANGE PERIOD (WHICH CULMINATES IN A
     CHANGE OF  CONTROL).  If,  during an Imminent  Control  Change  Period that
     culminates  in a  Consummation  Date,  the Company  terminates  Executive's
     employment other than for Cause or Disability,  or if Executive  terminates
     employment for Good Reason, the Employment  Agreement shall govern prior to
     the Consummation  Date, and upon the  Consummation  Date the Company's sole
     obligations to Executive under Articles II and IV shall be as follows:

     (a)  SEVERANCE  PAYMENTS.  The Company shall pay or provide  Executive,  in
          addition to all vested rights arising from  Executive's  employment as
          specified  in Article II, a lump-sum  cash amount  equal to the sum of
          all amounts described in Section 4.1(a).  Such amount shall be paid no
          more than ten  business  days  after an  Effective  Date that does not
          qualify as a Merger of Equals and no more than 30 business  days after
          an  Effective   Date  which  does  qualify  as  a  Merger  of  Equals.
          Notwithstanding  the  foregoing,  all  amounts  paid  pursuant to this
          Section  4.4(a)  shall be reduced  (but not below zero) by the same or
          similar  amounts paid to Executive  on account of the  Termination  of
          Employment  (under  this  Supplement  and  Amendment,  the  Employment
          Agreement or otherwise) to the extent such amounts would reasonably be
          considered  duplicative,  prior to the date payment is made under this
          Section 4.4(a).

     (b)  CONTINUATION OF WELFARE  BENEFITS.  Until the third anniversary of the
          Termination  Date or such  later  date as any  Plan may  specify,  the
          Company shall continue to provide to Executive and Executive's  family
          welfare  benefits with the same scope and cost as described in Section
          4.1(b). Notwithstanding the foregoing, all coverage under this Section
          4.4(b)  shall be reduced by all  coverage  provided  by the Company to

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          Executive  on account of the  Termination  of  Employment  (under this
          Supplement and Amendment, the Employment Agreement, or otherwise),  to
          the extent such amounts would  reasonably  be considered  duplicative,
          prior to the date  such  benefits  are  provided  under  this  Section
          4.4(b).

         If the  Date  of  Termination  occurs  prior  to the  Executive's  57th
         birthday,  Executive  shall be entitled to the benefits  equivalent  to
         those payable under the  Principal  Welfare  Benefit Plan for Employees
         calculated  under the terms of such plan as if the Date of  Termination
         occurred after  Executive's 57th birthday,  reduced by amounts actually
         payable  under  such  plan,  and if  either  Executive  or the  Company
         reasonably  believes it is likely that such benefits cannot be provided
         on a tax-favored basis, the Company shall pay the cost of the insurance
         premium for such benefits.

         Executive's  rights under this Section shall be in addition to, and not
         in lieu of, any  post-termination  continuation  coverage or conversion
         rights  Executive  may  have  pursuant  to  applicable  law,  including
         continuation coverage required by Section 4980 of the Code.

     (c)  OUTPLACEMENT.  The Company shall pay on behalf of Executive reasonable
          fees and  costs  charged  by the  outplacement  firm  selected  by the
          Company  to  provide  outplacement  services  to  Executive  after the
          Termination  Date,  within  ten  business  days of its  receipt  of an
          invoice therefor, subject to a maximum of $30,000. Notwithstanding the
          foregoing,  all outplacement  amounts payable pursuant to this Section
          4.4(c) shall be reduced (but not below zero) by  outplacement  amounts
          paid to  Executive  on account of such  Termination  Date  (under this
          Supplement and Amendment,  the Employment Agreement, or otherwise) but
          prior to the date payment is made pursuant to this Section 4.4(c).

     (d)  STOCK  INCENTIVE  AWARDS.  In addition to vesting in  accordance  with
          Section 6.3(g) of the Employment  Agreement,  Executive's vested Stock
          options (whether vested prior to or upon such Termination  Date) shall
          be treated as follows:

          (i)  not expire  (unless such Stock  Options would have so expired had
               Executive  remained  an  employee  of  the  Company)  during  the
               Imminent Control Change Period;

          (ii) continue  to be  exercisable  after the  Termination  Date to the
               extent  provided in the applicable  grant  agreement or Plan, and
               thereafter,  such Stock Options shall not be  exercisable  during
               the Imminent Control Change Period.

               Upon the  Consummation  Date,  such vested  Stock  Options may be
               exercised  by  Executive  in whole or in part,  during the 30-day
               period  following the  Consummation  Date,  (but in no case shall
               Stock  Options  remain  exercisable  after the date on which such
               Stock  options  would have expired if  Executive  had remained an
               employee of the Company).  Notwithstanding  any provision in this
               Section,   if  the   Consummation   Date   is  a   Reorganization
               Transaction,  and if so provided under the agreement  pursuant to
               which  the  Reorganization  Transaction  is  effected,  then  all
               Executive's  Stock  Options  shall (a) be  extinguished  for such
               consideration  as is  provided  for  vested  options  under  such
               agreement; or (b) be converted into options to purchase the stock
               of the Surviving Corporation, and such converted options shall be
               subject to the same option terms as those applicable prior to the
               Consummation Date.

4.5  WAIVER AND RELEASE.  Notwithstanding  anything herein to the contrary,  the
     Company shall have no  obligation to Executive  under Section 4.1, 4.2, 4.3
     or 4.4 or  Article V unless  and until  Executive  executes  a release  and
     waiver  of PFGI  and the  Companies,  in  substantially  the  same  form as

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     attached hereto as Exhibit A. This Section 4.5 shall superseded Section 6.5
     of the Employment  Agreement  (Waiver and Release) insofar as it relates to
     material contained in this Section 4.5, effective on the Effective Date.

4.6  TERMINATION BY THE COMPANY FOR CAUSE. If the Company terminates Executive's
     employment for Cause during the Post-Change  Employment  Period or Imminent
     Control Change Period, Section 6.1 of the Employment Agreement (Termination
     for Cause or Other than for Good  Reason,  etc.)  shall not apply,  and the
     Company's sole obligation to Executive under Articles II and IV shall be to
     pay  Executive,  a lump-sum  cash amount  equal to all Accrued  Obligations
     determined  as of the  Termination  Date.  The LTIP Bonus shall be governed
     according to the terms of the LTIP and New LTIP, as applicable.

4.7  TERMINATION BY EXECUTIVE OTHER THAN FOR GOOD REASON.

     (a)  If Executive terminates  employment during the Post-Change  Employment
          Period or Imminent  Control  change Period other than for  Retirement,
          Good  Reason,  Disability  or  Death,  Section  6.2 of the  Employment
          Agreement (Termination for Retirement,  Death or Disability) shall not
          apply,  and the Company's sole  obligation to Executive under Articles
          II and IV shall be to pay  Executive,  a lump-sum cash amount equal to
          all Accrued  Obligations  determined as of the  Termination  Date. The
          LTIP Bonus  shall be governed  according  to the terms of the LTIP and
          New LTIP, as applicable.

     (b)  If Executive terminates  employment during the Post-Change  Employment
          Period  or  Imminent  Control  Change  Period  due to his  Retirement,
          Section 6.2 of the Employment  Agreement  (Termination for Retirement,
          Death or Disability) shall govern.

4.8  TERMINATION  BY THE  COMPANY  FOR  DISABILITY.  If the  Company  terminates
     Executive's  employment  by reason of  Executive's  Disability  during  the
     Post-Change  Employment  Period or Imminent Control Change Period,  Section
     6.2 of the  Employment  Agreement  (Termination  for  Retirement,  Death or
     Disability) shall not apply, and the Company's sole obligation to Executive
     under Articles II and IV shall be as follows:

     (a)  to pay Executive (i) the amount  determined in accordance with Section
          6.2 of the Employment Agreement (Termination for Retirement,  Death or
          Disability),  and (ii) to the  extent  not paid  under the  Employment
          Agreement,  a lump-sum  cash amount  equal to all Accrued  Obligations
          determined as of the Termination Date, and

     (b)  to  provide   Executive   disability  and  other  benefits  after  the
          Termination  Date  that are not less than the most  favorable  of such
          benefits  then  available  under Plans of the Company to disabled peer
          executives of the Company.

     If the Termination  Date occurred during an Imminent  Control Change Period
     which  had a  Consummation  Date  which is not also a Merger of Equals or a
     Post-Change  Employment  Period other than a Post-Merger  of Equals Period,
     such disability and other benefits shall also be no less favorable,  in the
     aggregate,  than the most  favorable of the  disability  and other benefits
     available  to  Executive  under such Plans in effect at any time during the
     90-day  period  immediately  preceding  (1)  the  Effective  Date  if  such
     Termination Date occurred during a Post-Change Employment Period or (2) the
     date of the  Imminent  Control  Change if such  Termination  Date  occurred
     during an  Imminent  Control  Change  Period.  The LTIP Bonus shall also be
     governed according to the terms of the LTIP and New LTIP, as applicable.

4.9  IF UPON DEATH.  Notwithstanding  anything to the contrary set forth in this
     Article  IV,  if   Executive's   employment  is  terminated  by  reason  of
     Executive's  death  during the  Post-Change  Employment  Period or Imminent
     Control Change Period, Section 6.2 of the Employment Agreement (Termination
     for  Retirement,  Death or Disability)  shall not apply,  and the Company's
     sole obligations to Executive under Articles II and IV shall be as follows:

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     (a)  to pay Executive's  Beneficiary or estate (i) the amount determined in
          accordance with Section 6.2 of the Employment  Agreement  (Termination
          for  Retirement,  Death or Disability) and (ii) to the extent not paid
          under the  Employment  Agreement,  a lump-sum cash amount equal to all
          Accrued Obligations; and

     (b)  to  provide  Executive's  estate  or  Beneficiary  survivor  and other
          benefits that are not less than the most favorable  survivor and other
          benefits then  available  under Plans of the Company to the estates or
          the surviving families of peer executives of the Company.

     If the Termination  Date occurred  during an Imminent  Control Change which
     had a  Consummation  Date  which  is  not  also a  Merger  of  Equals  or a
     Post-Change  Employment  Period other than a Post-Merger  of Equals Period,
     such survivor  benefits shall also be no less favorable,  in the aggregate,
     than the most  favorable  of the survivor  benefits  available to Executive
     under such Plans in effect at any time during the 90-day period immediately
     preceding (1) the Effective Date if such Termination Date occurred during a
     Post-Change  Employment  Period  or (2) the  date of the  Imminent  Control
     Change if such  Termination Date occurred during an Imminent Control Change
     Period. The LTIP Bonus shall be governed according to the terms of the LTIP
     and New LTIP, as applicable.

4.10 EXECUTIVE'S ELECTION TO WAIVE.  Notwithstanding the foregoing provisions of
     this  Article  IV  or  any  provision  of  the  Employment  Agreement,   if
     Executive's employment is terminated during a Post-Change Employment Period
     other  than  for  Disability,  or  other  than by the  Company  for  Cause,
     including under circumstances entitling Executive to payments and provision
     of benefits under Section 4.1 or 4.2, then Executive may waive  ("Severance
     Waiver") all his rights to such  payments and  benefits,  and all rights to
     payments and  provision  of benefits  under  Section 6.3 of the  Employment
     Agreement; provided, however, that the Severance Waiver shall not include a
     wavier of payment or provision of Executive's Accrued Obligations. Any such
     Severance  Waiver shall be in writing and shall be delivered to the Company
     as  provided  in Section  9.7  within  three  days if such  termination  of
     employment (and in any event prior to receipt of Executive's receipt of any
     payments or  benefits).  The  provisions  of Section 7.1 of the  Employment
     Agreement  (non-Competition)  shall not  apply  from and after the date the
     Severance Waiver is duly delivered to the Company.

                                   ARTICLE V.

                   CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

5.1  GROSS-UP  PAYMENT.  During the  Supplement  Term,  this  Section  5.1 shall
     supersede  Section  8.1  of  the  Employment  Agreement,  effective  on  an
     Effective Date. If at any time or from time to time, it shall be determined
     by the Company's  independent  auditors,  but only after an Effective Date,
     that any payment or other  benefit to  Executive  pursuant to Article II or
     Article  IV of this  Supplement  and  Amendment  or  otherwise  ("POTENTIAL
     PARACHUTE  PAYMENT") is or will become subject to the excise tax imposed by
     Section 4999 of the Code or any similar tax payable under any United States
     federal,  state,  local,  foreign or other law ("EXCISE  Taxes"),  then the
     Company  shall pay or cause to be paid a tax  gross-up  payment  ("GROSS-UP
     PAYMENT")  with  respect to all such  Excise  Taxes and other  Taxes on the
     GROSS-UP  PAYMENT.  The  GROSS-UP  PAYMENT  shall be an amount equal to the
     product of

     (a)  The amount of the Excise Taxes  (calculated at the effective  marginal
          rates of all federal, state, local, foreign or other law),

          multiplied by

     (b)  A fraction (the  "GROSS-UP  MULTIPLE"),  the numerator of which is one
          (1.0),  and the  denominator of which is one (1.0) minus the lesser of
          (i)  the  sum,  expressed  as a  decimal  fraction,  of the  effective

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          marginal  rates of any Taxes and any Excise  Taxes  applicable  to the
          GROSS-UP PAYMENT or (ii) .80. If different rates of tax are applicable
          to various  portions of a GROSS-UP  PAYMENT,  the weighted  average of
          such rates  shall be used.  For  purposes of this  section,  Executive
          shall be deemed to be subject to the highest  effective  marginal rate
          of Taxes.

     The  GROSS-UP  PAYMENT is intended  to  compensate  Executive  for all such
     Excise Taxes and any other Taxes  payable by Executive  with respect to the
     GROSS-UP  PAYMENT.  The Company  shall pay or cause to be paid the Gross-Up
     Payment  to  Executive  within  ten (10)  days of the  calculation  of such
     amount, but in no event after the Executive makes the payment to the IRS of
     such Excise Taxes.

5.2  LIMITATION ON GROSS-UP  PAYMENTS.  This section 5.2 shall supersede Section
     8.2 of the Employment Agreement, effective on the Supplement Date.

     (a)  To the extent  possible,  any payments or other  benefits to Executive
          pursuant  to Article  II and  Article  IV of this  Agreement  shall be
          allocated as consideration for Executive's entry into the covenants of
          Article VII of the Employment Agreement (Restrictive Covenants).

     (b)  Notwithstanding  any  other  provision  of  this  Article  V,  if  the
          aggregate  After-Tax  Amount  (as  defined  below)  of  the  Potential
          Parachute  Payments and GROSS-UP  PAYMENT  that,  but for this Section
          5.2, would be payable to Executive,  does not exceed 110% of After-Tax
          Floor Amount (as defined  below),  then no GROSS-UP  PAYMENT  shall be
          made to Executive  and the  aggregate  amount of  Potential  Parachute
          Payments  payable to  Executive  shall be  reduced  (but not below the
          Floor Amount) to the largest amount which would both (i) not cause any
          Excise Tax to be payable by Executive and (ii) not cause any Potential
          Parachute Payments to become nondeductible by the Company by reason of
          Section 280G of the Code (or any successor provision). For purposes of
          the preceding sentence, Executive shall be deemed to be subject to the
          highest effective marginal rate of Taxes.

     (c)  For purposes of this Supplement and Amendment:

          (i)  "AFTER-TAX  AMOUNT" means the portion of a specified  amount that
               would  remain  after  payment  of all Taxes  paid or  payable  by
               Executive in respect of such specified amount;

          (ii) "FLOOR  AMOUNT"  means the greatest  pre-tax  amount of Potential
               Parachute  Payments  that  could  be  paid to  Executive  without
               causing  Executive  to  become  liable  for any  Excise  Taxes in
               connection therewith; and

          (iii)"AFTER-TAX  FLOOR AMOUNT" means the After-Tax Amount of the Floor
               Amount.

5.3  ADDITIONAL  GROSS-UP  AMOUNTS.  If, for any  reason  (whether  pursuant  to
     subsequently enacted provisions of the Code, final regulations or published
     rulings  of  the  IRS,  or  a  final  judgment  of  a  court  of  competent
     jurisdiction) the Company's  independent  auditors later determine that the
     amount of Excise  Taxes  payable by  Executive  is greater  than the amount
     initially  determined  pursuant to Section  5.1,  then the  Company  shall,
     subject to Sections  5.2 and 5.4,  pay  Executive,  within ten (10) days of
     such  determination,  or pay to the IRS as required by  applicable  law, an
     amount (which shall also be deemed a Gross-Up Payment) equal to the product
     of:

     (a)  the sum of (i) such  additional  Excise  Taxes and (ii) any  interest,
          penalties,  expenses or other costs  incurred by Executive as a result
          of having taken a position in  accordance  with a  determination  made
          pursuant to Section 5.1 or 5.4,

          multiplied by

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     (b)  the Gross-Up Multiple.

5.4  AMOUNT INCREASED OR CONTESTED.

     (a)  Executive  shall  notify  the  Company  in  writing  (an  "EXECUTIVE'S
          NOTICE") of any claim by the IRS or other  taxing  authority  (an "IRS
          CLAIM") that, if successful, would require the payment by Executive of
          Excise Taxes in respect of Potential  Parachute  Payments in an amount
          in excess of the amount of such Excise Taxes  determined in accordance
          with Section  5.1.  Executive's  Notice  shall  include the nature and
          amount of such IRS  Claim,  the date on which such IRS Claim is due to
          be paid (the "IRS  CLAIM  DEADLINE"),  and a copy of all  notices  and
          other documents or correspondence  received by Executive in respect of
          such IRS Claim. Executive shall give the Executive's Notice as soon as
          practicable,  but no  later  than  the  earlier  of (i) 10 days  after
          Executive  first  obtains  actual  knowledge of such IRS Claim or (ii)
          five days before the IRS Claim Deadline;  provided,  however, that any
          failure to give such  Executive's  Notice shall  affect the  Company's
          obligations  under this Article only to the extent that the Company is
          actually  prejudiced  by such  failure.  If at least one  business day
          before the IRS Claim Deadline the Company shall:

          (i)  deliver to  Executive a written  certificate  from the  Company's
               independent auditors ("COMPANY  CERTIFICATE") to the effect that,
               notwithstanding  the IRS  Claim,  the  amount  of  Excise  Taxes,
               interest or  penalties  payable by Executive is either zero or an
               amount less than the amount specified in the IRS Claim,

          (ii) pay to Executive, or to the IRS as required by applicable law, an
               amount (which shall also be deemed a Gross-Up  Payment)  equal to
               difference  between  the  product of (x) amount of Excise  Taxes,
               interest and penalties specified in the Company  Certificate,  if
               any, multiplied by (y) the Gross-Up Multiple, less the portion of
               such  product,  if  any,  previously  paid  to  Executive  by the
               Company, and

          (iii)direct  Executive  pursuant  to  Section  5.4(d) to  contest  the
               balance of the IRS Claim,

     then Executive shall pay only the amount, if any, of Excise Taxes, interest
     and  penalties  specified  in the  Company  Certificate.  In no event shall
     Executive pay an IRS Claim earlier than 30 business days after having given
     an  Executive's  Notice  to the  Company  (or,  if  sooner,  the IRS  Claim
     Deadline).

     (b)  At any time  after the  payment by  Executive  of any amount of Excise
          Taxes,  other  Taxes or related  interest or  penalties  in respect of
          Potential  Parachute  Payments  (including any such amount equal to or
          less than the amount of such  Excise  Taxes  specified  in any Company
          Certificate,  or IRS Claim), the Company may in its discretion require
          Executive to pursue a claim for a refund (a "REFUND  CLAIM") of all or
          any portion of such Excise Taxes,  other Taxes,  interest or penalties
          as may be specified by the Company in a written notice to Executive.

     (c)  If the Company notifies  Executive in writing that the Company desires
          Executive  to  contest  an IRS  Claim or to  pursue  a  Refund  Claim,
          Executive shall:

          (i)  give the Company all information  that it reasonably  requests in
               writing  from time to time  relating  to such IRS Claim or Refund
               Claim, as applicable,

          (ii) take  such  action  in  connection  with such IRS Claim or Refund
               Claim (as  applicable)  as the  Company  reasonably  requests  in
               writing   from   time  to   time,   including   accepting   legal
               representation  with respect  thereto by an attorney  selected by

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               the Company, subject to the approval of Executive (which approval
               shall not be unreasonably withheld or delayed),

          (iii)cooperate  with the  Company in good  faith to  contest  such IRS
               Claim or pursue such Refund Claim, as applicable,

          (iv) permit the Company to participate in any proceedings  relating to
               such IRS Claim or Refund Claim, as applicable, and

          (v)  contest such IRS Claim or prosecute  Refund Claim (as applicable)
               to a determination before any administrative tribunal, in a court
               of initial  jurisdiction and in one or more appellate  courts, as
               the Company may from time to time determine in its discretion.

     The Company shall control all proceedings in connection with such IRS Claim
     or Refund Claim (as  applicable)  and in its discretion may cause Executive
     to  pursue  or  forego  any and all  administrative  appeals,  proceedings,
     hearings and conferences  with the Internal Revenue Service or other taxing
     authority  in  respect of such IRS Claim or Refund  Claim (as  applicable);
     provided that (i) any extension of the statute of  limitations  relating to
     payment of taxes for the  taxable  year of  Executive  relating  to the IRS
     Claim is limited  solely to such IRS Claim,  (ii) the Company's  control of
     the IRS Claim or Refund  Claim (as  applicable)  shall be limited to issues
     with  respect  to which a  Gross-Up  Payment  would be  payable,  and (iii)
     Executive  shall be entitled to settle or contest,  as the case may be, any
     other  issue  raised  by the  Internal  Revenue  Service  or  other  taxing
     authority.

     (d)  The Company may at any time in its discretion  direct Executive to (i)
          contest  the IRS Claim in any  lawful  manner  or (ii) pay the  amount
          specified  in an IRS  Claim  and  pursue  a  Refund  Claim;  provided,
          however, that if the Company directs Executive to pay an IRS Claim and
          pursue a Refund  Claim,  the Company  shall advance the amount of such
          payment to Executive  on an  interest-free  basis and shall  indemnify
          Executive,  on an after-tax  basis,  for any Excise Tax or income tax,
          including related interest or penalties,  imposed with respect to such
          advance.

     (e)  The Company shall pay directly all legal,  accounting  and other costs
          and expenses (including additional interest and penalties) incurred by
          the Company or  Executive in  connection  with any IRS Claim or Refund
          Claim, as applicable,  and shall indemnify Executive,  on an after-tax
          basis,  for any Excise Tax or income tax,  including  related interest
          and  penalties,  imposed  as a result  of such  payment  of costs  and
          expenses.

5.5  REFUNDS.  If,  after the receipt by  Executive or the IRS of any payment or
     advance of Excise  Taxes or other  Taxes by the  Company  pursuant  to this
     Article,  Executive  receives any refund with respect to such Excise Taxes,
     Executive  shall  (subject to the Company's  complying  with any applicable
     requirements  of Section  5.4)  promptly pay the Company the amount of such
     refund  (together  with any interest  paid or credited  thereon after taxes
     applicable  thereto).  If,  after the  receipt  by  Executive  of an amount
     advanced by the Company pursuant to Section 5.4 or receipt by the IRS of an
     amount paid by the Company on behalf of the  Executive  pursuant to Section
     5.4, a  determination  is made that Executive  shall not be entitled to any
     refund with respect to such claim and the Company does not notify Executive
     in writing of its intent to contest such determination within 30 days after
     the  Company  receives  written  notice  of such  determination,  then such
     advance  shall be  forgiven  and shall not be required to be repaid and the
     amount of such advance shall offset,  to the extent thereof,  the amount of
     Gross-Up  Payment  required  to be paid.  Any contest of a denial of refund
     shall be controlled by Section 5.4(d).

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                                  ARTICLE VI.

                    EXPENSES, INTEREST AND DISPUTE RESOLUTION

6.1  LEGAL FEES AND OTHER EXPENSES.

     (a)  If Executive  incurs legal fees or other  expenses  (including  expert
          witness and accounting fees and  arbitration  costs and expenses under
          Section 6.3) in an effort to secure,  preserve,  establish entitlement
          to or obtain benefits under this Supplement and Amendment, the Company
          shall,  regardless of the outcome of such effort,  reimburse Executive
          on a current basis (in accordance  with Section  6.1(b)) for such fees
          and expenses.

     (b)  Reimbursement  of legal fees and expenses and gross-up  payments shall
          be made monthly within 10 days after Executive's written submission of
          a request for reimbursement  together with evidence that such fees and
          expenses were incurred.

     (c)  If  Executive  does not prevail  (after  exhaustion  of all  available
          judicial  remedies)  in  respect  of a claim  by  Executive  or by the
          Company  hereunder,  and the  Company  establishes  before  a court of
          competent  jurisdiction  that  Executive had no  reasonable  basis for
          Executive's  claim  hereunder,  or  for  Executive's  response  to the
          Company's  claim  hereunder,  or that Executive acted in bad faith, no
          further  reimbursement  for legal  fees and  expenses  shall be due to
          Executive  in  respect of such claim and  Executive  shall  refund any
          amounts previously reimbursed hereunder with respect to such claim.

     (d)  In no event shall  Executive be entitled to  reimbursement  under this
          Supplement  and Amendment and under the  Employment  Agreement for the
          same fees, costs or expenses.

     (e)  The Company shall  promptly  reimburse  Executive  for all  attorney's
          fees, costs and expenses  incurred by Executive in connection with the
          negotiation, execution and delivery of this Supplement and Amendment.

6.2  INTEREST.  If the Company  does not pay any amount due to  Executive  under
     this  Supplement  and Amendment  within ten business days after such amount
     first became due and owing,  interest  shall accrue on such amount from the
     date it became due and owing  until the date of  payment at an annual  rate
     equal to 300 basis points above the base commercial  lending rate published
     in THE WALL STREET JOURNAL in effect from time to time during the period of
     such nonpayment.

6.3  BINDING ARBITRATION. Any dispute, controversy or claim arising out of or in
     connection  with or relating to this Supplement and Amendment or any breach
     or alleged breach  thereof,  or any benefit or alleged  benefit  hereunder,
     shall be  submitted  to and settled by binding  arbitration  in Des Moines,
     Iowa, in accordance with the Commercial  Arbitration  Rules of the American
     Arbitration  Association.  Any dispute,  controversy or claim submitted for
     resolution shall be submitted to three (3)  arbitrators,  each of whom is a
     nationally  recognized  executive  compensation  specialist.   The  Company
     involved in the  dispute,  controversy  or claim,  or PFGI if more than one
     Company is so involved,  shall select one  arbitrator,  the Executive shall
     select one  arbitrator  and the third  arbitrator  shall be selected by the
     first two  arbitrators.  Any award  rendered  shall be final and conclusive
     upon the parties and a judgment thereon may be entered in the highest court
     of a forum,  state or federal,  having  jurisdiction.  The  expenses of the
     arbitration  shall be borne according to Section 6.1. No arbitration  shall
     be  commenced  after  the date  when  institution  of  legal  or  equitable
     proceedings  based  upon  such  subject  matter  would  be  barred  by  the
     applicable statute of limitations. Notwithstanding anything to the contrary
     contained  in  this  Section  6.3  or  elsewhere  in  this  Supplement  and
     Amendment,  either party may bring an action in the District  Court of Polk
     County,  or the United States  District Court for the Southern  District of
     Iowa, if jurisdiction  there lies, in order to maintain the status quo ante
     of the  parties.  The "status  quo ante" is defined as the last  peaceable,

                                      218

     uncontested status between the parties. However, neither the party bringing
     the action nor the party  defending the action  thereby waives its right to
     arbitration  of any  dispute,  controversy  or claim  arising  out of or in
     connection or relating to this  Supplement and  Amendment.  Notwithstanding
     anything to the contrary contained in this Section 6.3 or elsewhere in this
     Supplement  and  Amendment,  either  party  may seek  relief in the form of
     specific  performance,  injunctive  or other  equitable  relief in order to
     enforce the decision of the  arbitrator(s).  The parties  agree that in any
     arbitration  commenced  pursuant  to this  Supplement  and  Amendment,  the
     parties  shall  be  entitled  to  such  discovery  (including  depositions,
     requests for the production of documents and  interrogatories)  as would be
     available in a federal  district  court  pursuant to Rules 26 through 37 of
     the Federal Rules of Civil Procedure.  In the event that either party fails
     to comply with its discovery obligations hereunder, the arbitrator(s) shall
     have full power and authority to compel  disclosure or impose  sanctions to
     the full extent of Rule 37 of the Federal Rules of Civil Procedure.

                                  ARTICLE VII.

                   NO SET-OFF OR MITIGATION; NO DOUBLE PAYMENT

7.1  NO SET-OFF BY COMPANY.  Executive's  right to receive when due the payments
     and other  benefits  provided for under this  Supplement  and  Amendment is
     absolute,  unconditional and subject to no setoff, counterclaim or legal or
     equitable defense. Time is of the essence in the performance by the Company
     of its obligations under this Supplement and Amendment. Any claim which the
     Company may have against Executive, whether for a breach of this Supplement
     and  Amendment  or  otherwise,  shall be brought  in a  separate  action or
     proceeding and not as part of any action or proceeding brought by Executive
     to enforce  any rights  against  the  Company  under  this  Supplement  and
     Amendment.

7.2  NO  MITIGATION.  Executive  shall not have any duty to mitigate the amounts
     payable by the Company under this  Supplement  and Amendment by seeking new
     employment or self-employment following termination. Except as specifically
     otherwise  provided in this  Supplement and Amendment,  all amounts payable
     pursuant to this Supplement and Amendment  shall be paid without  reduction
     regardless  of any amounts of salary,  compensation  or other amounts which
     may be paid or payable to Executive as the result of Executive's employment
     by another employer or self-employment.

7.3  NO DOUBLE PAYMENT.  Notwithstanding  any other provision of this Supplement
     and  Amendment,  the Executive  shall not be entitled to payment under both
     this  Supplement  and Amendment and the  Employment  Agreement for the same
     type of benefit or payment,  to the extent such payment would reasonably be
     considered duplicative.  Amounts paid hereunder shall be reduced by amounts
     paid  under  the  Employment  Agreement  for the same  type of  benefit  or
     payment,  to  the  extent  such  payment  would  reasonably  be  considered
     duplicative.

                                 ARTICLE VIII.

                            NON-EXCLUSIVITY OF RIGHTS

8.1  WAIVER OF CERTAIN OTHER RIGHTS.  To the extent that lump sum cash severance
     payments are made to  Executive  pursuant to Article IV,  Executive  hereby
     waives the right to receive severance  payments of severance benefits under
     any other Plan or agreement of the Company,  including under the Employment
     Agreement.

8.2  OTHER RIGHTS.  Except as expressly  provided in Section 8.1 or elsewhere in
     this  Supplement and  Amendment,  this  Supplement and Amendment  shall not
     prevent or limit  Executive's  continuing  or future  participation  in any
     benefit,  bonus,  incentive or other Plans  provided by the Company and for
     which Executive may qualify,  nor shall this Supplement and Amendment limit
     or  otherwise  affect  such  rights as  Executive  may have under any other
     agreements  with the Company.  The applicable  provisions of the Employment
     Agreement  (including the provision in Article VII (Restricted  Covenants))

                                      219

     shall continue to apply,  except as expressly  provided in Sections 8.1 and
     4.10 or elsewhere  in this  Supplement  and  Amendment.  Amounts  which are
     vested benefits or which  Executive is otherwise  entitled to receive under
     any Plan and any other  payment or benefit  required by law at or after the
     Termination  Date  shall  be  payable  in  accordance  with  such  Plan  or
     applicable  law  except  as  expressly  modified  by  this  Supplement  and
     Amendment.

8.3  NO RIGHT TO CONTINUED EMPLOYMENT.  Nothing in this Supplement and Amendment
     shall  guarantee the right of Executive to continue in employment,  and the
     Companies  retain the right to terminate the Executive's  employment at any
     time for any reason or for no reason.

                                  ARTICLE IX.

                                  MISCELLANEOUS

9.1  NO  ASSIGNABILITY.  This  Supplement and Amendment is personal to Executive
     and  without  the  prior  written  consent  of  the  Company  shall  not be
     assignable by Executive  otherwise  than by will or the laws of descent and
     distribution.  This  Supplement and Amendment shall inure to the benefit of
     and be enforceable by Executive's legal representatives.

9.2  SUCCESSORS. This Supplement and Amendment shall inure to the benefit of and
     be binding upon the Company and its  successors  and  assigns.  The Company
     will  require any  successor  (whether  direct or  indirect,  by  purchase,
     merger,  consolidation  or  otherwise) to all or  substantially  all of the
     business or assets of the Company to assume  expressly and agree to perform
     this  Supplement  and  Amendment  in the same manner and to the same extent
     that the Company would be required to perform it if no such  succession had
     taken place.  Any  successor to the business or assets of the Company which
     assumes or agrees to perform this  Supplement and Amendment by operation of
     law, contract,  or otherwise shall be jointly and severally liable with the
     Company under this  Supplement  and Amendment as if such successor were the
     Company.

9.3  PAYMENTS TO  BENEFICIARY.  If Executive  dies before  receiving  amounts to
     which  Executive is entitled  under this  Supplement  and  Amendment,  such
     amounts shall be paid in a lump sum to Executive's Beneficiary (or estate).

9.4  NON-ALIENATION  OF BENEFITS.  Benefits  payable under this  Supplement  and
     Amendment shall not be subject in any manner to  anticipation,  alienation,
     sale,  transfer,  assignment,  pledge,  encumbrance,  charge,  garnishment,
     execution  or levy of any kind,  either  voluntary or  involuntary,  before
     actually  being  received by Executive,  and any such attempt to dispose of
     any right to benefits  payable under this Supplement and Amendment shall be
     void.

9.5  SEVERABILITY.  If any one or more  Articles,  Sections or other portions of
     this  Supplement  and Amendment  are declared by any court or  governmental
     authority to be unlawful or invalid,  such unlawfulness or invalidity shall
     not serve to  invalidate  any  Article,  Section  or other  portion  not so
     declared to be unlawful or invalid.  Any Article,  Section or other portion
     so  declared  to  be  unlawful  or  invalid  shall  be  construed  so as to
     effectuate  the terms of such  Article,  Section  or other  portion  to the
     fullest extent possible while remaining lawful and valid.

9.6  AMENDMENTS.  This Supplement and Amendment shall not be amended or modified
     except by written instrument executed by the Company and Executive.

9.7  NOTICES.  All notices and other  communications  under this  Supplement and
     Amendment    shall   be   in   writing   and    delivered   by   hand,   by
     nationally-recognized delivery service that promises overnight delivery, or
     by first-class  registered or certified  mail,  return  receipt  requested,
     postage prepaid, addressed as follows:

                                      220

     If to Executive,  to Executive at his most recent home address on file with
     the Company.

     With a copy to:

     Susan  Daley,  Esq.
     Altheimer  & Grey
     10 South  Wacker  Drive,  Suite 4000
     Chicago, Illinois 60606
     Facsimile No.: (312) 715-4800

     If to any Company:

     Principal  Financial  Group,  Inc.
     711 High Street Des Moines,  Iowa 50392
     Attention: Karen Shaff
     Facsimile No.: (515) 235-9852

     With copy to:

     Pamela Baker, Esq.
     Sonnenschein Nath & Rosenthal
     8000 Sears Tower
     Chicago, Illinois 60606
     Facsimile No.: (312) 876-7934

     or to such other address as either party shall have  furnished to the other
     in writing.  Notice and  communications  shall be effective  when  actually
     received by the addressee.

9.8  CONTINUING VALIDITY OF EMPLOYMENT AGREEMENT. Except as amended herein or as
     subsequently  amended,  the Employment  Agreement shall remain in effect in
     accordance with its terms.

9.9  COUNTERPARTS.  This Supplement and Amendment may be executed in two or more
     counterparts,  each of which shall be deemed an original,  but all of which
     together constitute one and the same instrument.

9.10 GOVERNING  LAW. This  Supplement  and Amendment  shall be  interpreted  and
     construed in accordance with the laws of the State of Iowa,  without regard
     to its choice of law principles.

9.11 CAPTIONS.  The captions of this  Supplement and Amendment are not a part of
     the provisions hereof and shall have no force or effect.

9.12 NUMBER AND GENDER.  Wherever  appropriate,  the singular  shall include the
     plural,  the plural shall  include the singular,  and the  masculine  shall
     include the feminine.

9.13 TAX  WITHHOLDING.  The Company may withhold from any amounts  payable under
     this  Supplement  and  Amendment any Taxes that are required to be withheld
     pursuant  to any  applicable  law or  regulation  and may  report  all such
     amounts  payable to such  authority as is required by any applicable law or
     regulation.

9.14 WAIVER.  Executive's  failure to insist  upon  strict  compliance  with any
     provision of this  Supplement and Amendment shall not be deemed a waiver of
     such provision or any other provision of this  Supplement and Amendment.  A

                                      221

     waiver of any  provision  of this  Supplement  and  Amendment  shall not be
     deemed a waiver of any other  provision,  and any waiver of any  default in
     any such  provision  shall  not be  deemed a waiver  of any  later  default
     thereof or of any other provision.

9.15 JOINT AND SEVERAL LIABILITY.  The obligations of the Companies to Executive
     under this Supplement and Amendment shall be joint and several.

9.16 ENTIRE  AGREEMENT.  This  Supplement  and  Amendment,   together  with  the
     Employment Agreement, contains the entire understanding ---------------- of
     the Companies and Executive with respect to its subject matter.

IN  WITNESS  WHEREOF,  Executive,  Principal  Financial  Group,  Inc.  Principal
Financial  Services,  Inc., and Principal  Life Insurance  Company have executed
this Supplement and Amendment as of the date first above written.

                                            EXECUTIVE

                                            /s/ J. BARRY GRISWELL
                                            ------------------------------------
                                            J. Barry Griswell

                                            PRINCIPAL FINANCIAL GROUP, INC.

                                            By: --------------------------------
                                            Title:  CHAIRMAN, HUMAN RESOURCES
                                                    COMMITTEE OF THE BOARD

                                            PRINCIPAL FINANCIAL SERVICES, INC.

                                            By: --------------------------------
                                            Title:  CHAIRMAN, HUMAN RESOURCES
                                                    COMMITTEE OF THE BOARD

                                            PRINCIPAL LIFE INSURANCE COMPANY

                                            By: --------------------------------
                                            Title:  CHAIRMAN, HUMAN RESOURCES
                                                    COMMITTEE OF THE BOARD

                                      222

                                    EXHIBIT A

                               WAIVER AND RELEASE

This agreement,  release and waiver (the  "RELEASE"),  made as of the ___ day of
________________,  _____ (the "Effective  Date"), is made by and among Principal
Financial Group, Inc., a Delaware  corporation,  Principal  Financial  Services,
Inc., an Iowa corporation, Principal Life Insurance Company, an Iowa corporation
("COMPANY"), and _____________________ ("EXECUTIVE").

WHEREAS,  the  Company  and  Executive  have  entered  into a Change of  Control
Employment Agreement dated , ("AGREEMENT");

NOW THEREFORE, in consideration for receiving benefits and severance pursuant to
the Agreement, and in consideration of the representations, covenants and mutual
promises set forth in this Release, the parties agree as follows:

1.   RELEASE.  Except  with  respect  to  the  Company'  obligations  under  the
     Agreement,  the  Executive,  and  Executive's  heirs,  executors,  assigns,
     representatives,    agents,    legal    representatives,    and    personal
     representatives,  hereby  releases,  acquits  and  forever  discharges  the
     Company,  its  agents,  subsidiaries,   affiliates,   respective  officers,
     directors,   agents,   servants,   employees,   attorneys,    shareholders,
     successors,  assigns  and  affiliates,  of and  from  any and  all  claims,
     liabilities,  demands,  causes of action, costs, expenses,  attorneys fees,
     damages,  indemnities  and  obligations  of every kind and nature,  in law,
     equity,  or  otherwise,  known  and  unknown,  suspected  and  unsuspected,
     disclosed  and  undisclosed,  arising  out  of or in  any  way  related  to
     agreements,  events,  acts or conduct at any time prior to the day prior to
     execution of this  Release,  including but not limited to: any and all such
     claims and  demands  directly  or  indirectly  arising out of or in any way
     connected with the Executive's employment with the Company; the Executive's
     termination of employment  with the Company;  claims or demands  related to
     salary, bonuses, commissions,  stock, stock options, or any other ownership
     interests  in  the  Company,   vacation  pay,  fringe   benefits,   expense
     reimbursements,  sabbatical benefits, severance benefits, or any other form
     of compensation or equity;  claims  pursuant to any federal,  state,  local
     law, statute,  ordinance or cause of action including,  but not limited to,
     the  federal  Civil  Rights  Act of  1964,  as  amended;  the  federal  Age
     Discrimination in Employment Act of 1967, as amended; the federal Americans
     with Disabilities Act of 1990; tort law; contract law; wrongful  discharge;
     discrimination;  fraud;  defamation;  harassment;  emotional  distress;  or
     breach of the implied covenant of good faith and fair dealing. This Release
     does not apply to any benefits to which the Executive may be entitled under
     a Company sponsored tax qualified retirement or savings plan.

2.   RELEASE BY COMPANY.  Except  with  respect to the  Executive's  obligations
     under the  Agreement,  including but not limited to the  covenants  entered
     into  pursuant  to  the  eligibility  requirements  of the  Agreement,  the
     Company,  and  its  agents,   subsidiaries,   attorneys,   representatives,
     successors,  and assigns,  hereby release, acquit and forever discharge the
     Executive,  and Executive's  heirs,  executors,  assigns,  representatives,
     agents, legal representatives,  and personal  representatives,  of and from
     any  and  all  claims,  liabilities,  demands,  causes  of  action,  costs,
     expenses,  attorneys  fees,  damages,  indemnities and obligations of every
     kind and nature, in law, equity, or otherwise, known and unknown, suspected
     and unsuspected,  disclosed and  undisclosed,  arising out of or in any way
     related to agreements, events, acts or conduct at any time prior to the day
     prior to execution of this  Release,  including but not limited to: any and
     all claims and demands directly or indirectly  arising out of or in any way
     connected with the Executive's employment with the Company.

3.   NO INDUCEMENT. Executive agrees that no promise or inducement to enter into
     this Release has been offered or made except as set forth in this  Release,
     that the  Executive  is entering  into this  Release  without any threat or
     coercion and without  reliance or any statement or  representation  made on
     behalf of the  Company or by any person  employed  by or  representing  the
     Company,  except for the written  provisions and promises contained in this
     Release.

                                      223

4.   DAMAGES. The parties agree that damages incurred as a result of a breach of
     this Release will be difficult to measure. It is, therefore, further agreed
     that, in addition to any other remedies, equitable relief will be available
     in the case of a breach of this  Release.  It is also agreed  that,  in the
     event of a breach of this Release by  Executive,  the Company may withhold,
     retain, or require  reimbursement of all or any portion of the benefits and
     payments under the Agreement.

5.   ADVICE OF COUNSEL; TIME TO CONSIDER; REVOCATION. Executive acknowledges the
     following:

     (a)  Executive has read this Release, and understands its legal and binding
          effect.  Executive is acting  voluntarily  and of Executive's own free
          will in executing this Release.

     (b)  Executive has been advised to seek and has had the opportunity to seek
          legal counsel in connection with this Release.

     (c)  Executive  was  given at least 21 days to  consider  the terms of this
          Release before signing it.

     Executive  understands that, if Executive signs the Release,  Executive may
     revoke it within seven days after signing it.  Executive  understands  that
     this  Release will not be effective  until after the  seven-day  period has
     expired.

6.   SEVERABILITY.  If all or any part of this  Release is declared by any court
     or governmental  authority to be unlawful or invalid,  such unlawfulness or
     invalidity  shall not  invalidate  any other portion of this  Release.  Any
     section or a part of a section declared to be unlawful or invalid shall, if
     possible,  be  construed in a manner which will give effect to the terms of
     the section to the  fullest  extent  possible  while  remaining  lawful and
     valid.

7.   AMENDMENT.  This Release shall not be altered,  amended, or modified except
     by written instrument executed by the Companies and the Executive. A waiver
     of any  portion of this  Release  shall not be deemed a waiver of any other
     portion of this Release.

8.   COUNTERPARTS. This Release may be executed in several counterparts, each of
     which shall be deemed to be an  original,  but all of which  together  will
     constitute one and the same instrument.

9.   HEADINGS.  The  headings  of this  Release  are not part of the  provisions
     hereof and shall not have any force or effect.

10.  APPLICABLE  LAW. The  provisions of this Release shall be  interpreted  and
     construed in accordance  with the laws of the State of Iowa without  regard
     to its choice of law principles.

IN WITNESS  WHEREOF,  the parties  have  executed  this  Release as of the dates
specified below.

                         EXECUTIVE

                         -------------------------------------------------------
                         DATE: -------------------------------------------------

                         PRINCIPAL FINANICAL GROUP, INC.

                         By:   -------------------------------------------------
                         Title:-------------------------------------------------
                         DATE: -------------------------------------------------

                                      224

                         PRINCIPAL FINANCIAL SERVICES, INC.

                         By:   -------------------------------------------------
                         Title:-------------------------------------------------
                         DATE: -------------------------------------------------

                         PRINCIPAL LIFE INSURANCE COMPANY

                         By:   -------------------------------------------------
                         Title:-------------------------------------------------
                         DATE: -------------------------------------------------

                                      225

                                                                      Exhibit 12

                         PRINCIPAL FINANCIAL GROUP, INC.

                 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO

                                                    FOR THE
                                                   SIX MONTHS
                                                     ENDED                                   FOR THE
                                                    JUNE 30,                         YEAR ENDED DECEMBER 31,
                                             ------------------------  -------------------------------------------------------------
                                                2004        2003         2003        2002         2001        2000        1999
                                             ----------- ------------  ----------- ----------- ----------- ----------- -------------
                                                                              ($ IN MILLIONS)

1.  Income from continuing operations
      before income taxes...................   $ 370.9     $ 331.8      $  824.3     $  371.5    $  249.9   $  751.1    $  975.3
2.  Interest expense........................      52.3        51.0         104.3         99.2        96.7      116.8       145.4
3.  Interest factor of rental expense.......       2.3         4.0           4.6          8.0         9.4       15.1         9.9
4.  Undistributed income from equity
      investees.............................      (4.5)       (6.8)        (18.3)         4.3       (17.4)     (27.1)      (99.7)
                                             ----------- ------------  ----------- ----------- ----------- ----------- -------------
5.  Earnings before interest credited on
      investment products...................     421.0       380.0         914.9        483.0       338.6      855.9     1,030.9
6.  Interest credited on investment
      products..............................     365.6       366.1         735.7        743.4       773.1      723.5       708.5
                                             ----------- ------------  ----------- ----------- ----------- ----------- -------------
7.  Earnings................................   $ 786.6     $ 746.1      $1,650.6     $1,226.4    $1,111.7   $1,579.4    $1,739.4
                                             =========== ============  =========== =========== =========== =========== =============

8.  Interest expense........................   $  52.3     $  51.0      $  104.3     $   99.2    $   96.7   $  116.8    $  145.4
9.  Interest factor of rental expense.......       2.3         4.0           4.6          8.0         9.4       15.1         9.9
10. Preferred stock dividend requirements
      of majority-owned subsidiaries (non-
      intercompany).........................       0.2         0.7           1.2          0.4         -          -           -
                                             ----------- ------------  ----------- ----------- ----------- ----------- -------------
11. Fixed charges before interest credited
      on investment products................      54.8        55.7         110.1        107.6       106.1      131.9       155.3
12. Interest credited on investment
      products..............................     365.6       366.1         735.7        743.4       773.1      723.5       708.5
                                             ----------- ------------  ----------- ----------- ----------- ----------- -------------
13. Fixed charges...........................   $ 420.4     $ 421.8      $  845.8     $  851.0    $  879.2   $  855.4    $  863.8
                                             =========== ============  =========== =========== =========== =========== =============
14. Ratio of earnings to fixed charges
      before interest credited on investment
      products (Line item 5/Line item 11)...       7.7         6.8           8.3          4.5        3.2         6.5         6.6
15. Ratio of earnings to fixed charges
      (Line item 7/Line item 13)............       1.9         1.8           2.0          1.4        1.3         1.8         2.0

                                      226

                                                                    Exhibit 31.1

                                 CERTIFICATIONS

I, J. Barry Griswell, certify that:

1.  I have reviewed this  quarterly  report on Form 10-Q of Principal  Financial
    Group, Inc.;

2.  Based on my knowledge,  this report does not contain any untrue statement of
    a  material  fact or omit to state a  material  fact  necessary  to make the
    statements made, in light of the  circumstances  under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information included in this report, fairly present in all material respects
    the  financial  condition,  results  of  operations  and  cash  flows of the
    registrant as of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer(s) and I are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a) Designed  such  disclosure  controls  and  procedures,   or  caused  such
       disclosure  controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities,  particularly  during the period in which this  report is being
       prepared;

    b) Evaluated the effectiveness of the registrant's  disclosure  controls and
       procedures  and  presented  in this  report  our  conclusions  about  the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based on such evaluation; and

    c) Disclosed in this report any change in the registrant's  internal control
       over  financial  reporting  that occurred  during the  registrant's  most
       recent fiscal quarter (the registrant's fourth fiscal quarter in the case
       of an annual  report)  that has  materially  affected,  or is  reasonably
       likely to  materially  affect,  the  registrant's  internal  control over
       financial reporting; and

5.  The registrant's other certifying officer(s) and I have disclosed,  based on
    our most recent evaluation of internal control over financial reporting,  to
    the registrant's  auditors and the audit committee of registrant's  board of
    directors (or persons performing the equivalent functions):

    a) All  significant  deficiencies  and material  weaknesses in the design or
       operation  of  internal  control  over  financial   reporting  which  are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and

    b) Any fraud,  whether or not material,  that  involves  management or other
       employees  who  have a  significant  role  in the  registrant's  internal
       control over financial reporting.

Date:  August 4, 2004
                                              /S/ J. BARRY GRISWELL
                                              ----------------------------------
                                              J. Barry Griswell
                                              Chairman, President and Chief
                                              Executive Officer

                                      227

                                                                    Exhibit 31.2

                                 CERTIFICATIONS

I, Michael H. Gersie, certify that:

1.  I have reviewed this  quarterly  report on Form 10-Q of Principal  Financial
    Group, Inc.;

2.  Based on my knowledge,  this report does not contain any untrue statement of
    a  material  fact or omit to state a  material  fact  necessary  to make the
    statements made, in light of the  circumstances  under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information included in this report, fairly present in all material respects
    the  financial  condition,  results  of  operations  and  cash  flows of the
    registrant as of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer(s) and I are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a) Designed  such  disclosure  controls  and  procedures,   or  caused  such
       disclosure  controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities,  particularly  during the period in which this  report is being
       prepared;

    b) Evaluated the effectiveness of the registrant's  disclosure  controls and
       procedures  and  presented  in this  report  our  conclusions  about  the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based on such evaluation; and

    c) Disclosed in this report any change in the registrant's  internal control
       over  financial  reporting  that occurred  during the  registrant's  most
       recent fiscal quarter (the registrant's fourth fiscal quarter in the case
       of an annual  report)  that has  materially  affected,  or is  reasonably
       likely to  materially  affect,  the  registrant's  internal  control over
       financial reporting; and

5.  The registrant's other certifying officer(s) and I have disclosed,  based on
    our most recent evaluation of internal control over financial reporting,  to
    the registrant's  auditors and the audit committee of registrant's  board of
    directors (or persons performing the equivalent functions):

    a) All  significant  deficiencies  and material  weaknesses in the design or
       operation  of  internal  control  over  financial   reporting  which  are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and

    b) Any fraud,  whether or not material,  that  involves  management or other
       employees  who  have a  significant  role  in the  registrant's  internal
       control over financial reporting.

Date:  August 4, 2004

                                              /S/ MICHAEL H. GERSIE
                                              ----------------------------------
                                              Michael H. Gersie
                                              Executive Vice President and
                                              Chief Financial Officer

                                      228

                                                                    Exhibit 32.1

              CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
                      OF TITLE 18 OF THE UNITED STATES CODE

I, J.  Barry  Griswell,  Chairman,  President  and Chief  Executive  Officer  of
Principal  Financial Group, Inc., certify that (i) the Form 10-Q for the quarter
ended June 30, 2004 fully complies with the requirements of Section 13(a) of the
Securities  Exchange Act of 1934 and (ii) the information  contained in the Form
10-Q for the  quarter  ended June 30,  2004  fairly  presents,  in all  material
respects,  the  financial  condition  and  results of  operations  of  Principal
Financial Group, Inc.

                                              /S/ J. BARRY GRISWELL
                                              ----------------------------------
                                              J. Barry Griswell
                                              Chairman, President and Chief
                                              Executive Officer
                                              Date:  August 4, 2004

                                      229

                                                                    Exhibit 32.2

              CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
                      OF TITLE 18 OF THE UNITED STATES CODE

I, Michael H. Gersie,  Executive Vice President and Chief  Financial  Officer of
Principal  Financial Group, Inc., certify that (i) the Form 10-Q for the quarter
ended June 30, 2004 fully complies with the requirements of Section 13(a) of the
Securities  Exchange Act of 1934 and (ii) the information  contained in the Form
10-Q for the  quarter  ended June 30,  2004  fairly  presents,  in all  material
respects,  the  financial  condition  and  results of  operations  of  Principal
Financial Group, Inc.

                                              /S/ MICHAEL H. GERSIE
                                              ----------------------------------
                                              Michael H. Gersie
                                              Executive Vice President and
                                              Chief Financial Officer
                                              Date:  August 4, 2004

                                      230