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 March 31, 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 April 28, 2004 was 319,201,574.

                         PRINCIPAL FINANCIAL GROUP, INC.
                                TABLE OF CONTENTS

                                                                           PAGE
PART I - FINANCIAL INFORMATION
     Item 1. Financial Statements
              Consolidated Statements of Financial Position at March 31, 2004
                  (Unaudited)and December 31, 2003............................3
              Unaudited Consolidated Statements of Operations for the three
                  months ended March 31, 2004 and 2003........................4
              Unaudited Consolidated Statements of Stockholders' Equity for
                  the three months ended March 31, 2004 and 2003..............5
              Unaudited Consolidated Statements of Cash Flows for the three
                  months ended March 31, 2004 and 2003........................6
              Notes to Unaudited Consolidated Financial Statements -
                  March 31, 2004..............................................8
     Item 2. Management's Discussion and Analysis of Financial Condition and
              Results of Operations...........................................35
     Item 3. Quantitative and Qualitative Disclosures about Market Risk.......77
     Item 4. Controls and Procedures..........................................84

PART II - OTHER INFORMATION
     Item 1. Legal proceedings................................................84
     Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
             Equity Securities................................................85
     Item 6. Exhibits and Reports on Form 8-K.................................85
     Signature................................................................86

                                       2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         PRINCIPAL FINANCIAL GROUP, INC.
                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                                                                    MARCH 31,         DECEMBER 31,
                                                                                     2004                2003
                                                                               ------------------ ------------------
                                                                                  (Unaudited)          (Note 1)
                                                                                           (IN MILLIONS,
                                                                                      EXCEPT PER SHARE DATA)
                                                                                               
ASSETS
Fixed maturities, available-for-sale........................................      $   38,641.7       $   37,449.7
Fixed maturities, trading...................................................             103.4              102.9
Equity securities, available-for-sale.......................................             749.2              712.5
Mortgage loans..............................................................          12,888.1           13,508.1
Real estate.................................................................           1,473.9            1,537.5
Policy loans................................................................             804.5              804.1
Other investments...........................................................           1,331.7            1,463.0
                                                                               ------------------ ------------------
   Total investments........................................................          55,992.5           55,577.8

Cash and cash equivalents...................................................           1,608.6            1,692.9
Accrued investment income...................................................             625.8              650.7
Premiums due and other receivables..........................................             543.7              719.8
Deferred policy acquisition costs...........................................           1,552.4            1,571.7
Property and equipment......................................................             443.3              447.8
Goodwill....................................................................             250.1              184.2
Other intangibles...........................................................             156.4              121.4
Mortgage loan servicing rights..............................................           1,748.1            1,953.1
Separate account assets.....................................................          46,186.6           43,407.8
Other assets................................................................           1,705.3            1,427.2
                                                                               ------------------ ------------------
   Total assets.............................................................      $  110,812.8       $  107,754.4
                                                                               ================== ==================
LIABILITIES
Contractholder funds........................................................      $   28,913.7       $   28,902.5
Future policy benefits and claims...........................................          15,525.8           15,474.7
Other policyholder funds....................................................             769.2              710.2
Short-term debt.............................................................             986.3            1,617.8
Long-term debt..............................................................           2,555.1            2,767.3
Income taxes payable........................................................             146.0               90.0
Deferred income taxes.......................................................           1,849.8            1,644.0
Separate account liabilities................................................          46,186.6           43,407.8
Other liabilities...........................................................           5,893.3            5,740.5
                                                                               ------------------ ------------------
   Total liabilities........................................................         102,825.8          100,354.8

STOCKHOLDERS' EQUITY
Common stock,  par value  $.01 per share - 2,500.0  million  shares
   authorized, 377.6 million and 377.4 million shares issued, and 320.8
   million and 320.7 million shares outstanding in 2004 and 2003,
   respectively.............................................................               3.8                3.8
Additional paid-in capital..................................................           7,179.1            7,153.2
Retained earnings...........................................................             824.0              630.4
Accumulated other comprehensive income......................................           1,539.6            1,171.3
Treasury stock, at cost (56.8 million and 56.7 million shares in 2004 and
   2003, respectively)......................................................          (1,559.5)          (1,559.1)
                                                                               ------------------ ------------------
   Total stockholders' equity...............................................           7,987.0            7,399.6
                                                                               ------------------ ------------------
   Total liabilities and stockholders' equity...............................      $  110,812.8       $  107,754.4
                                                                               ================== ==================

SEE ACCOMPANYING NOTES.

                                       3

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

                                                          FOR THE THREE MONTHS ENDED
                                                                  MARCH 31,
                                                       ---------------------------------
                                                            2004             2003
                                                       ---------------- ----------------
                                                        (IN MILLIONS, EXCEPT PER SHARE
                                                                     DATA)
                                                                      
REVENUES
Premiums and other considerations.....................     $  921.8         $  905.5
Fees and other revenues...............................        561.1            632.0
Net investment income.................................        817.0            836.0
Net realized/unrealized capital losses................        (42.8)           (76.7)
                                                       ---------------- ----------------
   Total revenues.....................................      2,257.1          2,296.8

EXPENSES
Benefits, claims and settlement expenses..............      1,187.5          1,195.2
Dividends to policyholders............................         73.3             80.1
Operating expenses....................................        730.9            799.3
                                                       ---------------- ----------------
   Total expenses.....................................      1,991.7          2,074.6
                                                       ---------------- ----------------
Income from continuing operations before income
   taxes..............................................        265.4            222.2
Income taxes..........................................         66.1             65.8
                                                       ---------------- ----------------
Income from continuing operations, net of related
   income taxes.......................................        199.3            156.4
Loss from discontinued operations, net of related
   income taxes.......................................          -               (0.7)
                                                       ---------------- ----------------
Income before cumulative effect of
   accounting change..................................        199.3            155.7
Cumulative effect of accounting change, net of
   related income taxes...............................         (5.7)             -
                                                       ---------------- ----------------
Net income............................................     $  193.6         $  155.7
                                                       ================ ================
EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share:
   Income from continuing operations, net of
     related income taxes.............................     $    0.62        $    0.47
   Loss from discontinued operations, net of
     related income taxes.............................          -                -
                                                       ---------------- ----------------
   Income before cumulative effect of
     accounting change................................          0.62             0.47
   Cumulative effect of accounting change, net of
     related income taxes.............................         (0.02)            -
                                                       ---------------- ----------------
   Net income.........................................     $    0.60        $    0.47
                                                       ================ ================

SEE ACCOMPANYING NOTES.

                                       4

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

                                                                               ACCUMULATED
                                                  ADDITIONAL                     OTHER                       TOTAL
                                      COMMON       PAID-IN       RETAINED     COMPREHENSIVE    TREASURY   STOCKHOLDERS'  OUTSTANDING
                                      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.    -              (3.0)         -                -              -            (3.0)        156.8
Stock-based compensation...........    -               5.3          -                -              -             5.3
Treasury stock acquired............    -               -            -                -           (184.1)       (184.1)     (6,533.0)
Comprehensive income:
  Net income.......................    -               -          155.7              -              -           155.7
  Net unrealized gains.............    -               -            -              331.9            -           331.9
  Provision for deferred income
    taxes..........................    -               -            -             (117.0)           -          (117.0)
  Net foreign currency translation
    adjustment.....................    -               -            -               (9.2)           -            (9.2)
                                                                                                         ---------------
Comprehensive income...............                                                                             361.4
                                   ------------- ------------ -------------- --------------- ----------- --------------- -----------
BALANCES AT MARCH 31, 2003.........   $3.8        $7,108.6      $ 185.1         $  841.5      $(1,302.2)     $6,836.8     328,043.1
                                   ============= ============ ============== =============== =========== =============== ===========

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......................    -              16.0          -                -              -            16.0         160.5
Stock-based compensation...........    -               9.9          -                -              -             9.9
Treasury stock acquired............    -               -            -                -             (0.4)         (0.4)        (10.2)
Comprehensive income:
  Net income.......................    -               -          193.6              -              -           193.6
  Net unrealized gains.............    -               -            -              537.1            -           537.1
  Provision for deferred income
    taxes..........................    -               -            -             (172.7)           -          (172.7)
  Net foreign currency translation
  adjustment.......................    -               -            -                3.9            -             3.9
                                                                                                         ---------------
Comprehensive income...............                                                                             561.9
                                   ------------- ------------ -------------- --------------- ----------- --------------- -----------
BALANCES AT MARCH 31, 2004.........   $3.8        $7,179.1      $ 824.0         $1,539.6      $(1,559.5)     $7,987.0     320,817.8
                                   ============= ============ ============== =============== =========== =============== ===========

SEE ACCOMPANYING NOTES.

                                       5

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

                                                         FOR THE THREE MONTHS ENDED
                                                                  MARCH 31,
                                                       ----------------------------------
                                                             2004             2003
                                                       ----------------- ----------------
                                                                   (IN MILLIONS)
                                                                      
OPERATING ACTIVITIES
Net income............................................     $   193.6        $    155.7
Adjustments to reconcile net income to net cash
    provided by operating activities:
    Loss from discontinued operations, net of related
       income taxes...................................           -                 0.7
    Cumulative effect of accounting change,
       net of related income taxes....................           5.7               -
    Amortization of deferred policy acquisition costs.          36.2              51.4
    Additions to deferred policy acquisition costs....         (97.3)            (85.8)
    Accrued investment income.........................          24.9              26.0
    Premiums due and other receivables................          47.5              30.9
    Contractholder and policyholder liabilities
       and dividends..................................         366.6             481.2
    Current and deferred income taxes.................          75.5              63.3
    Net realized/unrealized capital losses............          42.8              76.7
    Depreciation and amortization expense.............          27.2              24.6
    Mortgage loans held for sale, acquired or
       originated.....................................      (7,647.2)        (16,153.1)
    Mortgage loans held for sale, sold or repaid, net
       of gain........................................       8,143.8          15,924.1
    Real estate acquired through operating activities.          (1.4)             (6.3)
    Real estate sold through operating activities.....          33.4               1.2
    Amortization of mortgage servicing rights.........          95.6             111.2
    Stock-based compensation..........................           8.2               3.5
    Mortgage servicing rights valuation adjustments...         271.6             159.3
    Other.............................................         (46.1)           (117.5)
                                                       ----------------- ----------------
Net adjustments.......................................       1,387.0             591.4
                                                       ----------------- ----------------
Net cash provided by operating activities.............       1,580.6             747.1

INVESTING ACTIVITIES
Available-for-sale securities:
    Purchases.........................................      (2,317.3)         (2,911.7)
    Sales............................................          606.9             690.6
    Maturities.......................................        1,245.1           1,065.9
Mortgage loans acquired or originated.................        (390.7)           (215.6)
Mortgage loans sold or repaid.........................         417.0             313.9
Purchase of mortgage servicing rights.................        (102.7)           (310.6)
Proceeds from sale of mortgage servicing rights.......           -                 0.5
Real estate acquired..................................         (10.2)            (92.6)
Real estate sold......................................          46.2              23.6
Net change in property and equipment..................          (9.6)             (3.1)
Net proceeds from sales of subsidiaries...............           -                 2.1
Purchases of interest in subsidiaries, net of
    cash acquired.....................................        (106.2)            (60.3)
Net change in other investments.......................          20.2              (0.4)
                                                       ----------------- ----------------
Net cash used in investing activities.................     $  (601.3)       $ (1,497.7)

                                       6

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

                                                         FOR THE THREE MONTHS ENDED
                                                                  MARCH 31,
                                                       ----------------------------------
                                                             2004             2003
                                                       ----------------- ----------------
                                                                    (IN MILLIONS)
                                                                       
FINANCING ACTIVITIES
Issuance of common stock, net of call options........      $     3.5         $    (3.0)
Acquisition of treasury stock........................           (0.4)           (184.1)
Proceeds from financing element derivatives..........           55.3               -
Payments for financing element derivatives...........          (22.0)              -
Issuance of long-term debt...........................            5.2               7.5
Principal repayments of long-term debt...............         (220.3)             (4.4)
Net proceeds (repayments) of short-term borrowings...         (632.7)            192.8
Investment contract deposits.........................        1,356.5           2,937.8
Investment contract withdrawals......................       (1,602.1)         (2,312.4)
Net increase (decrease) in banking operation
   deposits..........................................           (6.6)             44.7
                                                       ----------------- ----------------
Net cash provided by (used in) financing activities..       (1,063.6)            678.9
                                                       ----------------- ----------------
Net decrease in cash and cash equivalents............          (84.3)            (71.7)

Cash and cash equivalents at beginning of period.....        1,692.9           1,038.6
                                                       ----------------- ----------------
Cash and cash equivalents at end of period...........      $ 1,608.6         $   966.9
                                                       ================= ================

SEE ACCOMPANYING NOTES.

                                       7

                         PRINCIPAL FINANCIAL GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 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
ended March 31, 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 March 31, 2003 financial  statements to
conform to the March 31, 2004 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

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.

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.

                                       8

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

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

We also decreased an equity method  investment  within our  International  Asset
Management and Accumulation  segment by $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.

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.  Accordingly,  effective  April 1, 2004,  we
intend to record IRLCs at zero value at date of issuance with  subsequent  gains
or losses  measured by changes in market  interest  rates. We do not expect this
SAB to have a material impact on our consolidated financial statements.

SEPARATE ACCOUNTS

At March 31, 2004 and  December  31,  2003,  the  separate  accounts  included a
separate  account  valued at $814.9  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 March 31, 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.

                                       9

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 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 March 31, 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
                                                                                MARCH 31,
                                                                    --------------------------------
                                                                         2004             2003
                                                                    ---------------  ---------------
                                                                    (IN MILLIONS, EXCEPT PER SHARE
                                                                                 DATA)

Net income, as reported..........................................      $ 193.6          $155.7
Add:  Stock-based compensation expense included in reported
  net income, net of related tax effects.........................          3.4             3.0
Deduct:  Total stock-based compensation expense determined
  under fair value based method for all awards, net of related
  tax effects....................................................          4.2             3.9
                                                                    ---------------  ---------------
Pro forma net income.............................................      $ 192.8          $154.8
                                                                    ===============  ===============
Basic and diluted earnings per share:
  As reported....................................................      $   0.60         $  0.47
  Pro forma......................................................          0.60            0.47

2.  FEDERAL INCOME TAXES

The effective income tax rate on income from continuing operations for the three
months  ended March 31, 2004 and 2003,  is lower than the  prevailing  corporate
federal  income tax rate  primarily  due to income tax  deductions  allowed  for
corporate  dividends  received,   a  tax  benefit  associated  with  prior  year
accumulated  losses on a foreign  investment and interest exclusion from taxable
income, partially offset by state income taxes.

                                       10

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

3.  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 MARCH 31,              ENDED MARCH 31,
                                        ---------------------------- ----------------------------
                                            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)......................        0.4           0.4         (0.7)         (0.8)
Amortization of transition asset......        -            (0.1)         -             -
Recognized net actuarial loss.........        4.1           4.4          0.1           0.6
                                        ------------- -------------- ------------- --------------
Net periodic benefit cost (income)....    $  14.1       $  15.0        $(1.2)        $ 1.0
                                        ============= ============== ============= ==============

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.  The 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
information.  The new Act will be  reflected  once the plan is  amended  or FASB
issues finalized guidance on the accounting impact of the Act.

CONTRIBUTIONS

We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans.  We  contributed an immaterial  portion of this amount during the
three months ended March 31, 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 $10 million to $50 million for both the  qualified
and nonqualified plans. No contributions were made to the plans during the three
months ended March 31, 2004.

                                       11

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

4. COMPREHENSIVE INCOME

Comprehensive income is as follows (in millions):

                                                     FOR THE THREE MONTHS ENDED
                                                              MARCH 31,
                                                 -----------------------------------
                                                       2004              2003
                                                 ----------------   ----------------
                                                                  
COMPREHENSIVE INCOME:
Net income..................................         $ 193.6            $ 155.7
Net change in unrealized gains and losses
  on fixed maturities, available-for-sale...           638.3              406.8
Net change in unrealized gains and losses
  on equity securities, available-for-sale..             9.2               (2.6)
Adjustments for assumed changes in
  amortization patterns:
  Deferred policy acquisition costs.........           (42.6)             (48.1)
  Sales inducements.........................            (3.1)               -
  Unearned revenue reserves.................             1.3                2.1
Net change in unrealized gains and losses
  on derivative instruments.................             2.6               14.4
Adjustments to unrealized gains for
  Closed Block policyholder dividend
  obligation................................           (54.9)             (38.2)
Provision for deferred income tax expense...          (172.7)            (117.0)
Net change in unrealized gains and losses
  on equity method subsidiaries and
  minority interest adjustments.............           (13.7)              (2.5)
Change in net foreign currency translation
  adjustment................................             3.9               (9.2)
                                                 ----------------   ----------------
Comprehensive income........................         $ 561.9            $ 361.4
                                                 ================   ================

5. DEBT

SHORT-TERM DEBT

Effective  February 28, 2004,  Principal  Residential  Mortgage,  Inc. renewed a
short-term  borrowing  arrangement  with an unaffiliated  entity providing up to
$700.00 million related to the activities of its Principal  Residential Mortgage
Servicing  subsidiary.  At March 31, 2004, we had a $300.0  million note payable
outstanding  pursuant to this borrowing  arrangement.  The scheduled maturity of
this note payable is February 28, 2005.  We were not in  compliance  with one of
the covenants  under this agreement at March 31, 2004. We obtained a waiver from
the unaffiliated entity.

LONG-TERM DEBT

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

                                       12

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

5.  DEBT (CONTINUED)

                                                                            AS OF              AS OF
                                                                           MARCH 31,         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
PRMCR medium term notes.............................................       1,200.0            1,200.0
PRMCR equity certificates...........................................         193.0              193.0
Nonrecourse mortgages and notes payable.............................         341.7              340.7
Other mortgages and notes payable...................................          57.2               71.4
                                                                     ------------------- -------------------
Total long-term debt................................................    $  2,555.1          $ 2,767.3
                                                                     =================== ===================

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.

6.  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.

                                       13

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

6.  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 March 31, 2004, was  approximately  $192.0
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. $190.0 million as of March 31, 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.

                                       14

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

7.  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, Hong Kong and India and joint
ventures in Brazil, Japan and Malaysia.

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.

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.

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.

                                       15

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

7.  SEGMENT INFORMATION (CONTINUED)

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 MARCH 31,        AS OF DECEMBER 31,
                                                                   2004                   2003
                                                          ----------------------   --------------------
                                                                             (IN MILLIONS)
                                                                                    
ASSETS:
U.S. Asset Management and Accumulation ...............         $   87,221.9               $83,904.8
International Asset Management and Accumulation.......              3,143.3                 3,011.4
Life and Health Insurance.............................             12,514.5                12,171.8
Mortgage Banking......................................              5,434.0                 5,558.8
Corporate and Other ..................................              2,499.1                 3,107.6
                                                          ----------------------   --------------------
  Total consolidated assets...........................         $  110,812.8               $107,754.4
                                                          ======================   ====================

                                                            FOR THE THREE MONTHS ENDED
                                                                     MARCH 31,
                                                         --------------------------------
                                                             2004               2003
                                                         --------------    --------------
                                                                   (IN MILLIONS)
                                                                         
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation................     $    897.2          $  886.0
International Asset Management and Accumulation.......          115.5              76.8
Life and Health Insurance.............................        1,035.3           1,012.3
Mortgage Banking......................................          255.6             404.5
Corporate and Other...................................            0.3              (0.7)
                                                         --------------    --------------
  Total segment operating revenues....................        2,303.9           2,378.9
Net realized/unrealized capital losses, including
  recognition of front-end fee revenues and certain
  market value adjustments to fee revenues............          (46.8)            (82.1)
                                                         --------------    --------------
  Total revenue per consolidated statements
    of operations.....................................     $  2,257.1          $2,296.8
                                                         ==============    ==============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ...............     $    122.0          $   97.5
International Asset Management and Accumulation.......            8.7               6.6
Life and Health Insurance.............................           74.8              59.1
Mortgage Banking......................................           28.6              52.3
Corporate and Other ..................................          (11.5)             (5.0)
                                                         --------------    --------------
  Total segment operating earnings....................          222.6             210.5
Net realized/unrealized capital losses, as adjusted...          (23.3)            (54.1)
Other after-tax adjustments (1).......................           (5.7)             (0.7)
                                                         --------------    --------------
  Net income per consolidated statements
    of operations.....................................     $    193.6          $  155.7
                                                         ==============    ==============

- ------------------------
(1)  For the three months ended March 31, 2004,  other after-tax  adjustments of
     $(5.7)  million  included  the negative  effect of a  cumulative  effect of
     accounting change related to the  implementation of SOP 03-1. For the three
     months ended March 31, 2003, other after-tax  adjustments of $(0.7) million
     included the negative  effect of a change in the estimated loss on disposal
     of BT Financial Group.

                                       16

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

8.  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
                                                         MARCH 31,
                                             ----------------------------------
                                                  2004              2003
                                             ---------------- -----------------
                                              (IN MILLIONS, EXCEPT PER SHARE
                                                          DATA)

Income from continuing operations........         $199.3           $156.4
                                             ================ =================
Weighted-average shares outstanding:
  Basic..................................          320.8            331.4
  Dilutive effect:
    Stock options........................            1.1              0.3
    Restricted stock units...............            0.1              -
                                             ---------------- -----------------
  Diluted................................          322.0            331.7
                                             ================ =================
Income from continuing operations
  per share:
  Basic..................................         $  0.62          $ 0.47
                                             ================ =================
  Diluted................................         $  0.62          $ 0.47
                                             ================ =================

The  calculation of diluted  earnings per share for the three months ended March
31,  2004  and  2003,   excludes  the  incremental  effect  related  to  certain
stock-based compensation grants due to their anti-dilutive effect.

9. 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 March 31, 2004 and December 31, 2003,  and for the
three months ended March 31, 2004 and 2003.

                                       17

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                 MARCH 31, 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.......   $     -       $    49,153.3       $   8,038.3         $ (1,384.1)     $   55,807.5
Investment in unconsolidated
  entities......................     7,819.1             876.2           6,078.0          (14,588.2)            185.1
Cash and cash equivalents.......       175.7             171.5           1,748.5             (487.1)          1,608.6
Other intangibles...............         -                 4.4             152.0                -               156.4
Mortgage loan servicing rights..         -                 -             1,748.1                -             1,748.1
Separate account assets.........         -            45,504.8             670.8               11.0          46,186.6
All other assets................         1.2           3,735.9           1,578.5             (195.1)          5,120.5
                                -------------- ---------------- ---------------------- --------------- ---------------
  Total assets..................   $ 7,996.0     $    99,446.1       $  20,014.2         $(16,643.5)     $  110,812.8
                                ============== ================ ====================== =============== ===============
LIABILITIES
Contractholder funds............   $     -       $    29,051.7       $      12.0         $   (150.0)     $   28,913.7
Future policy benefits and
  claims........................         -            14,065.0           1,460.8                -            15,525.8
Other policyholder funds........         -               764.7               4.5                -               769.2
Short-term debt.................         -                 -             1,429.2             (442.9)            986.3
Long-term debt..................         -               227.0           2,590.5             (262.4)          2,555.1
Income taxes currently
  payable.......................         -               200.0              33.0              (87.0)            146.0
Deferred income taxes...........         8.3           1,154.9             690.5               (3.9)          1,849.8
Separate account liabilities....         -            45,504.8             670.8               11.0          46,186.6
Other liabilities...............         0.7           1,096.5           5,303.8             (507.7)          5,893.3
                                -------------- ---------------- ---------------------- --------------- ---------------
  Total liabilities.............         9.0          92,064.6          12,195.1           (1,442.9)        102,825.8

STOCKHOLDERS' EQUITY
Common stock....................         3.8               2.5               -                 (2.5)              3.8
Additional paid-in capital......     7,179.1           5,073.7           6,818.9          (11,892.6)          7,179.1
Retained earnings (deficit).....       824.0             774.8            (539.4)            (235.4)            824.0
Accumulated other
  comprehensive income..........     1,539.6           1,530.5           1,539.6           (3,070.1)          1,539.6
Treasury stock, at cost.........    (1,559.5)              -                 -                  -            (1,559.5)
                                -------------- ---------------- ---------------------- --------------- ---------------
  Total stockholders' equity....     7,987.0           7,381.5           7,819.1          (15,200.6)          7,987.0
                                -------------- ---------------- ---------------------- --------------- ---------------
  Total liabilities and
  stockholders' equity..........   $ 7,996.0     $    99,446.1       $  20,014.2         $(16,643.5)     $  100,812.8
                                ============== ================ ====================== ==============  ===============

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

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

                                       18

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. 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         $  8,610.9        $ (1,357.2)     $   55,410.6
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            1,360.5            (481.9)          1,692.9
Other intangibles...............         -               4.5              116.9               -               121.4
Mortgage loan servicing rights..         -               -              1,953.1               -             1,953.1
Separate account assets.........         -          42,753.4              632.2              22.2          43,407.8
All other assets................         1.7         3,825.7            1,374.4            (200.4)          5,001.4
                                -------------- ---------------- --------------------- -------------- ---------------
  Total assets..................    $7,409.5       $96,174.8         $ 19,741.3        $(15,571.2)     $  107,754.4
                                ============== ================ ===================== ============== ===============
LIABILITIES
Contractholder funds............    $    -         $29,040.4         $     11.9        $   (149.8)     $   28,902.5
Future policy benefits and
  claims........................         -          14,025.3            1,449.4               -            15,474.7
Other policyholder funds........         -             706.2                4.0               -               710.2
Short-term debt.................         -               -              2,053.8            (436.0)          1,617.8
Long-term debt..................         -             423.3            2,630.7            (286.7)          2,767.3
Income taxes currently
  payable.......................         -             160.0                4.3             (74.3)             90.0
Deferred income taxes...........         8.2           974.0              666.9              (5.1)          1,644.0
Separate account liabilities....         -          42,753.4              632.2              22.2          43,407.8
Other liabilities...............         1.7         1,226.1            5,054.2            (541.5)          5,740.5
                                -------------- ---------------- --------------------- -------------- ---------------
  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.

                                       19

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 31, 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)
                                                                                           
REVENUES
Premiums and other
  considerations....................   $     -          $ 857.7              $  64.1        $    -        $   921.8
Fees and other revenues.............         -            233.9                385.0           (57.8)         561.1
Net investment income...............         0.6          702.2                104.9             9.3          817.0
Net realized/unrealized
  capital losses....................         -            (41.5)                (6.9)            5.6          (42.8)
                                    -------------- --------------- ---------------------- -------------- -----------------
  Total revenues....................         0.6        1,752.3                547.1           (42.9)       2,257.1

EXPENSES
Benefits, claims, and settlement
  expenses..........................         -          1,111.8                 78.1            (2.4)       1,187.5
Dividends to policyholders..........         -             73.3                  -               -             73.3
Operating expenses..................         2.7          395.2                383.4           (50.4)         730.9
                                    -------------- --------------- ---------------------- -------------- -----------------
  Total expenses....................         2.7        1,580.3                461.5           (52.8)       1,991.7
                                    -------------- --------------- ---------------------- -------------- -----------------
Income (loss) before income
  taxes and cumulative effect of
  accounting change.................        (2.1)         172.0                 85.6             9.9          265.4

Income taxes (benefits).............        (0.7)          41.3                 23.1             2.4           66.1
Equity in the net income of
  subsidiaries, excluding
  cumulative effect of
  accounting change.................       200.7           51.9                138.2          (390.8)           -
                                    -------------- --------------- ---------------------- -------------- -----------------
Income before cumulative
  effect of accounting change.......       199.3          182.6                200.7          (383.3)         199.3

Cumulative effect of accounting
  change, net of related income
  taxes.............................        (5.7)          (2.5)                (5.7)            8.2           (5.7)
                                    -------------- --------------- ---------------------- -------------- -----------------
Net income..........................   $   193.6        $ 180.1              $ 195.0        $ (375.1)     $   193.6
                                    ============== =============== ====================== ============== =================

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

                                       20

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 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)
                                                                                             
REVENUES
Premiums and other considerations..      $   -          $  870.9            $  34.6         $    -          $  905.5
Fees and other revenues............          -             196.2              483.3            (47.5)          632.0
Net investment income..............          0.9           733.7              103.6             (2.2)          836.0
Net realized/unrealized capital
  gains (losses)...................          -             (79.3)              11.6             (9.0)          (76.7)
                                    -------------- ----------------- --------------------- --------------- ---------------
  Total revenues...................          0.9         1,721.5              633.1            (58.7)        2,296.8

EXPENSES
Benefits, claims, and settlement
  expenses.........................          -           1,147.0               50.0             (1.8)        1,195.2
Dividends to policyholders.........          -              80.1                -                -              80.1
Operating expenses.................          2.2           384.4              453.6            (40.9)          799.3
                                    -------------- ----------------- --------------------- --------------- ---------------
  Total expenses...................          2.2         1,611.5              503.6            (42.7)        2,074.6
                                    -------------- ----------------- --------------------- --------------- --------------
Income (loss) from continuing
  operations before income taxes...         (1.3)          110.0              129.5            (16.0)          222.2

Income taxes (benefits)............         (0.5)           20.2               49.2             (3.1)           65.8
Equity in the net income of
  subsidiaries, excluding
  discontinued operations..........        157.2            49.8               76.9           (283.9)            -
                                    -------------- ----------------- --------------------- --------------- ---------------
Income from continuing
  operations, net of related
  income taxes.....................        156.4           139.6              157.2           (296.8)          156.4

Loss from discontinued operations,
  net of related income taxes......         (0.7)            -                 (0.7)             0.7            (0.7)
                                    -------------- ----------------- --------------------- --------------- ---------------
Net income.........................      $ 155.7        $  139.6            $ 156.5         $ (296.1)       $  155.7
                                    ============== ================= ===================== =============== ===============

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

                                       21

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                    FOR THE THREE MONTHS ENDED MARCH 31, 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............    $  (1.2)    $    354.1         $  1,207.5          $  20.2        $  1,580.6

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.......................        -         (1,880.7)            (436.2)            (0.4)         (2,317.3)
  Sales...........................        -            488.4              118.5              -               606.9
  Maturities......................        -            985.0              260.1              -             1,245.1
Mortgage loans acquired or
  originated......................        -           (323.3)             (74.3)             6.9            (390.7)
Mortgage loans sold or repaid.....        -            369.3               79.1            (31.4)            417.0
Purchase of mortgage servicing
  rights..........................        -              -               (102.7)             -              (102.7)
Real estate acquired..............        -             (1.5)              (8.7)             -               (10.2)
Real estate sold..................        -             20.5               25.7              -                46.2
Net change in property and
  equipment.......................        -             (7.2)              (2.4)             -                (9.6)
Purchases of interest in
  subsidiaries, net of cash
  acquired........................        -              -               (106.2)             -              (106.2)
Dividends received from
  unconsolidated entities.........        -             11.2               94.4           (105.6)              -
Net change in other investments...        -            (75.3)              18.9             76.6              20.2
                                  ------------- ---------------- -------------------- --------------- ------------------
Net cash used in investing
  activities......................    $   -       $   (413.6)        $   (133.8)         $ (53.9)       $   (601.3)

                                       22

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                    FOR THE THREE MONTHS ENDED MARCH 31, 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........    $   3.5       $     -              $     -           $   -         $     3.5
Acquisition of treasury stock...       (0.4)            -                    -               -              (0.4)
Issuance of long-term debt......        -              12.3                  0.4            (7.5)            5.2
Principal repayments of long-
  term debt.....................        -            (209.5)               (42.7)           31.9          (220.3)
Net repayments of short-term
  borrowings....................        -               -                 (625.8)           (6.9)         (632.7)
Dividends paid to parent........        -               -                  (11.0)           11.0             -
Investment contract deposits....        -           1,356.5                  -               -           1,356.5
Investment contract
  withdrawals...................        -          (1,602.1)                 -               -          (1,602.1)
Net decrease in banking
  operation deposits............        -               -                   (6.6)            -              (6.6)
Proceeds from financing
  element derivatives...........        -              55.3                  -               -              55.3
Payments for financing element
  derivatives...................        -             (22.0)                 -               -             (22.0)
                                -------------- --------------- ---------------------- --------------- ---------------
Net cash provided by (used in)
  financing activities..........        3.1          (409.5)              (685.7)           28.5        (1,063.6)
                                -------------- --------------- ---------------------- --------------- ---------------
Net increase (decrease) in cash
  and cash equivalents..........        1.9          (469.0)               388.0            (5.2)          (84.3)

Cash and cash equivalents at
  beginning of year.............      173.8           640.5              1,360.5          (481.9)        1,692.9
                                -------------- --------------- ---------------------- --------------- ---------------
Cash and cash equivalents at
  end of year...................    $ 175.7       $   171.5            $ 1,748.5         $(487.1)      $ 1,608.6
                                ============== =============== ====================== =============== ===============

- -----------------------
(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)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                    FOR THE THREE MONTHS ENDED MARCH 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)
                                                                                       
OPERATING ACTIVITIES
Net cash provided by (used in)
  operating activities..........   $ (0.8)     $    456.5            $  404.1         $ (112.7)       $    747.1

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.....................      -          (2,418.1)             (500.5)             6.9          (2,911.7)
  Sales.........................      -             602.4                88.2              -               690.6
  Maturities....................      -             869.4               196.5              -             1,065.9
Net cash flows from trading
  securities....................      -               -                   2.0             (2.0)              -
Mortgage loans acquired or
  originated....................      -            (227.2)               11.6              -              (215.6)
Mortgage loans sold or repaid...      -             226.1                89.6             (1.8)            313.9
Purchase of mortgage
  servicing rights..............      -               -                (310.6)             -              (310.6)
Proceeds from sale of mortgage
  servicing rights..............      -               -                   0.5              -                 0.5
Real estate acquired............      -             (84.1)               (8.5)             -               (92.6)
Real estate sold................      -               5.9                17.7              -                23.6
Net change in property and
  equipment.....................      -              (2.9)               (0.2)             -                (3.1)
Net proceeds from sales of
  subsidiaries..................      -               -                   2.1              -                 2.1
Purchases of interest in
  subsidiaries, net of cash
  acquired......................      -             (18.5)              (41.8)             -               (60.3)
Dividends received from
  (contributions to)
  unconsolidated entities.......      -              22.9               (18.7)            (4.2)              -
Net change in other investments.      -             (24.4)              (68.6)            92.6              (0.4)
                                ------------- ----------------- -------------------- --------------- -----------------
Net cash used in investing
  activities....................   $  -        $ (1,048.5)           $ (540.7)        $   91.5        $ (1,497.7)

                                       24

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                    FOR THE THREE MONTHS ENDED MARCH 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)
                                                                                       
FINANCING ACTIVITIES
Issuance of common stock........  $    (3.0)      $    -             $      -          $   -          $    (3.0)
Acquisition of treasury stock...     (184.1)           -                    -              -             (184.1)
Issuance of long-term debt......        -              -                    7.5            -                7.5
Principal repayments of long-
  term debt.....................        -             (4.4)                (1.8)           1.8             (4.4)
Net proceeds of short-term
  borrowings....................        -              -                  191.7            1.1            192.8
Investment contract deposits....        -          2,937.8                  -              -            2,937.8
Investment contract
  withdrawals...................        -         (2,312.4)                 -              -           (2,312.4)
Net increase in banking
  operation deposits............        -              -                   44.7            -               44.7
                                ------------- ---------------- --------------------- --------------- ----------------
Net cash provided by (used in)
  financing activities..........     (187.1)         621.0                242.1            2.9            678.9
                                ------------- ---------------- --------------------- --------------- ----------------
Net increase (decrease) in cash
  and cash equivalents..........     (187.9)          29.0                105.5          (18.3)           (71.7)

Cash and cash equivalents at
  beginning of year.............      332.1          585.7                809.7         (688.9)         1,038.6
                                ------------- ---------------- --------------------- --------------- ----------------
Cash and cash equivalents at
  end of year...................  $   144.2       $  614.7           $    915.2        $(707.2)       $   966.9
                                ============= ================ ===================== =============== ================

- -----------------------
(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)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

In December  2003, we filed a shelf  registration  statement with the Securities
and Exchange  Commission.  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  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. 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
March 31, 2004 and December  31, 2003,  and for the three months ended March 31,
2004 and 2003.

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                 MARCH 31, 2004

                                                                  PRINCIPAL LIFE
                                  PRINCIPAL    PRINCIPAL LIFE       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.......   $     -         $    151.5        $  55,656.0      $      -          $ 55,807.5
Investment in unconsolidated
  entities......................     7,819.1          8,375.8              185.1       (16,194.9)            185.1
Cash and cash equivalents.......       175.7            580.8            1,065.3          (213.2)          1,608.6
Other intangibles...............         -                -                156.4             -               156.4
Mortgage loan servicing rights..         -                -              1,748.1             -             1,748.1
Separate account assets.........         -                -             46,186.6             -            46,186.6
All other assets................         1.2             99.6            5,043.0           (23.3)          5,120.5
                                ------------- ---------------- --------------------- --------------- ----------------
  Total assets..................   $ 7,996.0       $  9,207.7        $ 110,040.5      $(16,431.4)       $110,812.8
                                ============= ================ ===================== =============== ================
LIABILITIES
Contractholder funds............   $     -         $      -          $  28,913.7      $      -          $ 28,913.7
Future policy benefits and
  claims........................         -                -             15,525.8             -            15,525.8
Other policyholder funds........         -                -                769.2             -               769.2
Short-term debt.................         -              239.9              757.1           (10.7)            986.3
Long-term debt..................         -              664.1            1,891.0             -             2,555.1
Income taxes currently
  payable.......................         -               13.6              139.1            (6.7)            146.0
Deferred income taxes...........         8.3             19.5            1,822.2            (0.2)          1,849.8
Separate account liabilities....         -                -             46,186.6             -            46,186.6
Other liabilities...............         0.7            451.5            5,660.0          (218.9)          5,893.3
                                ------------- ---------------- --------------------- --------------- ----------------
  Total liabilities.............   $     9.0       $  1,388.6        $ 101,664.7      $   (236.5)       $102,825.8

                                       26

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

      CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION (CONTINUED)
                                 MARCH 31, 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)
                                                                                        
STOCKHOLDERS' EQUITY
Common stock...................   $     3.8         $     -           $      64.4      $      (64.4)   $       3.8
Additional paid-in capital.....     7,179.1           6,818.9             5,906.1         (12,725.0)       7,179.1
Retained earnings (deficit)....       824.0            (539.4)              867.2            (327.8)         824.0
Accumulated other
  comprehensive income.........     1,539.6           1,539.6             1,538.1          (3,077.7)       1,539.6
Treasury stock, at cost........    (1,559.5)              -                   -                 -         (1,559.5)
                               -------------- ------------------ -------------------- --------------- ----------------
  Total stockholders' equity...     7,987.0           7,819.1             8,375.8         (16,194.9)       7,987.0
                               -------------- ------------------ -------------------- --------------- ----------------
  Total liabilities and
  stockholders' equity.........   $ 7,996.0         $ 9,207.7         $ 110,040.5      $  (16,431.4)   $ 110,812.8
                               ============== ================== ==================== =============== ================

                                       27

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. 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        $  55,260.1        $      -         $  55,410.6
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              870.1            (223.7)          1,692.9
Other intangibles..............         -                -                121.4               -               121.4
Mortgage loan servicing
  rights.......................         -                -              1,953.1               -             1,953.1
Separate account assets........         -                -             43,407.8               -            43,407.8
All other assets...............         1.7            186.1            4,831.1             (17.5)          5,001.4
                               -------------- ------------------ -------------------- --------------- ----------------
  Total assets.................   $ 7,409.5         $8,981.0        $ 106,610.8        $(15,246.9)      $ 107,754.4
                               ============== ================== ==================== =============== ================
LIABILITIES
Contractholder funds...........   $     -           $    -          $  28,902.5        $      -         $  28,902.5
Future policy benefits and
  claims.......................         -                -             15,474.7               -            15,474.7
Other policyholder funds.......         -                -                710.2               -               710.2
Short-term debt................         -              399.9            1,228.6             (10.7)          1,617.8
Long-term debt.................         -              664.0            2,103.3               -             2,767.3
Income taxes currently
  payable......................         -               14.1               76.6              (0.7)             90.0
Deferred income taxes..........         8.2             20.7            1,615.1               -             1,644.0
Separate account liabilities...         -                -             43,407.8               -            43,407.8
Other liabilities..............         1.7            648.3            5,320.3            (229.8)          5,740.5
                               -------------- ------------------ -------------------- --------------- ----------------
  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
                               ============== ================== ==================== =============== ================

                                       28

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 31, 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.................   $   -           $  -             $   921.8            $   -            $  921.8
Fees and other revenues..........       -              -                 561.3               (0.2)            561.1
Net investment income............       0.6           12.8               803.5                0.1             817.0
Net realized/unrealized
  capital losses.................       -             (1.8)              (41.0)               -               (42.8)
                                 -------------- ------------------ -------------------- --------------- ----------------
  Total revenues.................       0.6           11.0             2,245.6               (0.1)          2,257.1

EXPENSES
Benefits, claims, and settlement
  expenses.......................       -              -               1,187.5                -             1,187.5
Dividends to policyholders.......       -              -                  73.3                -                73.3
Operating expenses...............       2.7           14.8               713.5               (0.1)            730.9
                                 -------------- ------------------ -------------------- --------------- ----------------
  Total expenses.................       2.7           14.8             1,974.3               (0.1)          1,991.7
                                 -------------- ------------------ -------------------- --------------- ----------------
Income (loss) before income
  taxes and cumulative effect
  of accounting change...........      (2.1)          (3.8)              271.3                -               265.4

Income taxes (benefits)..........      (0.7)          (1.4)               68.2                -                66.1
Equity in the net income of
  subsidiaries, excluding
  cumulative effect of
  accounting change..............     200.7          203.1                 -               (403.8)              -
                                 -------------- ------------------ -------------------- --------------- ----------------
Income before cumulative
  effect of accounting change....     199.3          200.7               203.1             (403.8)            199.3

Cumulative effect of accounting
  change, net of related income
  taxes..........................      (5.7)          (5.7)               (5.7)              11.4              (5.7)
                                 -------------- ------------------ -------------------- --------------- ----------------
Net income.......................   $ 193.6         $195.0           $   197.4            $(392.4)         $  193.6
                                 ============== ================== ==================== =============== ================

                                       29

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 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)
                                                                                            
REVENUES
Premiums and other
  considerations.................    $   -          $   -              $   905.5           $    -          $  905.5
Fees and other revenues..........        -              -                  632.2               (0.2)          632.0
Net investment income............        0.9           32.9                802.0                0.2           836.0
Net realized/unrealized capital
  gains (losses).................        -              7.5                (84.2)               -             (76.7)
                                 -------------- ------------------ -------------------- --------------- ----------------
  Total revenues.................        0.9           40.4              2,255.5                -           2,296.8

EXPENSES
Benefits, claims, and settlement
  expenses.......................        -              -                1,195.2                -           1,195.2
Dividends to policyholders.......        -              -                   80.1                -              80.1
Operating expenses...............        2.2           15.4                781.7                -             799.3
                                 -------------- ------------------ -------------------- --------------- ----------------
  Total expenses.................        2.2           15.4              2,057.0                -           2,074.6
                                 -------------- ------------------ -------------------- --------------- ----------------
Income (loss) from continuing
  operations before income taxes.       (1.3)          25.0                198.5                -             222.2

Income taxes (benefits)..........       (0.5)           9.3                 57.0                -              65.8
Equity in the net income of
  subsidiaries, excluding
  discontinued operations........      157.2          141.5                  -               (298.7)            -
                                 -------------- ------------------ -------------------- --------------- ----------------
Income from continuing
  operations, net of related
  income taxes...................      156.4          157.2                141.5             (298.7)          156.4

Loss from discontinued
  operations, net of related
  income taxes...................       (0.7)          (0.7)                (0.7)               1.4            (0.7)
                                 -------------- ------------------ -------------------- --------------- ----------------
Net income.......................    $ 155.7        $ 156.5            $   140.8           $ (297.3)       $  155.7
                                 ============== ================== ==================== =============== ================

                                       30

                         PRINCIPAL FINANCIAL GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                    FOR THE THREE MONTHS ENDED MARCH 31, 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..........    $(1.2)         $ ( 61.6)          $ 1,640.9           $  2.5            $1,580.6

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.....................      -              (150.4)           (2,166.9)             -              (2,317.3)
  Sales.........................      -               102.4               504.5              -                 606.9
  Maturities....................      -                 -               1,245.1              -               1,245.1
Mortgage loans acquired or
  originated....................      -                 -                (390.7)             -                (390.7)
Mortgage loans sold or repaid...      -                 -                 417.0              -                 417.0
Purchase of mortgage servicing
  rights........................      -                 -                (102.7)             -                (102.7)
Real estate acquired............      -                 -                 (10.2)             -                 (10.2)
Real estate sold................      -                 -                  46.2              -                  46.2
Net change in property and
  equipment.....................      -                 -                  (9.6)             -                  (9.6)
Purchases of interest in
  subsidiaries, net of cash
  acquired......................      -               (25.7)              (80.5)             -                (106.2)
Dividends received from
  unconsolidated entities.......      -                35.3                 5.4            (40.7)                -
Net change in other investments.      -               (32.0)               19.7             32.5                20.2
                               ---------------- ------------------ -------------------- --------------- ----------------
Net cash used in investing
  activities....................    $ -            $  (70.4)          $  (522.7)          $ (8.2)           $ (601.3)

                                       31

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                    FOR THE THREE MONTHS ENDED MARCH 31, 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..........    $   3.5        $   -              $      -          $   -            $     3.5
Acquisition of treasury stock.....       (0.4)           -                     -              -                 (0.4)
Issuance of long-term debt........        -              -                     5.2            -                  5.2
Principal repayments of
  long-term debt..................        -              -                  (220.3)           -               (220.3)
Net repayments of short-term
  borrowings......................        -           (159.9)               (472.7)          (0.1)            (632.7)
Dividends paid to parent..........        -              -                   (16.3)          16.3                -
Investment contract deposits......        -              -                 1,356.5            -              1,356.5
Investment contract withdrawals...        -              -                (1,602.1)           -             (1,602.1)
Net increase (decrease) in
  banking operation deposits......        -              -                    (6.6)           -                 (6.6)
Proceeds from financing element
  derivatives.....................        -              -                    55.3            -                 55.3
Payments for financing element
  derivatives.....................        -              -                   (22.0)           -                (22.0)
                                  -------------- ------------------ -------------------- --------------- ----------------
Net cash provided by (used in)
  financing activities............        3.1         (159.9)               (923.0)          16.2           (1,063.6)
                                  -------------- ------------------ -------------------- --------------- ----------------
Net increase (decrease) in cash
  and cash equivalents............        1.9         (291.9)                195.2           10.5              (84.3)

Cash and cash equivalents at
  beginning of year...............      173.8          872.7                 870.1         (223.7)           1,692.9
                                  -------------- ------------------ -------------------- --------------- ----------------
Cash and cash equivalents at end
  of year.........................    $ 175.7        $ 580.8            $  1,065.3        $(213.2)         $ 1,608.6
                                  ============== ================== ==================== =============== ================

                                       32

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                    FOR THE THREE MONTHS ENDED MARCH 31, 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...........     $  (0.8)       $  30.5            $    740.0          $ (22.6)        $    747.1

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases......................         -             (1.2)             (2,910.5)             -             (2,911.7)
  Sales..........................         -              2.7                 687.9              -                690.6
  Maturities.....................         -              -                 1,065.9              -              1,065.9
Mortgage loans acquired or
  originated.....................         -              -                  (215.6)             -               (215.6)
Mortgage loans sold or repaid....         -              -                   313.9              -                313.9
Purchase of mortgage servicing
  rights.........................         -              -                  (310.6)             -               (310.6)
Proceeds from sale of mortgage
  servicing rights...............         -              -                     0.5              -                  0.5
Real estate acquired.............         -              -                   (92.6)             -                (92.6)
Real estate sold.................         -              -                    23.6              -                 23.6
Net change in property and
  equipment......................         -              -                    (3.1)             -                 (3.1)
Net proceeds from sales of
  subsidiaries...................         -              -                     2.1              -                  2.1
Purchases of interest in
  subsidiaries, net of cash
  acquired.......................         -              -                   (60.3)             -                (60.3)
Dividends received from
  unconsolidated entities........         -              9.5                  29.7            (39.2)               -
Net change in other investments..         -            (26.1)                 (0.6)            26.3               (0.4)
                                  -------------- ------------------ -------------------- --------------- ----------------
Net cash used in investing
  activities.....................     $   -          $ (15.1)           $ (1,469.7)         $ (12.9)        $ (1,497.7)

                                       33

                         PRINCIPAL FINANCIAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2004
                                   (UNAUDITED)

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                    FOR THE THREE MONTHS ENDED MARCH 31, 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)
                                                                                            
FINANCING ACTIVITIES
Issuance of common stock..........    $  (3.0)      $    -              $     -            $    -          $    (3.0)
Acquisition of treasury stock.....     (184.1)           -                    -                 -             (184.1)
Issuance of long-term debt........        -              -                    7.5               -                7.5
Principal repayments of
  long-term debt..................        -              -                   (4.4)              -               (4.4)
Net proceeds of short-term
  borrowings......................        -            117.4                 75.4               -              192.8
Dividends paid to parent..........        -              -                   (4.0)              4.0              -
Investment contract deposits......        -              -                2,937.8               -            2,937.8
Investment contract withdrawals...        -              -               (2,312.4)              -           (2,312.4)
Net increase in banking
  operation deposits..............        -              -                   44.7               -               44.7
                                  -------------- ------------------ -------------------- --------------- ----------------
Net cash provided by (used in)
  financing activities............     (187.1)         117.4                744.6               4.0            678.9
                                  -------------- ------------------ -------------------- --------------- ----------------
Net increase (decrease) in cash
  and cash equivalents............     (187.9)         132.8                 14.9             (31.5)           (71.7)
Cash and cash equivalents at
  beginning of year...............      332.1          977.7                301.4            (572.6)         1,038.6
                                  -------------- ------------------ -------------------- --------------- ----------------
Cash and cash equivalents at end
  of year.........................    $ 144.2       $1,110.5            $   316.3          $ (604.1)       $   966.9
                                  ============== ================== ==================== =============== ================

                                       34

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

The following analysis  discusses our financial  condition as of March 31, 2004,
compared with December 31, 2003, and our consolidated  results of operations for
the three  months  ended March 31, 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.

                                       35

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.
     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,  Hong Kong and India and joint  ventures in
     Brazil,  Japan,  and  Malaysia.  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."

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.

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,  income on
     capital not allocated to other segments, intersegment eliminations,  income
     tax risk  assumptions  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

                                       36

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.

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  increased
approximately $5.0 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 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
expect to close the transaction in the second quarter of 2004.

On June 24,  2003,  Principal  Financial  Group  (Mauritius)  Ltd.  finalized an
agreement to purchase 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  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.  Activity  that will affect our  statements  of operations in future
periods will be accounted for using the full consolidation 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

BT  FINANCIAL  GROUP.  On October  31,  2002,  we sold  substantially  all of BT
Financial  Group to Westpac  Banking  Corporation  ("Westpac").  As of March 31,
2004, we have received  proceeds of A$958.9  million  Australian  dollars ("A$")
(U.S. $537.4 million) from Westpac,  with future contingent  proceeds in 2004 of
up to A$150.0  million  (approximately  U.S.  $115.0  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 March 31, 2003, we incurred an
additional after-tax loss of $0.7 million. These losses are recorded in the loss
from  discontinued  operations in the  consolidated  statements  of  operations.

                                       37

During the three  months ended March 31,  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. $190.0 million as of March 31, 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

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
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.

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 for the three months ended March
31, 2004 and  negatively  impacted $2.1 million for the three months ended March
31, 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

                                       38

exchange rate risk, see Item 3. "Quantitative and Qualitative  Disclosures about
Market Risk."

PENSION AND OTHER POST-RETIREMENT 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  over the  2003  pre-tax  pension  expense  of $60.2  million.
Approximately  $14.1  million of pre-tax  pension  expense was  reflected in the
determination  of first  quarter,  2004 net income.  In addition,  approximately
$14.1  million of  pre-tax  pension  expense  will be  reflected  in each of the
following  three  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%.

PERMANENT IMPAIRMENT OF MORTGAGE SERVICING RIGHTS

During  the  second  quarter  of 2003,  we  established  a policy of  evaluating
permanent  impairment  of our mortgage  servicing  rights.  Each quarter we will
evaluate  permanent  impairment  of  our  mortgage  servicing  rights  and  will
recognize a direct  write-down  when the gross carrying value is not expected to
be  recovered  in the  foreseeable  future.  We estimate the amount of permanent
impairment  based on an  analysis of the  mortgage  servicing  rights  valuation
allowance  related to loans that have  prepaid.  During the twelve  months ended
December 31, 2003, we recorded a permanent  impairment of our mortgage servicing
rights of approximately  $666.4 million,  which reduced the gross carrying value
and the valuation allowance of the mortgage servicing rights, thereby precluding
subsequent reversals. During the three months ending March 31, 2004, we recorded
a permanent  impairment of our mortgage servicing rights of approximately  $60.8
million.  These  write-downs  had no  immediate  impact  on our  net  income  or
financial  position in 2003 or the current quarter.  However,  these write-downs
have resulted in a reduction of amortization  expense in the current quarter and
may reduce amortization expense in future periods.

RECENT ACCOUNTING PRONOUNCEMENTS

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.

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.

                                       39

We also decreased an equity method  investment  within our  International  Asset
Management and Accumulation  segment by $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.

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.  SAB 105 requires IRLCs issued after April 1, 2004, to be
accounted  for as written  options  that would be reported as a liability  until
expiration or termination of the commitment. We do not expect this SAB to have a
material impact on our consolidated financial statements.

RESULTS OF OPERATIONS

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

                                                                                   FOR THE THREE MONTHS ENDED
                                                                                          MARCH 31,
                                                                                ---------------------------------------
                                                                                      2004                  2003
                                                                                ------------------    -----------------
                                                                                                
INCOME STATEMENT DATA:
Revenues:
  Premiums and other considerations......................................       $    921.8            $    905.5
  Fees and other revenues................................................            561.1                 632.0
  Net investment income..................................................            817.0                 836.0
  Net realized/unrealized capital losses.................................            (42.8)                (76.7)
                                                                                ------------------    -----------------
    Total revenues.......................................................          2,257.1               2,296.8

Expenses:
  Benefits, claims and settlement expenses...............................          1,187.5               1,195.2
  Dividends to policyholders.............................................             73.3                  80.1
  Operating expenses.....................................................            730.9                 799.3
                                                                                ------------------    -----------------
    Total expenses.......................................................          1,991.7               2,074.6
                                                                                ------------------    -----------------
Income from continuing operations before income taxes....................            265.4                 222.2
Income taxes.............................................................             66.1                  65.8
                                                                                ------------------    -----------------
    Income from continuing operations, net of related income taxes.......            199.3                 156.4

Loss from discontinued operations, net of related income taxes...........              -                    (0.7)
                                                                                ------------------    -----------------
Income before cumulative effect of accounting changes....................            199.3                 155.7
Cumulative effect of accounting change, net of related income taxes......             (5.7)                  -
                                                                                ------------------    -----------------
    Net income...........................................................       $    193.6            $    155.7
                                                                                ==================    =================

                                       40

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Premiums and other  considerations  increased  $16.3  million,  or 2%, to $921.8
million for the three months ended March 31, 2004,  from $905.5  million for the
three  months  ended March 31,  2003.  The  increase  reflected a $29.5  million
increase from the  International  Asset  Management  and  Accumulation  segment,
primarily  related  to  record  sales of  single  premium  annuities  with  life
contingencies in Chile in 2004 following a year of decreased sales due to market
contraction and the strengthening of the Chilean peso versus the U.S. dollar. In
addition, Life and Health segment premiums increased $11.7 million primarily due
to increased sales and stable  persistency in our specialty  benefits  business.
The increases  were partially  offset by a $24.9 million  decrease from the U.S.
Asset Management and Accumulation  segment,  primarily a result of a 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  decreased $70.9 million,  or 11%, to $561.1 million for
the three months ended March 31, 2004,  from $632.0 million for the three months
ended March 31, 2003. The decrease was largely due to a $139.0 million  decrease
from the Mortgage  Banking  segment  resulting  from a decrease in mortgage loan
production.  The decrease was partially  offset by a $46.4 million increase from
the  U.S.  Asset  Management  and  Accumulation  segment  primarily  related  to
improvements  in the equity markets and net cash flow,  which have led to higher
account values,  and increases in management fee income.  In addition,  Life and
Health fees and other  revenues  increased  $13.2  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 $19.0 million,  or 2%, to $817.0 million for the
three  months  ended March 31,  2004,  from $836.0  million for the three months
ended  March 31,  2003.  The  decrease  was  primarily  related to a decrease in
annualized  investment  yields.  The annualized yield on average invested assets
and cash was 5.7% for the three months  ended March 31,  2004,  compared to 6.6%
for the three  months  ended  March 31,  2003.  This  reflects  lower  yields on
invested  assets due in part to a lower  interest  rate  environment.  Partially
offsetting  the  decrease  was a $4,648.5  million,  or 9%,  increase in average
invested assets and cash, excluding the impact of the implementation of FIN 46.

Net realized/unrealized capital losses decreased $33.9 million, or 44%, to $42.8
million for the three months ended March 31,  2004,  from $76.7  million for the
three months ended March 31,  2003.  The decrease  includes a reduction in write
downs of other than  temporary  declines in the value of certain fixed  maturity
securities and less losses on credit  impaired fixed maturity  securities  sales
partially offset by higher losses related to hedging activities.

                                       41

The following  table  highlights  the  contributors  to net  realized/unrealized
capital gains and losses for the three months ended March 31, 2004.

                                                 FOR THE THREE MONTHS ENDED MARCH 31, 2004
                                 -----------------------------------------------------------------------
                                                      NET REALIZED                       NET REALIZED/
                                                         GAINS                            UNREALIZED
                                                      (LOSSES) ON       HEDGING         CAPITAL GAINS
                                   IMPAIRMENTS         DISPOSAL       ADJUSTMENTS         (LOSSES)
                                 ---------------- ---------------- ----------------- -------------------
                                                               (IN MILLIONS)

Fixed maturity securities (1)...  $   (21.8)          $     5.1          $    27.9        $    11.2
Equity securities (2)...........       (3.9)                3.9                -                -
Mortgage loans on real
  estate (3)....................      (11.7)                -                  -              (11.7)
Real estate.....................       (3.3)                3.9                -                0.6
Derivatives.....................        -                   -                (72.9)           (72.9)
Other (4).......................        -                  25.3                4.7             30.0
                                 ---------------- ---------------- ----------------- -------------------
  Total.........................  $   (40.7)          $    38.2          $   (40.3)       $   (42.8)
                                 ================ ================ ================= ===================

- -----------------------
(1) Impairments  include $2.4 million in  recoveries  on the sale of  previously
    impaired assets and $24.2 million of impairment  losses.  Net realized gains
    (losses) on disposal  includes  gross  realized  gains of $14.2  million and
    gross realized losses of $9.1 million.
(2) Impairments  include $3.9 million of impairment  losses.  Net realized gains
    (losses) on disposal includes gross realized gains of $5.5 million and gross
    realized losses of $1.6 million.
(3) Includes  $5.6  million  in  realized  losses due to sale,  foreclosure,  or
    impairment  write-down  of  commercial  mortgage  loans  and a $6.1  million
    increase in commercial mortgage valuation allowance.
(4) Net realized gains  (losses) on disposal  includes $10.6 million in realized
    gains on seed money,  $6.8  million for mark to market  gains on seed money,
    and $1.9 million related to foreign currency gains.

Benefits,  claims and  settlement  expenses  decreased  $7.7 million,  or 1%, to
$1,187.5  million for the three  months  ended  March 31,  2004,  from  $1,195.2
million for the three months ended March 31,  2003.  The decrease was  primarily
due to a $33.7 million  decrease from the U.S. Asset Management and Accumulation
segment,  reflecting a decrease in pension  full-service  payout sales of single
premium  group  annuities  with life  contingencies.  Partially  offsetting  the
decrease was a $28.2 million increase in the International  Asset Management and
Accumulation segment primarily a result of higher reserve expenses due to record
sales of  single  premium  annuities  with life  contingencies  in Chile in 2004
following  a  year  of  decreased  sales  due  to  market  contraction  and  the
strengthening of the Chilean peso versus the U.S. dollar.

Dividends to policyholders  decreased $6.8 million,  or 8%, to $73.3 million for
the three months ended March 31, 2004,  from $80.1  million for the three months
ended March 31, 2003. The decrease was  attributable to a $3.5 million  decrease
from the Life and  Health  Insurance  segment,  resulting  from  changes  in the
individual life insurance dividend crediting rates. In addition, U.S. Management
and  Accumulation  dividends to policyholders  decreased $3.3 million  resulting
from  a  decrease  in  dividends  for  our  participating  pension  full-service
accumulation products.

Operating  expenses  decreased  $68.4 million,  or 9%, to $730.9 million for the
three  months  ended March 31,  2004,  from $799.3  million for the three months
ended March 31, 2003. The decrease was largely due to a $110.8 million  decrease
from the Mortgage  Banking  segment  primarily  resulting from a decrease in the
impairment  of  capitalized  mortgage  servicing  rights net of servicing  hedge
activity and amortization of mortgage servicing rights. Partially offsetting the
decrease was an $18.0 million increase in the Corporate and Other segment partly
related to a prepayment  penalty  recognized  on redemption of our surplus notes
due 2024. In addition,  U.S Asset Management and Accumulation  segment operating

                                       42

expenses  increased $14.6 million due to our acquisition of Post Advisory in the
third quarter of 2003 and increases in  professional  and investment  management
fees.

Income taxes  increased $0.3 million to $66.1 million for the three months ended
March 31, 2004 from $65.8 million for the three months ended March 31, 2003. The
effective  income tax rate was 25% for the three months ended March 31, 2004 and
30% for the three months ended March 31, 2003. The effective income tax rate for
the three  months ended March 31, 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 prior year accumulated losses
on a foreign  investment and interest  exclusion from taxable income,  partially
offset by state income taxes. The effective income tax rate for the three months
ended  March  31,  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,  partially  offset by state income
taxes.  The decrease in the effective tax rate to 25% for the three months ended
March 31,  2004,  from 30% for the  three  months  ended  March  31,  2003,  was
primarily due to a tax benefit  associated with prior year accumulated losses on
a foreign investment.

As a  result  of  the  foregoing  factors  and  the  inclusion  of a  loss  from
discontinued  operations and the cumulative effect of accounting  change, net of
related income taxes,  net income  increased  $37.9  million,  or 24%, to $193.6
million for the three months ended March 31, 2004,  from $155.7  million for the
three months ended March 31, 2003.  The loss from  discontinued  operations  was
related to our sale of BT Financial Group.  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.

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

                                       43

                                                                            AS OF OR FOR THREE MONTHS ENDED
                                                                                      MARCH 31,
                                                                         -----------------------------------
                                                                              2004                2003
                                                                         ---------------     ---------------
                                                                                    (IN MILLIONS)
                                                                                         
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation.................................   $    897.2           $    886.0
International Asset Management and Accumulation........................        115.5                 76.8
Life and Health Insurance..............................................      1,035.3              1,012.3
Mortgage Banking.......................................................        255.6                404.5
Corporate and Other(1).................................................          0.3                 (0.7)
                                                                         ---------------     ---------------
  Total segment operating revenues.....................................      2,303.9              2,378.9
Net realized/unrealized capital losses, including recognition of
  front-end fee revenues and certain market value adjustments to fee
  revenues(2)..........................................................        (46.8)               (82.1)
                                                                         ---------------     ---------------
  Total revenue per consolidated statements of operations..............   $  2,257.1           $  2,296.8
                                                                         ===============     ===============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ................................   $    122.0           $     97.5
International Asset Management and Accumulation........................          8.7                  6.6
Life and Health Insurance..............................................         74.8                 59.1
Mortgage Banking.......................................................         28.6                 52.3
Corporate and Other ...................................................        (11.5)                (5.0)
                                                                         ---------------     ---------------
  Total segment operating earnings.....................................        222.6                210.5
Net realized/unrealized capital losses, as adjusted(2).................        (23.3)               (54.1)
Other after-tax adjustments(3).........................................         (5.7)                (0.7)
                                                                         ---------------     ---------------
  Net income (loss) per consolidated statements of operations..........   $    193.6           $    155.7
                                                                         ===============     ===============
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation(4)..............................   $ 87,221.9           $ 72,396.8
International Asset Management and Accumulation........................      3,143.3              2,269.6
Life and Health Insurance..............................................     12,514.5             11,477.0
Mortgage Banking(5)....................................................      5,434.0              3,651.5
Corporate and Other(6).................................................      2,499.1              2,045.6
                                                                         ---------------     ---------------
  Total assets.........................................................   $110,812.8           $ 91,840.5
                                                                         ===============     ===============

- -----------------------
(1)  Includes   inter-segment   eliminations   primarily   related  to  internal
     investment  management  fee revenues,  commission fee revenues paid to U.S.
     Asset  Management  and  Accumulation  agents  for  selling  Life and Health
     Insurance  segment  insurance  products,  internal  interest  paid  to  our
     Mortgage Banking segment for escrow accounts  deposited with our U.S. Asset
     Management and Accumulation segment.

(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.

                                       44

                                                                                       FOR THE THREE MONTHS ENDED
                                                                                                MARCH 31,
                                                                                     -------------------------------
                                                                                         2004             2003
                                                                                     --------------   --------------
                                                                                             (IN MILLIONS)

Net realized/unrealized capital losses..........................................      $     (42.8)       $   (76.7)
Certain market value adjustments to fee revenues................................             (2.9)            (9.8)
Recognition of front-end fee revenues...........................................             (1.1)             4.4
                                                                                     --------------   --------------
  Net realized/unrealized capital losses, including recognition of front-end
    fee revenues and certain market value adjustments to fee revenues...........            (46.8)           (82.1)
Amortization of deferred policy acquisition and sales inducement costs
  related to net realized capital gains (losses)................................              2.1              3.7
Capital (gains) losses distributed..............................................             (2.0)             1.6
Minority interest capital gains.................................................             (0.1)            (0.1)
                                                                                     --------------   --------------
  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 losses distributed and
    minority interest capital gains.............................................            (46.8)           (76.9)

Income tax effect...............................................................             23.5             22.8
                                                                                     --------------   --------------
  Net realized/unrealized capital losses, as adjusted...........................      $     (23.3)       $   (54.1)
                                                                                     ==============   ==============

(3)  For the three months ended March 31, 2004,  other after-tax  adjustments of
     $5.7  million  included the  negative  effect of a cumulative  effect of an
     accounting  change,  a result of our  implementation  of SOP 03-1.  For the
     three months  ended March 31, 2003,  other  after-tax  adjustments  of $0.7
     million  included the negative  effect of a change in the estimated loss on
     disposal of BT Financial Group.

(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
     $814.9  million at March 31,  2004,  and $838.0  million at March 31, 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 $1.2  billion in  mortgage  loans held for sale as of March 31,
     2004.

(6)  Includes  inter-segment  elimination amounts related to an internal line of
     credit, intercompany short-term investments,  internally generated mortgage
     loans, and long-term borrowings.  The Corporate and Other segment managed a
     revolving  line of credit  used by other  segments.  The  Mortgage  Banking
     segment and the Life and Health Insurance  segment have cash deposited with
     the  U.S.  Asset  Management  and  Accumulation  segment.  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.  The U.S. Asset  Management and  Accumulation
     segment  provides a source of funding for the  Mortgage  Banking  segment's
     mortgage servicing rights.

                                       45

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 MONTHS ENDED MARCH 31,
                                                    -------------------------------------
                                                         2004                 2003
                                                    ----------------     ----------------
                                                               (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating revenues(1):
 Premiums and other considerations............       $      88.9           $     113.8
 Fees and other revenues......................             229.8                 184.8
 Net investment income........................             578.5                 587.4
                                                    ----------------     ----------------
   Total operating revenues...................             897.2                 886.0

Expenses:
Benefits, claims and settlement expenses,
 including dividends to policyholders.........             498.6                 535.6
Operating expenses............................             238.4                 225.4
                                                    ----------------     ----------------
   Total expenses.............................             737.0                 761.0
                                                    ----------------     ----------------
Pre-tax operating earnings....................             160.2                 125.0
Income taxes..................................              38.2                  27.5
                                                    ----------------     ----------------
Operating earnings............................             122.0                  97.5

Net realized/unrealized capital losses, as
 adjusted.....................................             (37.2)                (31.1)
Other after-tax adjustments...................              (1.5)                  -
                                                    ----------------     ----------------
U.S. GAAP REPORTED:
Net income....................................       $      83.3           $      66.4
                                                    ================     ================

- -------------------------
(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 MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Premiums and other  considerations  decreased  $24.9  million,  or 22%, to $88.9
million for the three months ended March 31, 2004,  from $113.8  million for the
three months ended March 31, 2003. The decrease  primarily resulted from a $19.8
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.  Also  contributing to the overall decline was a $5.1 million decrease in
individual  payout annuity  sales,  primarily  related to increased  competitive
pricing pressures.

Fees and other revenues  increased $45.0 million,  or 24%, to $229.8 million for
the three months ended March 31, 2004,  from $184.8 million for the three months
ended March 31, 2003. Pension  full-service  accumulation fees and other revenue
increased   $21.1  million   primarily  due  to  an  increase  in  revenue  from
improvements  in the equity markets and net cash flow,  which have led to higher
account values. In addition,  Principal Global Investors fees and other revenues
increased $14.6 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.  Furthermore,  mutual  fund  fees and  other  revenue
increased  $17.0 million due to an increase in  commission  and  management  fee

                                       46

income,  which resulted from higher sales and account values.  Of this increase,
$8.7  million  relates  to sales  within the  segment  and is  eliminated  at an
operating segment level.

Net investment  income decreased $8.9 million,  or 2%, to $578.5 million for the
three  months  ended March 31,  2004,  from $587.4  million for the three months
ended March 31, 2003.  The decrease  primarily  resulted  from a decrease in the
average  annualized  yield on invested  assets and cash,  which was 5.7% for the
three months  ended March 31, 2004,  compared to 6.3% for the three months ended
March 31, 2003.  This reflects  lower yields on fixed  maturity  securities  and
commercial  mortgages  due in part to a lower  interest  rate  environment.  The
decrease was offset by a $3,123.7  million,  or 8%, increase in average invested
assets and cash.

Benefits, claims and settlement expenses,  including dividends to policyholders,
decreased  $37.0  million,  or 7%, to $498.6  million for the three months ended
March 31, 2004,  from $535.6  million for the three months ended March 31, 2003.
The decrease  primarily  resulted from a $20.8  million  decrease in our pension
full-service  payout  business as a result of decreased  sales of single premium
group  annuities  with life  contingencies.  In addition,  pension  full-service
accumulation  products  decreased  $9.2 million  primarily due to lower interest
credited on our non-participating  deposit type business and due to decreases in
cost of interest credited on declining business from our participating block.

Operating  expenses  increased  $13.0 million,  or 6%, to $238.4 million for the
three  months  ended March 31,  2004,  from $225.4  million for the three months
ended March 31,  2003.  The  increase  primarily  resulted  from an $8.8 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  consulting
and professional fees. In addition,  pension full-service  accumulation expenses
increased  $6.4 million  primarily  due to a decrease in the  capitalization  of
deferred policy  acquisition costs and due to higher investment  management fees
and compensation costs.

Income taxes  increased  $10.7  million,  or 39%, to $38.2 million for the three
months ended March 31, 2004, from $27.5 million for the three months ended March
31, 2003.  The effective  income tax rate for this segment was 24% for the three
months ended March 31, 2004,  and 22% for the three months ended March 31, 2003.
The  effective  income tax rates for the three  months  ended March 31, 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  $24.5
million,  or 25%, to $122.0  million for the three  months  ended March 31, 2004
from $97.5 million for the three months ended March 31, 2003.

Net realized/unrealized capital losses, as adjusted,  increased $6.1 million, or
20%, to $37.2  million for the three  months  ended March 31,  2004,  from $31.1
million for the three months ended March 31, 2003. The increase is primarily due
to higher capital losses related to hedging activities and increased  commercial
mortgage loan losses,  which were offset by lower 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 $16.9 million,  or 25%, to $83.3 million for
the three months ended March 31, 2004,  from $66.4  million for the three months
ended March 31, 2003.  For the three  months  ended March 31,  2004,  net income
included  the  negative  effect of other  after-tax  adjustments  totaling  $1.5
million,  related  to a  cumulative  effect  of  accounting  change  due  to our
implementation of SOP 03-1.

                                       47

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:

                                                                FOR THE THREE MONTHS ENDED
                                                                         MARCH 31,
                                                              --------------------------------
                                                                  2004              2003
                                                              -------------    ---------------
                                                                       (IN MILLIONS)
                                                                            
OPERATING EARNINGS DATA:
Operating revenues (1):
  Premiums and other considerations........................    $    60.2          $  30.7
  Fees and other revenues..................................         21.5             14.8
  Net investment income....................................         33.8             31.3
                                                              -------------    ---------------
    Total operating revenues...............................        115.5             76.8

Expenses:
  Benefits, claims and settlement expenses.................         75.7             48.1
  Operating expenses.......................................         26.5             20.6
                                                              -------------    ---------------
    Total expenses.........................................        102.2             68.7
                                                              -------------    ---------------
Pre-tax operating earnings.................................         13.3              8.1
Income taxes ..............................................          4.6              1.5
                                                              -------------    ---------------
Operating earnings.........................................          8.7              6.6
Net realized/unrealized capital gains (losses), as
  adjusted.................................................          3.6             (4.4)

Other after-tax adjustments................................         (3.3)            (0.7)
                                                              -------------    ---------------
U.S. GAAP REPORTED:
Net income.................................................    $     9.0          $   1.5
                                                              =============    ===============
OTHER DATA:
Operating earnings:
  Principal International..................................    $     8.7          $   6.6
  BT Financial Group.......................................          -                -

Net income (loss):
  Principal International..................................    $     9.0          $   2.2
  BT Financial Group.......................................          -               (0.7)

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

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Premiums and other  considerations  increased  $29.5  million,  or 96%, to $60.2
million for the three months ended March 31,  2004,  from $30.7  million for the
three  months ended March 31,  2003.  An increase of $30.1  million in Chile was
primarily  a result  of  record  sales of  single  premium  annuities  with life
contingencies  in  2004  following  a year  of  decreased  sales  due to  market
contraction and the strengthening of the Chilean peso versus the U.S. dollar.

Fees and other revenues increased $6.7 million, or 45%, to $21.5 million for the
three months ended March 31, 2004, from $14.8 million for the three months ended
March 31, 2003.  An increase of $2.2 million in Hong Kong was primarily a result
of an increase in assets under  management  due to the  acquisition  of Dao Heng

                                       48

Fund  Management  in 2004. An increase of $2.1 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. In addition,  an increase of $1.0
million  in India was  primarily  a result of  accounting  for  Principal  Asset
Management Company using the full consolidation  method of accounting due to our
100%  ownership  beginning  third  quarter  2003.  Prior to third  quarter 2003,
results were reported using equity method of accounting.

Net investment  income  increased $2.5 million,  or 8%, to $33.8 million for the
three months ended March 31, 2004, from $31.3 million for the three months ended
March 31, 2003. The increase was primarily due to a $498.1 million increase,  or
33%,  increase  in  average  invested  assets  and cash,  excluding  our  equity
investment in  subsidiaries.  The increase was partially offset by a significant
decrease in investment  yields.  The annualized yield on average invested assets
and cash,  excluding  our equity  investment in  subsidiaries,  was 5.7% for the
three months  ended March 31, 2004,  compared to 7.9% for the three months ended
March 31, 2003.

Benefits,  claims and settlement  expenses  increased $27.6 million,  or 57%, to
$75.7 million for the three months ended March 31, 2004,  from $48.1 million for
the three months ended March 31, 2003. An increase of $25.5 million in Chile was
primarily  a result of 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 and the strengthening of the Chilean peso versus
the U.S. dollar.

Operating  expenses  increased  $5.9  million,  or 29%, to $26.5 million for the
three months ended March 31, 2004, from $20.6 million for the three months ended
March 31,  2003.  An  increase  of $2.6  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.
In  addition,  an increase of $2.4  million in Mexico was  primarily  due to the
acquisition of Principal Genera, S.A. de C.V.,  Operadora de Fondos de Inversion
in 2003 coupled with a refinement in  amortization  methodology  of the value of
business acquired ("VOBA").

Income taxes  increased  $3.1 million to $4.6 million for the three months ended
March 31, 2004, from $1.5 million for the three months ended March 31, 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 increased $2.1 million,
or 32%, to $8.7 million for the three  months  ended March 31,  2004,  from $6.6
million for the three months ended March 31, 2003.

Net  realized/unrealized  capital gains, as adjusted,  increased $8.0 million to
$3.6 million of net realized/unrealized capital gains for the three months ended
March 31, 2004, from $4.4 million of net realized/unrealized  capital losses for
the three months ended March 31, 2003.  An increase of $4.6 million in Hong Kong
was  primarily  due to a change in the fair value of  embedded  derivatives.  In
addition,  an  increase  of $2.3  million  in India  was  primarily  a result of
accounting for Principal Asset Management  Company using the full  consolidation
method of accounting  due to our 100%  ownership  that occurred in third quarter
2003.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income  increased  $7.5  million to $9.0 million for the three
months ended March 31, 2004,  from $1.5 million for the three months ended March
31, 2003.  For the three months  ended March 31, 2004,  net income  included the
negative effect of other after-tax adjustments totaling $3.3 million, due to the
cumulative effect of an accounting  change related to the  implementation of SOP
03-1.  For the three  months  ended  March 31,  2003,  net income  included  the
negative effect of other after-tax adjustments totaling $0.7 million, related to
the change in the estimated loss on disposal of BT Financial Group.

                                       49

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 MONTHS ENDED
                                                                    MARCH 31,
                                                    -------------------------------------
                                                         2004                 2003
                                                    ----------------     ----------------
                                                               (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating revenues (1):
  Premiums and other considerations............       $     772.7          $     761.0
  Fees and other revenues......................              97.6                 84.4
  Net investment income........................             165.0                166.9
                                                    ----------------     ----------------
   Total operating revenues....................           1,035.3              1,012.3

Expenses:
  Benefits, claims and settlement expenses.....             616.1                617.8
  Dividends to policyholders...................              72.0                 75.5
  Operating expenses...........................             233.6                230.1
                                                    ----------------     ----------------
   Total expenses..............................             921.7                923.4
                                                    ----------------     ----------------
Pre-tax operating earnings.....................             113.6                 88.9
Income taxes...................................              38.8                 29.8
                                                    ----------------     ----------------
Operating earnings.............................              74.8                 59.1

Net realized/unrealized capital losses, as
  adjusted.....................................              (1.9)                (9.3)
Other after-tax adjustments....................              (0.9)                 -
                                                    ----------------     ----------------
U.S. GAAP REPORTED:
Net income.....................................       $      72.0          $      49.8
                                                    ================     ================

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

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Premiums and other  considerations  increased  $11.7  million,  or 2%, to $772.7
million for the three months ended March 31, 2004,  from $761.0  million for the
three  months  ended  March 31,  2003.  Specialty  benefits  insurance  premiums
increased $20.2 million primarily due to increased sales and stable persistency.
Individual life insurance premiums decreased $9.8 million, 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  $13.2 million,  or 16%, to $97.6 million for
the three months ended March 31, 2004,  from $84.4  million for the three months
ended March 31, 2003. Fee revenues from our health insurance  business increased
$8.0  million,  primarily a result of the  acquisition  of the Molloy  Companies

                                       50

effective  January 2, 2004.  Fee revenues  from our  individual  life  insurance
business  increased  $4.6  million,  primarily  due to the  continued  shift  in
customer preference to fee-based universal and variable universal life insurance
products.

Net investment  income decreased $1.9 million,  or 1%, to $165.0 million for the
three  months  ended March 31,  2004,  from $166.9  million for the three months
ended  March 31,  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 March 31, 2004,  compared to 7.0% for the three months ended
March 31, 2003.  This reflects lower yields on invested  assets due in part to a
lower interest rate  environment.  The decrease was partially offset by a $530.4
million, or 6%, increase in average invested assets and cash for the segment.

Benefits,  claims  and  settlement  expenses  decreased  $1.7  million to $616.1
million for the three months ended March 31, 2004,  from $617.8  million for the
three months ended March 31, 2003.  Individual life insurance  benefits,  claims
and settlement  expenses decreased $9.0 million,  primarily due to the impact of
decreased  premium  and  lower  death  claims.  In  addition,  health  insurance
benefits,  claims and settlement expenses decreased $2.5 million,  primarily due
to a reduction in members and reserve refinements, partially offset by increased
claim  costs per  member.  Specialty  benefit  insurance  benefits,  claims  and
settlement  expenses  increased  $9.8  million,  primarily  due to growth in the
business.

Dividends to policyholders  decreased $3.5 million,  or 5%, to $72.0 million for
the three months ended March 31, 2004,  from $75.5  million for the three months
ended March 31, 2003.  The  decrease is  primarily  related to a decrease in the
individual life insurance dividend crediting rates.

Operating  expenses  increased  $3.5 million,  or 2%, to $233.6  million for the
three  months  ended March 31,  2004,  from $230.1  million for the three months
ended March 31, 2003.  Specialty  benefits  operating  expenses  increased  $4.6
million  primarily  due to increases in  non-deferrable  commissions  related to
higher  premium,  incentive  compensation  for  employees,  and loss  adjustment
expenses. Health insurance operating expenses increased $4.4 million,  primarily
a result of the acquisition of the Molloy  Companies,  increased  non-deferrable
commissions,  and  increased  loss  adjustment  expenses  partially  offset by a
decrease in tax related expenses.  Individual life insurance  operating expenses
decreased $5.5 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  $9.0  million,  or 30%, to $38.8  million for the three
months ended March 31, 2004, from $29.8 million for the three months ended March
31, 2003.  The  effective  income tax rate for the segment was 34% for the three
months  ended March 31, 2004 and 2003.  The  effective  income tax rates for the
three months ended March 31, 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  increased  $15.7
million,  or 27%, to $74.8  million for the three  months  ended March 31, 2004,
from $59.1 million for the three months ended March 31, 2003.

Net realized/unrealized capital losses, as adjusted,  decreased $7.4 million, or
80%,  to $1.9  million for the three  months  ended  March 31,  2004,  from $9.3
million for the three months ended March 31, 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 $22.2 million,  or 45%, to $72.0 million for
the three months ended March 31, 2004,  from $49.8  million for the three months
ended March 31, 2003.  For the three  months  ended March 31,  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.

                                       51

MORTGAGE BANKING SEGMENT

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

                                                            FOR THE THREE MONTHS ENDED
                                                                     MARCH  31,
                                                       ------------------------------------
                                                             2004                2003
                                                       -----------------    ---------------
                                                                  (IN MILLIONS)
                                                                         
OPERATING EARNINGS DATA:
Operating Revenues:
  Loan servicing....................................      $   181.1            $   164.1
  Loan production...................................           74.5                240.4
                                                       -----------------    ---------------
    Total operating revenues........................          255.6                404.5
Expenses:
  Loan servicing....................................          173.3                256.9
  Loan production...................................           36.3                 63.5
                                                       -----------------    ---------------
    Total expenses..................................          209.6                320.4
                                                       -----------------    ---------------
Pre-tax operating earnings..........................           46.0                 84.1
Income taxes........................................           17.4                 31.8
                                                       -----------------    ---------------
Operating earnings..................................           28.6                 52.3

Net realized/unrealized capital losses, as adjusted.            -                    -
Other after-tax adjustments.........................            -                    -
                                                       -----------------    ---------------
U.S. GAAP REPORTED:
Net income..........................................      $    28.6            $    52.3
                                                       =================    ===============

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Total operating revenues decreased $148.9 million, or 37%, to $255.6 million for
the three months ended March 31, 2004,  from $404.5 million for the three months
ended March 31, 2003.  Residential  mortgage loan production  revenues decreased
$165.9 million due to a decrease in mortgage loan production to $6.8 billion for
the three months ended March 31,  2004,  compared to $15.5  billion for the same
period a year ago.  Residential mortgage loan servicing revenues increased $17.0
million primarily due to the sale of approximately  $169.2 million of delinquent
GNMA loans in the first quarter of 2004 with no  corresponding  activity for the
same period a year ago. Also contributing to the increase was an increase in the
average  balance of the  servicing  portfolio  to $118.7  billion  for the three
months  ended March 31, 2004,  compared to $111.0  billion for the same period a
year ago.

Total expenses decreased $110.8 million, or 35%, to $209.6 million for the three
months  ended March 31,  2004,  from $320.4  million for the three  months ended
March 31, 2003.  Residential  mortgage loan servicing  expenses  decreased $83.6
million  primarily  due  to a  $56.0  million  decrease  in  the  impairment  of
capitalized  mortgage  servicing  rights net of servicing hedge  activity.  This
decrease  primarily related to valuation model adjustments that were made in the
first quarter of 2003, which resulted in a $90.5 million impairment.  There were
no model  adjustments  required  in the  first  quarter  of 2004.  In  addition,
amortization of capitalized mortgage servicing rights and interest differential,
which is the  interest we are required to pass through to the investor in excess
of what we collect when loans pay off,  decreased  due to the decrease in actual
and  expected  prepayments.  Amortization  also  decreased  as a  result  of the
recognition of $666.4 million in direct  write-downs of the capitalized basis in
2003. This  write-down had no impact on our net income or financial  position in
2003, but resulted in a reduction of amortization expense in 2004 and may result
in a reduction of amortization  expense in future periods.  Residential mortgage

                                       52

loan  production  expenses  decreased  $27.2 million  reflecting the decrease in
residential mortgage loan production volume.

Income taxes  decreased  $14.4  million,  or 45%, to $17.4 million for the three
months ended March 31, 2004, from $31.8 million for the three months ended March
31, 2003.  The decrease in income taxes  primarily  resulted  from a decrease in
pre-tax operating  earnings.  The effective income tax rate for this segment was
38% for the three months ended March 31, 2004 and 2003. The effective income tax
rates for the three months  ended March 31, 2004 and 2003,  were higher than the
corporate income tax rate of 35% due to state income taxes.

As a  result  of the  foregoing  factors,  operating  earnings  and  net  income
decreased  $23.7  million,  or 45%, to $28.6  million for the three months ended
March 31, 2004, from $52.3 million for the three months ended March 31, 2003.

CORPORATE AND OTHER SEGMENT

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

                                                               FOR THE THREE MONTHS ENDED
                                                                        MARCH 31,
                                                           ------------------------------------
                                                                 2004                2003
                                                           -----------------    ---------------
                                                                      (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating Revenues (1):
    Total operating revenues..........................         $    0.3            $   (0.7)

Expenses:
    Total expenses....................................             21.2                 6.3
                                                           -----------------    ---------------
Pre-tax operating loss................................            (20.9)               (7.0)
Income tax benefits...................................             (9.4)               (2.0)
                                                           -----------------    ---------------
Operating loss........................................            (11.5)               (5.0)

Net realized/unrealized capital gains (losses), as
  adjusted............................................             12.2                (9.3)
Other after-tax adjustments...........................              -                   -
                                                           -----------------    ---------------
U.S. GAAP REPORTED:
Net income (loss).....................................         $    0.7            $  (14.3)
                                                           =================    ===============

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

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Total  operating  revenues  increased $1.0 million to $0.3 million for the three
months ended March 31, 2004,  from a negative  $0.7 million for the three months
ended March 31, 2003. The increase was partially due to a $3.3 million  decrease
in inter-segment  eliminations  included in this segment,  which was offset by a
corresponding  change in total  expenses.  The  increase in total  revenues  was
partially offset by a $2.0 million decrease in net investment income,  primarily
due to a decrease in average annualized investment yields for the segment.

Total  expenses  increased  $14.9  million to $21.2 million for the three months
ended March 31,  2004,  from $6.3  million for the three  months ended March 31,
2003. An increase of $7.2 million related to a prepayment  penalty recognized on

                                       53

redemption of our surplus notes due 2024. Inter-segment eliminations included in
this segment decreased $3.3 million, resulting in an increase in total expenses.

Income tax benefits  increased $7.4 million to $9.4 million for the three months
ended March 31,  2004,  from $2.0  million for the three  months ended March 31,
2003.  The increase was  primarily a result of an increase in pre-tax  operating
loss as well as a tax benefit associated with prior year accumulated losses on a
foreign investment.

As a result of the foregoing  factors,  operating loss increased $6.5 million to
$11.5  million for the three months ended March 31, 2004,  from $5.0 million for
the three months ended March 31, 2003.

Net realized/unrealized  capital gains, as adjusted,  increased $21.5 million to
$12.2  million of net  realized/unrealized  capital  gains for the three  months
ended  March 31,  2004,  from $9.3  million of net  realized/unrealized  capital
losses for the three months ended March 31, 2003. The increase was primarily due
to realized capital gains on sales of invested assets.

As a result of the foregoing factors, net income increased $15.0 million to $0.7
million of net income for the three  months  ended  March 31,  2004,  from $14.3
million of net loss for the three months ended March 31, 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.

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

SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS

Net cash  provided  by  operating  activities  was  $1,580.6  million and $747.1
million for the three  months ended March 31, 2004 and 2003,  respectively.  The
increase in cash provided by our operations between periods primarily related to
increases  in net funds  collected  through  servicing  on  behalf of  investors
related to  mortgage  banking  services  as well as an  increase in the net cash
provided by the mortgage loans held for sale activity.

Net cash used in investing  activities was $601.3  million and $1,497.7  million
for the three months ended March 31, 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 in
addition to a decline in net purchases of mortgage servicing rights.

Net cash used in financing  activities was $1,063.6 million for the three months
ended March 31, 2004,  compared to net cash provided by financing  activities of
$678.9  million for the three months  ended March 31, 2003.  The increase in net
cash used in  financing  activities  was  primarily  due to net  withdrawals  of
investment  contracts compared to net deposits in the prior year. The redemption

                                       54

of a surplus  note,  as well as an increase in the payment of  short-term  debt,
primarily  related to PRMCR,  also  contributed  to the increase in cash used in
financing activities.  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.

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.

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.

During the three months ended March 31, 2004,  we did not  repurchase  shares of
our outstanding common stock on the open market.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION OPERATIONS

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. $115.0 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 three months ended March 31, 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 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 three months ended March 31, 2004,
and $29.5  million for the three months ended March 31, 2003,  primarily to fund
acquisitions  and to a  lesser  extent,  to meet the cash  outflow  and  capital
requirements of certain operations. These international operations are primarily
in the start-up stage or are expanding in the short-term. 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.

                                       55

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of March 31, 2004,  we had $2,555.1  million of  long-term  debt  outstanding
compared to $2,767.3  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   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.

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

SHORT-TERM DEBT

As of March 31,  2004,  we had $986.3  million of  short-term  debt  outstanding
compared to $1,617.8  million at December 31, 2003. As of March 31, 2004, we had
credit facilities with various financial  institutions in an aggregate amount of
$4.9 billion,  which  consisted of a $2.5 billion PRMCR credit facility and $2.4
billion in other  credit  facilities.  We  consolidated  PRMCR in July 2003 as a
result of adopting  FIN 46. PRMCR can use the $2.5  billion  credit  facility to
issue short-term  debt. As of March 31, 2004, PRMCR had no outstanding  balances
under this facility.  Of our other remaining credit facilities,  as of March 31,
2004,  we had  $886.1  million  of  outstanding  borrowings  from  these  credit
facilities. Our credit facilities include a $600.0 million back-stop facility to
provide 100% support for our commercial  paper  program,  of which there were no
outstanding  balances  as of  March  31,  2004.  Also  included  in  our  credit
facilities is a short-term  borrowing  arrangement  with an unaffiliated  entity
renewed by Principal Residential Mortgage, Inc. on February 28, 2004, to provide
up to $700.0  million  related to the  activities of its  Principal  Residential
Mortgage Servicing  subsidiary.  At March 31, 2004, we had a $300.0 million note
payable  outstanding  pursuant  to this  borrowing  arrangement.  The  scheduled
maturity of this note payable is February 28,  2005.  We were not in  compliance
with one of the covenants  under this agreement at March 31, 2004. We obtained a
waiver from the unaffiliated entity.

PRMCR also has $100.0 million outstanding short-term debt in fixed term notes as
of March 31, 2004, which was originally  issued under a separate credit facility
for long-term borrowings. Due to the maturity date of less than twelve months at
the time of  consolidation in July 2003, the fixed term notes were classified as
short-term debt.

OFF-BALANCE SHEET ARRANGEMENTS

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 March 31, 2004 and 2003, the Trust held
$652.5  million and $507.0  million in  mortgage  loans,  respectively,  and had
outstanding  participation  certificates  of $617.6 million and $479.3  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  $11.0  million  and $7.0  million in
servicing and  successful  servicing fees from PRMF in the first quarter of 2004

                                       56

and 2003,  respectively.  At March 31, 2004 and 2003,  our residual  interest in
such cash  flows was $54.4  million  and $39.9  million,  respectively,  and was
recorded in other assets on the consolidated statements of financial position.

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 March 31, 2004, was  approximately  $192.0
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,  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. $190.0 million as of March 31, 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.

INVESTMENTS

We had total  consolidated  assets as of March 31, 2004, of $110.8  billion,  of
which $56.0 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

                                       57

assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $53.9 billion were held by
our  U.S.   operations   and  the  remaining  $2.1  billion  were  held  by  our
International Asset Management and Accumulation segment.

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 March 31, 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.

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;

                                       58

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 65%
and the debt service  coverage ratio at loan inception was 2.4 times as of March
31, 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 March 31,
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 March 31, 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,  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.

                                       59

                              U.S. INVESTED ASSETS

                                                             AS OF MARCH 31,            AS OF DECEMBER 31,
                                                           ------------------------  -------------------------
                                                                   2004                      2003
                                                           ------------------------  -------------------------
                                                            CARRYING       % OF         CARRYING      % OF
                                                             AMOUNT        TOTAL         AMOUNT       TOTAL
                                                           ------------ -----------  -------------  ----------
                                                                          ($ IN MILLIONS)
                                                                                          
Fixed maturity securities
  Public...........................................         $ 25,517.4        47%     $  24,785.0      46%
  Private..........................................           11,722.8        22         11,343.0      21
Equity securities..................................              697.3         1            670.7       1
Mortgage loans
  Commercial ......................................            9,703.7        18          9,630.4      18
  Residential (1)..................................            2,852.0         5          3,544.6       7
Real estate held for sale .........................              502.3         1            524.4       1
Real estate held for investment....................              962.3         2          1,003.6       2
Policy loans.......................................              804.5         2            804.1       2
Other investments .................................            1,117.1         2          1,249.7       2
                                                          ------------- -----------  -------------  ----------
    Total invested assets..........................           53,879.4       100%        53,555.5     100%
                                                                        ===========                 ==========
Cash and cash equivalents..........................            1,537.8                    1,619.8
                                                          -------------              -------------
    Total invested assets and cash ................         $ 55,417.2                $  55,175.3
                                                          =============              =============

- -----------------------
(1) As a  result  of our  implementation  of FIN 46,  effective  July  1,  2003,
    residential  mortgage loans include the full  consolidation of PRMCR,  which
    provides a source of funding for our residential  mortgage loan  production.
    PRMCR held $1.2 billion in mortgage loans held for sale as of March 31, 2004
    and $2.0 billion as of December 31, 2003.

We actively manage public fixed maturity securities,  including our portfolio of
residential  mortgage-backed  securities,  in order  to  provide  liquidity  and
enhance yield and total return. Our residential  mortgage-backed  securities are
managed to reduce the risk of prepayment. This active management has resulted in
the realization of capital gains and losses with respect to such investments.

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
5.7% for the three months  ended March 31, 2004,  compared to 6.5% for the three
months  ended March 31,  2003.  We  calculate  annualized  yields using a simple
average  of asset  classes at the  beginning  and end of the  reporting  period.
Effective July 1, 2003,  residential mortgage loans increased  significantly due
to the full consolidation of PRMCR under the implementation of FIN 46. The yield
on  other  invested  assets  for the  first  quarter  of 2003  was  high  due to
derivatives associated with the increase in mortgage loan production.

                                       60

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

                                                        FOR THE THREE MONTHS ENDED MARCH 31,
                                              --------------------------------------------------------
                                                        2004                          2003
                                              ---------------------------      -----------------------

                                                 YIELD          AMOUNT           YIELD       AMOUNT
                                              -----------   -------------      ----------  -----------
                                                                      ($ IN MILLIONS)

Fixed maturity securities.............            5.9%      $     540.1           6.5%        $548.3
Equity securities.....................            6.8              11.6           7.5            6.8
Mortgage loans - Commercial...........            7.0             169.7           7.4          174.4
Mortgage loans - Residential..........            5.8              46.5           4.4           16.4
Real Estate...........................            9.2              34.3           6.8           21.5
Policy loans..........................            6.4              12.8           6.9           14.0
Cash and cash equivalents.............            0.7               2.9           1.4            3.2
Other investments.....................            4.5              13.2          18.3           46.4
                                                            -------------                  -----------
  Total before investment expenses....            6.0             831.1           6.7          831.0

Investment expenses...................            0.3              47.9           0.2           26.3
                                                            -------------                  -----------
  Net investment income...............            5.7%      $     783.2           6.5%        $804.7
                                                            =============                  ===========

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  69% of total U.S.  invested assets as of March 31, 2004
and 67% as of December 31, 2003.  The fixed  maturity  securities  portfolio was
comprised,  based on carrying  amount,  of 69% in publicly traded fixed maturity
securities and 31% in privately placed fixed maturity securities as of March 31,
2004 and December  31,  2003,  respectively.  Included in the  privately  placed
category as of March 31,  2004,  were $4.7  billion 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 March 31, 2004, and December 31, 2003, as shown in the following table:

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

                                                             AS OF MARCH 31,           AS OF DECEMBER 31,
                                                        ------------------------    ------------------------
                                                                 2004                        2003
                                                        ------------------------    -------------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                        ---------------  -------    ------------- -----------
                                                                           ($ IN MILLIONS)
                                                                                        
U.S. Government and agencies...........................   $     620.5         2%     $    610.9       2%
States and political subdivisions......................         525.1         1           537.0       1
Non-U.S. governments...................................         464.5         1           422.4       1
Corporate - public.....................................      18,539.0        50        18,033.4      50
Corporate - private....................................       9,824.9        26         9,693.1      27
Residential pass-through securities....................       2,027.1         6         2,070.3       6
Commercial MBS.........................................       3,157.3         9         2,917.4       8
Collateral mortgage obligations........................         511.1         1           294.6       1
Asset-backed securities................................       1,570.7         4         1,548.9       4
                                                        ---------------  -------    ------------- -----------
    Total fixed maturities.............................   $  37,240.2       100%     $ 36,128.0     100%
                                                        ===============  =======    ============= ===========

                                       61

We held $7,266.2 million of  mortgage-backed  and asset-backed  securities as of
March 31, 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 and is actively managed to reduce the risk of prepayment.

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
$5,299.8  million,  or 14% of total fixed maturity  securities,  as of March 31,
2004,  comprised of corporate and foreign government fixed maturity  securities.
Of the  $5,299.8  million as of March 31,  2004,  investments  totaled  $1,498.7
million in the United  Kingdom,  $1,268.0  million in the  continental  European
Union,  $607.5 million in Asia, $440.5 million in South America,  $423.3 million
in Australia  and $16.0  million in Japan.  The  remaining  $1,045.8  million is
invested in 12 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 March 31, 2004,  our  investments  in Canada  totaled  $1,364.8
million.

As of March 31, 2004,  our top ten corporate  bond  exposures  were rated an "A"
equivalent or better by the rating agencies and represented $2,940.9 million, or
8% of our fixed  maturity  securities  portfolio  and 5% of total U.S.  invested
assets. As of March 31, 2004, 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

                                       62

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
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 March 31,  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 93%.

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 March 31, 2004, and December 31, 2003, as well as the
percentage, based on estimated fair value, that each designation comprises:

                                       63

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

                                                 AS OF MARCH 31, 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.............  $  17,686.3   $19,085.8         51%         $ 17,299.2    $  18,415.1        51%
2               Baa..................     14,269.2    15,641.5         42            13,579.3       14,657.1        41
3               Ba...................      1,540.3     1,677.5          5             1,998.0        2,123.1         6
4               B....................        545.1       546.7          1               517.4          514.5         1
5               Caa and lower........        101.3        98.8          -               230.9          225.4         1
6               In or near default...        182.0       189.9          1               220.7          192.8         -
                                       ------------  ----------   --------------   -----------   ------------  ---------------
                  Total fixed
                    maturities.......  $  34,324.2   $37,240.2        100%         $ 33,845.5    $  36,128.0       100%
                                       ============  ==========   ==============   ===========   ============  ===============

- -----------------------
(1)  Includes 137 securities with an amortized cost of $1,336.4  million,  gross
     gains of $55.8 million,  gross losses of $2.3 million and a carrying amount
     of $1,389.9  million as of March 31, 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.

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 March 31, 2004, we had invested 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 March
31, 2004, and December 31, 2003.

                                       64

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

                                                           AS OF MARCH 31,            AS OF DECEMBER 31,
                                                      --------------------------  --------------------------
                                                                 2004                       2003
                                                      --------------------------  --------------------------
                                                          CARRYING     % OF          CARRYING       % OF
                                                           AMOUNT      TOTAL          AMOUNT        TOTAL
                                                      -------------  -----------  --------------  ----------
                                                                         ($ IN MILLIONS)

INDUSTRY CLASS
Finance - Bank..........................               $  3,076.0          11%     $  3,041.9          11%
Finance - Insurance.....................                  1,987.2           7         1,718.1           6
Finance - Other.........................                  3,454.4          12         3,337.5          12
Industrial - Consumer...................                    989.3           3           879.4           3
Industrial - Energy.....................                  2,799.3          10         2,779.5          10
Industrial - Manufacturing..............                  5,669.1          20         5,729.6          21
Industrial - Other......................                    161.7           1           158.7           1
Industrial - Service....................                  4,469.9          16         4,503.0          16
Industrial - Transport..................                  1,003.3           3           967.8           4
Utility - Electric......................                  2,826.8          10         2,751.2          10
Utility - Other.........................                     61.4           -            67.4           -
Utility - Telecom.......................                  1,865.5           7         1,792.4           6
                                                      -------------  -----------  --------------  ----------
    Total...............................               $ 28,363.9         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
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

                                       65

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  were $21.8
million for the three months ended March 31, 2004. Following is a summary of our
material impairments taken for the three months ended March 31, 2004:

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    $7.1 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.

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.

For the three  months  ended March 31,  2004,  we  realized  $9.1 of losses upon
disposal of bonds excluding hedging  adjustments.  Included in this $9.1 million
is $4.1 million related to sales of seven credit  impaired  names.  These losses
were  incurred as part of our general  portfolio  repositioning  activities.  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 new  information  causes us to change our assessment of whether a bond will
recover or perform  according to its contractual  terms, in response to external
events (such as a merger or a  downgrade)  that result in  investment  guideline
violations  (such as single issuer or overall  portfolio credit quality limits),
in response to extreme  catastrophic  events (such as  September  11, 2001) that
result in industry or market wide  disruption,  or to take  advantage  of tender
offers. 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
March 31, 2004, and December 31, 2003.

                                       66

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

                                                                     AS OF MARCH 31, 2004
                                              --------------------------------------------------------------
                                                                GROSS           GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED          CARRYING
                                                  COST           GAINS       LOSSES (1)           AMOUNT
                                              -------------- -------------- ---------------  ---------------
                                                                        (IN MILLIONS)

Finance - Bank..........................       $   2,862.5    $   221.6      $     8.1        $ 3,076.0
Finance - Insurance.....................           1,847.5        142.4            2.7          1,987.2
Finance - Other.........................           3,206.2        255.0            6.8          3,454.4
Industrial - Consumer...................             913.8         76.0            0.5            989.3
Industrial - Energy.....................           2,509.2        300.9           10.8          2,799.3
Industrial - Manufacturing..............           5,210.1        464.0            5.0          5,669.1
Industrial - Other......................             148.1         13.6            -              161.7
Industrial - Service....................           4,059.9        413.4            3.4          4,469.9
Industrial - Transport..................             920.3         97.0           14.0          1,003.3
Utility - Electric......................           2,612.4        217.8            3.4          2,826.8
Utility - Other.........................              53.7          8.5            0.8             61.4
Utility - Telecom.......................           1,666.3        200.5            1.3          1,865.5
                                              -------------- -------------- ---------------  ---------------
   Total corporate securities...........          26,010.0      2,410.7           56.8         28,363.9
U.S. Government and agencies............             604.4         16.1            -              620.5
States and political subdivisions.......             479.2         46.4            0.5            525.1
Non-U.S. governments....................             394.9         69.6            -              464.5
Mortgage-backed and other
  asset-backed securities...............           6,741.3        433.3           11.8          7,162.8
                                              -------------- -------------- ---------------  ---------------
    Total fixed maturity securities,
      available-for-sale................       $  34,229.8    $ 2,976.1      $    69.1        $37,136.8
                                              ============== ============== ===============  ===============

- -----------------------
(1)  Included in the $69.1  million in  unrealized  losses is $0.2  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.

                                       67

                              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 $69.1  million  and $151.6  million as of March 31, 2004 and  December  31,
2003, respectively.  Of the $69.1 million in gross unrealized losses as of March
31, 2004, there were $3.5 million in losses  attributed to securities  scheduled
to  mature  in one  year or less,  $6.9  million  is  attributed  to  securities
scheduled to mature  between one to five years,  $16.3  million is attributed to
securities  scheduled  to mature  between  five to ten years,  $30.6  million is
attributed to securities  scheduled to mature after ten years, and $11.8 million
is  related  to  mortgage-backed  and  other  asset-back  securities.  The gross
unrealized  losses  as of March  31,  2004 were  concentrated  primarily  in the
Industrial-Transportation,  Mortgage-backed and other asset-backed security, and
Industrial-Energy  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 March 31, 2004, and December 31, 2003.

                                       68

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

                                                                AS OF MARCH 31, 2004
                                              -----------------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED        CARRYING
                                                  COST           GAINS         LOSSES           AMOUNT
                                              -------------- -------------  -------------  --------------
                                                                       (IN MILLIONS)
                                                                                 
Investment Grade:
  Public.....................................   $  22,299.3    $ 1,958.3      $    17.4      $  24,240.2
  Private....................................       9,561.8        841.5           19.6         10,383.7
Below Investment Grade:
  Public.....................................       1,185.8         96.7            5.2          1,277.3
  Private....................................       1,182.9         79.6           26.9          1,235.6
                                              -------------- -------------  -------------  --------------
Total fixed maturity securities, available-
  for-sale...................................   $  34,229.8    $ 2,976.1      $    69.1      $  37,136.8
                                              ============== =============  =============  ==============

                              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
                                              ============== =============  =============  ==============

                                       69

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

                                                                       AS OF MARCH 31, 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..................   $     344.0   $       3.3    $    200.7     $       2.0   $   544.7    $     5.3
Greater than three to six months......          69.1           0.8         110.0             1.7       179.1          2.5
Greater than six to nine months.......          99.1           0.9         319.8            12.8       418.9         13.7
Greater than nine to twelve months....         266.7           4.6         117.1             1.3       383.8          5.9
Greater than twelve to twenty-four
  months..............................          29.7           0.7          20.9             1.5        50.6          2.2
Greater than twenty-four to thirty-
  six months..........................          65.8           6.5           -               -          65.8          6.5
Greater than thirty-six months........          20.6           0.6          24.9             0.3        45.5          0.9
                                        ------------- -------------   -----------  --------------  ----------  -------------
  Total fixed maturities, available-
    for-sale..........................   $     895.0   $      17.4    $    793.4     $      19.6   $ 1,688.4    $    37.0
                                        ============= =============   ===========  ==============  ==========  =============

                              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
                                        ============= =============   ==========   ==============   ===========  =============

                                       70

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

                                                                         AS OF MARCH 31, 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..................   $ 73.3        $  1.6        $ 16.7          $  0.4        $  90.0       $  2.0
Greater than three to six months......      6.0           0.1          28.1             1.4           34.1          1.5
Greater than six to nine months.......      5.2           0.1          16.4             1.3           21.6          1.4
Greater than nine to twelve months....      3.4           0.1           -               -              3.4          0.1
Greater than twelve to twenty-four
  months..............................     12.5           0.9          79.6             9.7           92.1         10.6
Greater than twenty-four to thirty-
  six months..........................      8.5           2.4          16.3             2.9           24.8          5.3
Greater than thirty-six months........      -             -            60.1            11.2           60.1         11.2
                                        ------------- ------------- --------------- -------------- -----------  --------------
  Total fixed maturities, available-
    for-sale..........................   $108.9        $  5.2        $217.2          $ 26.9        $ 326.1       $ 32.1
                                        ============= ============= =============== ============== ===========  ==============

                              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 March 31, 2004 and  December  31, 2003,
$37.0  million and $76.4 million were related to  investment  grade  securities,
respectively.   Gross  unrealized  losses  related  to  below  investment  grade
securities  were  $32.1  million  and $75.2  million  as of March  31,  2004 and
December 31, 2003, respectively.

                                       71

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 March 31, 2004,
and December 31, 2003.

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

                                                                           AS OF MARCH 31, 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..................   $     -       $     -         $  36.6     $    10.1       $  36.6      $  10.1
Greater than three to six months......         -             -            12.3           3.5          12.3          3.5
Greater than six to nine months.......         -             -             -             -             -            -
Greater than nine to twelve months....         -             -             -             -             -            -
Greater than twelve months............        10.1           2.8           -             -            10.1          2.8
                                         -----------  -------------  -----------  --------------  ----------  ----------------
  Total fixed maturity securities,
    available-for-sale................   $    10.1     $     2.8       $  48.9     $    13.6       $  59.0      $  16.4
                                         ===========  =============  ===========  ==============  ==========  ================

                              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
                                         -----------  -------------  -----------  --------------  -----------  ---------------
                                                                             (IN MILLIONS)

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 $16.4 million as of March
31, 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 $2.8 million and $36.2 million as of March 31, 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:

                                       72

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

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

Total fixed maturity securities (public and private)............            $   37,240.2            $  36,128.0
                                                                      ====================   ======================
Problem fixed maturity securities...............................            $      126.6            $     152.5
Potential problem fixed maturity securities.....................                   135.9                  230.1
Restructured fixed maturity securities..........................                    26.7                   39.9
                                                                      --------------------   ----------------------
  Total problem, potential problem and restructured fixed
    maturity securities.........................................            $      289.2            $     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 23% and 25% of total U.S.  invested assets as of March
31,  2004,  and  December  31, 2003,  respectively.  Mortgage  loans  consist of
commercial and residential loans.  Commercial  mortgage loans comprised $9,703.7
million as of March 31, 2004,  and $9,630.4  million as of December 31, 2003, or
77%  and 73% of  total  mortgage  loan  investments,  respectively.  Residential
mortgages  comprised  $2,852.0 million as of March 31, 2004 and $3,544.6 million
as of December  31, 2003,  or 23% and 27% of total  mortgage  loan  investments,
respectively.  Principal Residential Mortgage,  Inc. and Principal Bank hold the
majority of  residential  loans.  Principal  Residential  Mortgage,  Inc.  holds
residential  loans as part of its  securitization  inventory and Principal  Bank
holds residential loans to comply with federal thrift charter requirements. As a
result of our  implementation  of FIN 46,  effective  July 1, 2003,  residential
mortgage loans include the full  consolidation of PRMCR, which provides a source
of funding for our residential mortgage loan production. PRMCR held $1.2 billion
in  mortgage  loans  held for sale as of March 31,  2004 and $2.0  billion as of
December 31, 2003.

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
March 31, 2004. We are,  therefore,  exposed to potential  losses resulting from
the risk of catastrophes,  such as earthquakes, that may affect the region. Like

                                       73

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.

Our commercial loan portfolio is highly diversified by borrower. As of March 31,
2004,  39% 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 March  31,  2004 and
December  31, 2003 was 1,424 and 1,447,  respectively.  The average loan size of
our commercial mortgage portfolio was $6.9 million as of March 31, 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  $6.1 million for the three months ended March
31, 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

                                       74

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.

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

                              U.S. INVESTED ASSETS
                     COMMERCIAL MORTGAGE VALUATION ALLOWANCE

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

Beginning balance..........................................          $          49.6           $          83.6
Provision..................................................                     11.9                       1.3
Release....................................................                     (5.8)                    (35.3)
                                                                  ----------------------  ------------------------
Ending balance.............................................          $          55.7           $          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 MARCH 31,           AS OF DECEMBER 31,
                                                                  ----------------------  ------------------------
                                                                         2004                       2003
                                                                  ----------------------  ------------------------
                                                                                    ($ IN MILLIONS)

Total commercial mortgages ....................................      $      9,703.7           $        9,630.4
                                                                  ======================  ========================
Problem commercial mortgages(1)................................      $         45.8           $           45.9
Potential problem commercial mortgages ........................               134.0                       99.3
Restructured commercial mortgages .............................                62.9                       65.3
                                                                  ----------------------  ------------------------
  Total problem, potential problem and
    restructured commercial mortgages .........................      $        242.7           $          210.5
                                                                  ======================  ========================
  Total problem, potential problem and restructured
    commerical mortgages as a percent of  total commercial
    mortgages..................................................                 2%                         2%

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

EQUITY REAL ESTATE

We hold commercial equity real estate as part of our investment portfolio. As of
March 31, 2004, and December 31, 2003, the carrying amount of equity real estate
investment was $1,464.6  million and $1,528.0  million,  or 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.

                                       75

Equity real estate is categorized as either "real estate held for investment" or
"real  estate held for sale".  Real estate held for  investment  totaled  $962.3
million as of March 31, 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 March 31, 2004 and
December 31, 2003, there were no such impairment adjustments.

The  carrying  amount of real  estate  held for sale as of March 31,  2004,  and
December  31,  2003,  was $502.3  million and $524.4  million,  net of valuation
allowances of $25.4 million and $21.5 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 March 31, 2004. By property type,  there is a
concentration  in office  buildings that  represented  approximately  30% of the
equity real estate portfolio as of March 31, 2004.

OTHER INVESTMENTS

Our other investments totaled $1,117.1 million as of March 31, 2004, compared to
$1,249.7  million as of December  31,  2003.  Derivatives  accounted  for $625.3
million in other investments as of March 31, 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 March 31, 2004, our  international  investment  operations  consist of the
investments  of  Principal  International  comprised of $2.1 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 March 31,  2004,  and  December  31,  2003,  were  fixed  maturity
securities and residential mortgage loans:

                                       76

                          INTERNATIONAL INVESTED ASSETS

                                                             AS OF MARCH 31,             AS OF DECEMBER 31,
                                                          ----------------------     -------------------------
                                                                   2004                      2003
                                                          ----------------------     -------------------------
                                                            CARRYING      % OF        CARRYING        % OF
                                                             AMOUNT       TOTAL        AMOUNT         TOTAL
                                                          ------------  --------     -----------   -----------
                                                                              ($ IN MILLIONS)
                                                                                          
Fixed maturity securities
  Public..........................................         $  1,499.6      72%        $ 1,334.8        66%
  Private.........................................                5.3       -              89.8         5
Equity securities.................................               51.9       2              41.8         2
Mortgage loans
  Residential.....................................              332.4      16             333.1        16
Real estate held for investment...................                9.3       -               9.5         -
Other investments ................................              214.6      10             213.3        11
                                                          ------------  --------     -----------   -----------
  Total invested assets...........................            2,113.1     100%          2,022.3       100%
                                                                        ========                   ===========
Cash and cash equivalents.........................               70.8                      73.1
                                                          ------------               -----------
  Total invested assets and cash .................         $  2,183.9                 $ 2,095.4
                                                          ============               ===========

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
cash flows. These cash flows 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
cash flows and  re-determining  the net present value based upon an  alternative
level of interest rates, and determining the percentage change in fair value.

As of March 31, 2004, the difference  between the asset and liability  durations
on our primary duration managed  portfolio was 0.01. This duration gap indicates
that as of this date the sensitivity of the fair value of our assets to interest

                                       77

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 $30,190.3  million as of
March 31, 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 March 31,  2004,  the
weighted-average  difference between the asset and liability  durations on these
portfolios  was  0.38.  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 $13,625.8 million as of March 31, 2004.

We also have a block of  participating  general  account  pension  business that
passes the 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. Along with the
participating  pension product line, the assets in the corporate segment used to
back  surplus  are also not subject to  duration  monitoring  since there are no
liabilities  associated with the assets.  As of March 31, 2004, the total assets
in these two portfolios was $4,798.0 million.

Using the  assumptions and data in effect as of March 31, 2004, we estimate that
a 100 basis point immediate,  parallel  increase in interest rates decreases the
net fair value of our portfolio by $54.4  million.  The following  table details
the estimated changes by risk management strategy:

                                                                                                  CHANGE IN FAIR
                                                                        AS OF                  VALUE OF ASSETS LESS
                     RISK MANAGEMENT                               MARCH 31, 2004                  FAIR VALUE OF
                        STRATEGY                                VALUE OF TOTAL ASSETS              LIABILITIES
- ---------------------------------------------------------     --------------------------     -----------------------
                                                                                    (IN MILLIONS)

Primary duration-managed..............................             $   30,190.3                $       (3.0)
Duration-monitored....................................                 13,625.8                       (51.4)
Non duration-managed..................................                  4,798.0                         -
                                                              --------------------------     -----------------------
  Total...............................................             $   48,614.1                $      (54.4)
                                                              ==========================     =======================

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 are also exposed to interest rate risk in our Mortgage  Banking  segment.  We
manage this risk by striving to balance our loan  origination and loan servicing
operations, the two of which are generally counter-cyclical. In addition, we use
various financial instruments,  including derivatives  contracts,  to manage the
interest rate risk  specifically  related to committed loans in the pipeline and
mortgage  servicing  rights.  The overall  objective of our  interest  rate risk
management  policies is to offset changes in the values of these items resulting
from changes in interest rates. We do not speculate on the direction of interest
rates in our management of interest rate risk.

                                       78

We manage interest rate risk on our mortgage loan pipeline by using cash forward
sale   commitments,   mortgage-backed   securities   in  the  forward   markets,
over-the-counter  options  on  mortgage-backed  securities,  U.S.  Treasury  and
Eurodollar futures contracts, options on futures contracts, interest rate swaps,
options on  interest  rate  swaps,  private  investor  contracts  to buy or sell
residential mortgage loans, and servicing-released loans sales programs. We also
use interest rate floors, futures contracts, options on futures contracts, swaps
and swaptions, mortgage-backed securities and principal-only strips in hedging a
portion of our  portfolio  of mortgage  servicing  rights from  prepayment  risk
associated with changes in interest rates.

We measure  pipeline  interest  rate risk  exposure  by  adjusting  the  at-risk
pipeline in light of the theoretical  optionality of each applicant's rate/price
commitment. The at-risk pipeline, which consists of closed loans and rate locks,
is then refined at the product type level to express each product's  sensitivity
to  changes in market  interest  rates in terms of a single  current  coupon MBS
duration ("benchmark interest rate"). Suitable hedges are selected and a similar
methodology  applied to this hedge position.  The variety of hedging instruments
allows us to match the  behavior of the  financial  instrument  with that of the
different types of loans originated. Financial risk is limited by requiring that
the net  position  value will not change in excess of an amount  established  by
Senior  Management  of the  Mortgage  Banking  segment  given  an  instantaneous
pre-determined  price  change  in  the  benchmark  security.  Price  sensitivity
analysis is performed at least once daily. The  pre-determined  risk limits will
be reviewed  periodically and updated as needed. The face amount of the loans in
the pipeline as of March 31, 2004,  was $8.7  billion.  Due to the impact of our
hedging  activities,  we estimate that a 100 basis point immediate and sustained
increase in the  benchmark  interest  rates  decreases  the March 31, 2004,  net
position value by $40.4 million.

The financial risk associated with our mortgage servicing operations is the risk
that the fair value of the servicing asset falls below its U.S. GAAP book value.
To measure this risk, we analyze each  servicing  risk  tranche's U.S. GAAP book
value in relation to the then current fair value for similar  servicing  rights.
We perform this valuation  using  option-adjusted  spread  valuation  techniques
applied to each risk  tranche.  We produce  tranche fair values at least monthly
and model our net servicing hedge position at least daily.

The fair value of the servicing asset declines as interest rates decrease due to
possible  mortgage  loan  servicing  rights  impairment  that  may  result  from
increased current and projected future prepayment activity.  The change in value
of the servicing asset due to interest rate movements is partially offset by the
use of financial  instruments,  including  derivative  contracts  that typically
increase in aggregate  value when  interest  rates  decline.  Financial  risk is
limited by requiring that the net position value will not change in excess of an
amount established by Senior Management of the Mortgage Banking segment given an
instantaneous  pre-determined  change  in the  level of  interest  rates.  Price
sensitivity  analysis is performed at least once weekly. The pre-determined risk
limits will be reviewed  periodically and updated as needed.  Based on values as
of March 31, 2004, a 100 basis point immediate  parallel and sustained  decrease
in interest  rates  produces a $94.6  million  decline in value of the servicing
asset of our  Mortgage  Banking  segment,  net of the  impact  of these  hedging
vehicles, due to the differences between fair values and U.S. GAAP book values.

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
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.

                                       79

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 March 31, 2004 was $500.0 million and the mark
to market value was $11.4  million.  We also  invested in credit  default  swaps
creating  replicated assets with a notional of $343.3 million and mark to market
value of $6.6 million as of March 31, 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 $0.1  million  pre-tax  gain for the three  months ended March 31,
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;

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

                                       80

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 March 31, 2004, and December
31, 2003:

               DERIVATIVE FINANCIAL INSTRUMENTS - NOTIONAL AMOUNTS

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

Mortgage-backed forwards and options............         $   11,816.4         27%     $   4,892.3         16%
Swaptions.......................................             10,957.5         25          5,642.5         18
Interest rate swaps.............................              6,468.5         15          8,158.9         26
Interest rate lock commitments..................              6,036.7         14          2,242.4          7
Foreign currency swaps..........................              2,686.3          6          2,823.4          9
U.S. Treasury futures (LIBOR)...................              2,325.0          5          4,380.0         14
Interest rate floors............................              1,650.0          4          1,650.0          5
Credit default swaps ...........................                843.3          2            863.3          3
Bond forwards...................................                467.2          1            467.2          1
Currency forwards...............................                425.7          1            282.0          1
Call options....................................                 30.0          -             30.0          -
U.S. Treasury futures...........................                 18.9          -             27.8          -
Bond options....................................                 17.5          -             17.5          -
Other...........................................                  1.5          -              1.5          -
                                                         ---------------- ---------   ------------  -------------
   Total........................................         $   43,744.5        100%     $  31,478.8        100%
                                                         ================ =========   ============  =============

                                       81

               DERIVATIVE FINANCIAL INSTRUMENTS - CREDIT EXPOSURES

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

Foreign currency swaps..........................            $     545.7       75%      $    637.1        75%
Interest rate swaps.............................                   76.1       10             89.6        10
Bond forwards...................................                   59.9        8             52.2         6
Credit default swaps............................                   18.9        3             45.9         5
Swaptions ......................................                   17.2        2             29.2         3
Call options....................................                    6.5        1              6.6         1
Currency forwards...............................                    3.2        1              0.3         -
Interest rate floors............................                    0.1        -              1.9         -
                                                         ---------------- ---------   ------------  -------------
  Total.........................................            $     727.6      100%      $    862.8       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 MARCH 31, 2004
                                          -------------------------------------------------------------------------------------
                                                                                 FAIR VALUE (NO ACCRUED INTEREST)
                                                                               ------------------------------------------------
                                                                  WEIGHTED
                                                                  AVERAGE       -100 BASIS                        +100 BASIS
                                             NOTIONAL              TERM          POINTS                             POINT
                                              AMOUNT              (YEARS)        CHANGE          NO CHANGE          CHANGE
                                          -----------------  -----------------  ------------   -------------   ----------------
                                                                           ($ IN MILLIONS)

Interest rate swaps..................        $  6,468.5            8.34(1)      $  131.9       $   31.8         $ (34.8)
Swaptions............................          10,957.5            1.29(4)         762.6          375.6           170.4
Mortgage-backed forwards and options.          11,816.4            0.07(5)        (168.0)           5.0           199.1
U.S. Treasury futures (LIBOR)........           2,325.0            1.51(3)          (7.4)          (0.9)            5.6
Interest rate lock commitments.......           6,036.7            0.09(6)         101.0            2.7          (229.5)
Interest rate floors.................           1,650.0            2.25(2)          63.1           31.5            12.7
Bond forwards........................             467.2            2.64(5)          88.0           59.9            33.7
U.S. Treasury futures................              18.9            0.14(3)          (1.2)          (0.1)            1.0
Bond options.........................              17.5            2.54(5)          (2.5)          (1.0)           (0.4)
                                          -----------------                     ------------   -------------   ----------------
   Total.............................        $ 39,757.7                         $  967.5       $  504.5         $ 157.8
                                          =================                     ============   =============   ================

- --------------------
(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.

                                       82

DEBT ISSUED AND OUTSTANDING

As of March 31, 2004,  the aggregate  fair value of long-term  debt was $2,695.6
million,  which  includes  debt related to our  implementation  of FIN 46. A 100
basis point,  immediate,  parallel decrease in interest rates would increase the
fair value of debt by approximately $49.5 million.

                                                                              AS OF MARCH 31, 2004
                                                        -------------------------------------------------------------
                                                                       FAIR VALUE (NO ACCRUED INTEREST)
                                                        -------------------------------------------------------------
                                                            -100 BASIS                                 +100 BASIS
                                                           POINT CHANGE           NO CHANGE           POINT CHANGE
                                                        --------------------    ----------------   ------------------
                                                                                (IN MILLIONS)

4.55% notes payable, due 2004......................        $      413.3         $      410.2          $      407.1
7.95% notes payable, due 2004......................               205.0                204.2                 203.5
Variable rate equity certificates, due 2005 (1)....                44.0                 44.0                  44.0
Variable rate notes payable, due 2006 (2)..........               800.0                800.0                 800.0
Variable rate equity certificates, due 2006 (3)....               149.0                149.0                 149.0
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...........               365.3                358.4                 351.8
Other mortgages and notes payable..................                58.4                 57.6                  56.7
                                                        --------------------    ----------------   ------------------
   Total long-term debt............................        $    2,745.1         $    2,695.6          $    2,648.5
                                                        ====================    ================   ==================

- -----------------------
(1)  Represents $44.0 million at 165 basis points over 1 month LIBOR.
(2)  Represents  $400.0 million at 25 basis points over 1 month LIBOR and $400.0
     million at 29 basis points over 1 month LIBOR.
(3)  Represents  $25.2  million at 157 basis  points over 1 month  LIBOR,  $49.3
     million at 170 basis  points  over 1 month  LIBOR and $74.5  million at 180
     basis points over 1 month LIBOR.

EQUITY RISK

Equity  risk is the risk  that we will  incur  economic  losses  due to  adverse
fluctuations in a particular  common stock. As of March 31, 2004, the fair value
of our equity  securities was $749.2 million.  A 10% decline in the value of the
equity  securities  would result in an unrealized  loss of $74.9 million.  As of
March 31, 2004, a 10%  immediate  and  sustained  decline in the equity  markets
would result in a decrease of asset-based fee revenues of $30.8 million over the
next nine  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 March 31, 2004, was $2,451.6 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 March  31,  2004,  the fair  value  of our  foreign  currency
denominated fixed maturity  securities was $313.9 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
March 31, 2004, was $234.7 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

                                       83

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 March 31, 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 $19.7 million  (approximately
$225 million  Mexican  pesos) and we  recognized a $0.3 million  pre-tax gain in
other comprehensive income for the three months ended March 31, 2004.

We estimate  that as of March 31, 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
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 March 31,
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.

                                       84

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
                                                NUMBER OF      AVERAGE      PURCHASED AS PART OF     PURCHASED UNDER
                                               SHARES (OR     PRICE PAID         PUBLICLY               THE PLANS OR
                                                 UNITS)        PER SHARE         ANNOUNCED              PROGRAMS (IN
                  PERIOD                       PURCHASED       (OR UNIT)      PLANS OR PROGRAMS         MILLIONS) (1)
- ---------------------------------------------------------------------------------------------------------------------------

January 1, 2004 - January 31, 2004......            644 (2)      $33.07                 -                   $147.0
February 1, 2004 - February 29, 2004....              -            -                    -                   $147.0
March 1, 2004 - March 31, 2004..........          9,600 (3)      $36.37                 -                   $147.0
                                             ---------------                -----------------------
Total...................................         10,244          $36.16                 -                   $147.0
                                             ===============                =======================

- -------------------------
(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.
     There is no expiration date for this program.

(2)  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.

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

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.  EXHIBITS

    EXHIBIT
    NUMBER           DESCRIPTION
    10.6      The Principal Select Savings Excess Plan, restated as of January
                1, 2004
    10.7      The Principal Supplemental Executive Retirement Plan for
                Employees, restated as of January 1, 2003
    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  February 2, 2004,  and filed February 3,
     2004.

     Current Report on Form 8-K dated and filed February 3, 2004.

                                       85

                                    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:  May 5, 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

                                       86

EXHIBIT INDEX

EXHIBIT
NUMBER                           DESCRIPTION                               PAGE
 10.6     The Principal Select Savings Excess Plan, restated as of January
            1, 2004........................................................ 88
 10.7     The Principal Supplemental Executive Retirement Plan for
            Employees, restated as of January 1, 2003...................... 106
 12       Statement Regarding Computation of Ratio of Earnings to Fixed
            Charges........................................................ 123
 31.1     Certification of J. Barry Griswell............................... 125
 31.2     Certification of Michael H. Gersie............................... 125
 32.1     Certification Pursuant to Section 1350 of Chapter 63 of Title 18
            of the United States Code -  J. Barry Griswell................. 126
 32.2     Certification Pursuant to Section 1350 of Chapter 63 of Title
            18 of the United States Code -  Michael H. Gersie.............. 127

                                       87

                                                                    EXHIBIT 10.6

                                  THE PRINCIPAL

                           SELECT SAVINGS EXCESS PLAN

Restated January 1, 2004

                                       88

                                  INTRODUCTION

The Company  established  this Plan on September 1, 1988,  for a select group of
management,  highly compensated employees,  or field representatives who, due to
the  amount  of their  compensation,  are  unable  to fully  participate  in the
elective  deferral and matching  contributions  available to the other  eligible
participants  in the Associated  Plan. The Plan is designed and intended to be a
"top-hat" plan - that is, an unfunded plan maintained  primarily for the purpose
of providing  deferred  compensation  for a select group of  management,  highly
compensated employees,  or field representatives within the meaning of ERISA ss.
201(2),  301(a)(3) and 401(a)(1),  and therefore is exempt from Parts 2, 3 and 4
of Title I of ERISA,  and is intended to be a nonqualified  plan for purposes of
Code ss. 401.

The Company is of the opinion that the Plan should be changed.  It believes that
the best means to accomplish  these changes is to completely  restate the Plan's
terms, provisions and conditions. The restatement, effective January 1, 2004, is
set forth in this document and is substituted in lieu of the prior document.

                                    ARTICLE I

                                   DEFINITIONS

SECTION 1.01 -- FORMAT.

Words and phrases defined in the  DEFINITIONS  SECTION of this Article will have
the defined meaning when used in this Plan, unless the context clearly indicates
otherwise. These words and phrases will have an initial capital letter to aid in
identifying them as defined terms.

Words and  phrases  with an initial  capital  letter that are not defined in the
DEFINITIONS  SECTION of this Article will have the meaning assigned to such word
or phase  under the  Associated  Plan,  unless  the  context  clearly  indicates
otherwise.

SECTION 1.02 -- DEFINITIONS.

ACCOUNT means an account established for a Participant  pursuant to the ACCOUNTS
SECTION of Article III.

ACTIVE  PARTICIPANT  means any Employee,  Agent or Field Manager in the Eligible
Group.

AGENT means an  individual  who is not an Employee and who holds a current DD713
contract or any successor  full-time  contract with the Company,  and including,
but not  limited  to,  one of the  following  positions:

o an agent;
o a sales supervisor;
o a special marketing developer;
o a special agency assistant;
o a business specialist; or
o an executive benefits specialist.

ANNUALIZED  COMPENSATION means an individual's  Compensation (including bonuses,
incentive payments and other special compensation, excluding pay received from a
long term incentive pay plan) expressed on an annual basis.  Solely for purposes
of determining  Annualized  Compensation,  an individual's  Compensation will be

                                       89

deemed to include his compensation  with a prior employer if it is earned within
the calendar year in which he is hired or his contract first becomes effective.

ASSOCIATED PLAN means:

(a)  In  the  case  of an  Employee,  The  Principal  Select  Savings  Plan  for
     Employees; or

(b)  In the case of an Agent or Field Manager, The Principal Select Savings Plan
     for Individual Field.

BENEFICIARY  means the  person or persons  designated  as such  pursuant  to the
BENEFICIARIES SECTION of Article VII.

CHANGE IN CONTROL means the occurrence of any of the following  events:  (i) the
acquisition  by any Person (as defined in Section  3(a)(9) of the Securities and
Exchange Act of 1934,  as amended (the  "Exchange  Act") and as used in Sections
13(d) and 14(d) thereof)), entity or "group" (as defined in Section 13(d) of the
Exchange Act) of fifty percent (50%) or more of the outstanding  voting power of
the Parent then outstanding voting securities; (ii) the merger, consolidation or
reorganization of the Parent, as a result of which persons who were stockholders
of the Parent immediately prior to such merger, consolidation or reorganization,
do not,  immediately  thereafter,  own, directly or indirectly,  more than fifty
percent  (50%) of the combined  voting power  entitled to vote  generally in the
election of directors of the merged,  consolidated or reorganized company; (iii)
within any twelve  (12) month  period,  the persons  who were  directors  of the
Parent at the  beginning  of such period (the  "Incumbent  Directors")  cease to
constitute at least a majority of the Board,  provided that any director elected
to the  Board,  or  nominated  for  election,  by a  majority  of the  Incumbent
Directors  then still in office shall be deemed to be an Incumbent  Director for
purposes  of this clause  (iii);  (iv) the  liquidation  or  dissolution  of the
Parent; and (v) the sale,  transfer of other disposition,  in one transaction or
series of related  transactions,  of more than fifty  percent  (50%) of the fair
market  value of the assets of the Parent to any  Person.  For  purposes of this
definition,  the terms "Person,"  "entity" and "group" shall not include (a) the
Parent or any of its  subsidiaries  or controlled  affiliates;  (b) a trustee or
other fiduciary holding  securities under an employee benefit plan of the Parent
or any of its subsidiaries or affiliates; (c) an underwriter temporarily holding
securities of the Parent  pursuant to an offering of such  securities;  or (d) a
corporation owned, directly or indirectly,  by the shareholders of the Parent in
substantially the same proportions as their ownership of stock of the Parent.

CODE means the Internal Revenue Code of 1986, as amended.

COMMON STOCK means the common stock, par value $0.01 per share, of the Parent.

COMPANY means Principal Life Insurance Company.

COMPANY  MATCH CREDIT means a credit to an Account made in  accordance  with the
COMPANY MATCH CREDITS SECTION of Article III.

COMPENSATION   means  Compensation  as  defined  in  the  Associated  Plan,  but
determined  without regard to the compensation  limit of Code ss. 401(a)(17) and
without regard to any reduction in Compensation resulting from a salary deferral
agreement made pursuant to this Plan.

CONTROLLED GROUP MEMBER means any corporation or other business entity that is a
member of the same  controlled  group as, or is under common  control with,  the
Parent as determined under Code ss. 414(b) or (c).

DEFERRAL ELIGIBLE AMOUNT means:

(a)      In the case of an Employee,  his  Compensation,  excluding  any bonuses
         paid under any long term  incentive  pay plan,  plus any other bonus or
         other incentive payment the Corporate  Management  Committee determines
         in its sole discretion to be eligible for a deferral election under the
         ELECTIVE DEFERRAL CREDITS SECTION of Article III.

                                       90

(b)      In the case of an Agent or Field Manager, his Compensation.

EARLY  RETIREMENT DATE means the last day of any month following  Termination of
Service in which the Participant  has attained age fifty-seven  (57) or more and
completed ten (10) or more years of service.

ELECTIVE  DEFERRAL  CREDIT means a credit to an Account made in accordance  with
the ELECTIVE DEFERRAL CREDIT SECTION of Article III.

ELIGIBLE  GROUP means the group of Employees,  Agents and Field Managers who are
eligible to  participate  in the Plan,  as determined  under the ELIGIBLE  GROUP
SECTION of Article II.

EMPLOYEE  means any  common-law  employee of the Company or a  Controlled  Group
Member (while it is a Controlled Group Member).

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

FIELD MANAGER means an individual who is not an Employee and who holds a current
DD 713  contract or any  successor  full-time  contract  with the  Company,  and
including,  but not limited to, one of the following  full-time field management
positions:

o    management assistant;
o    management associate;
o    manager;
o    managing director;
o    co-managing director;
o    assistant managing director;
o    associate managing director;
o    regional managing director;
o    co-regional managing director;
o    advanced planning director;
o    director - relationship management;
o    regional client service director;
o    advanced planning regional vice president; or
o    disability income regional vice president.

LATE RETIREMENT  DATE means the last day of any month  following  Termination of
Service which is after a Participant's Normal Retirement Date.

NORMAL  RETIREMENT  DATE means last day of any month  following  Termination  of
Service on or after the date the Participant reaches age 65.

PARENT means the Principal  Financial Group, Inc., a Delaware  corporation,  and
any successor thereto.

PARTICIPANT  means any Active  Participant,  or any current or former  Employee,
Agent or Field  Manager who is not an Active  Participant  but who has a balance
remaining in an Account under the Plan.

PARTICIPATING CONTROLLED GROUP MEMBER means any Controlled Group Member that has
adopted  the  Associated  Plan  and that  employs  one or more  Participants  (a
Participating  Controlled Group Member will automatically  ceases to participate
if it ceases to be a Controlled Group Member).

PLAN means The Principal Select Savings Excess Plan.

PLAN YEAR means the calendar year.

                                       91

RETIREMENT  means  his  early,  normal or late  retirement  date  following  his
Termination of Service.

TERMINATION OF SERVICE means:

(a)      In the case of an Employee resignation, discharge, retirement, death or
         the  happening of any other event or  circumstance  that results in the
         severance of the  common-law  employer-employee  relationship  with the
         Company and all  Controlled  Group  Members,  unless the Employee  then
         becomes an Agent or Field Manager.
(b)      In the case of an Agent or Field  Manager,  the date of  termination of
         his agent's  contract  DD713 (as such contract may be amended from time
         to time,  or  successor  contracts  to it)  unless  the  Agent or Field
         Manager then becomes an Employee.

TRANSFER  CREDIT  means a  credit  to an  Account  made in  accordance  with the
TRANSFER CREDITS SECTION of Article III.

VALUATION  DATE  means  each day on which  trading  occurs on the New York Stock
Exchange.

                                   ARTICLE II

                                  PARTICIPATION

SECTION 2.01 -- ELIGIBLE GROUP.

All  Employees,  Agents and Field Managers who are in the Eligible Group will be
eligible to participate  in the Plan. An Employee,  Agent or Field Manager is in
the Eligible Group if:

(a)      he is eligible to participate in the Associated Plan; and either;
(b)      his  compensation  for the previous year is one hundred and twenty-five
         percent  (125%) or more of the salary minimum used in the definition of
         a highly compensated employee under Code ss. 414(q) for that year;
(c)      his  compensation  for the current year is one hundred and  twenty-five
         percent  (125%) or more of the salary minimum used in the definition of
         a highly compensated employee under Code ss. 414(q) for the year; or
(d)      he  has  been  selected  by  the  Corporate   Management  Committee  to
         participate in this Plan.

However,  the Corporate Management Committee in its sole and absolute discretion
may determine that an Employee,  Agent or Field Manager described above will not
be in the Eligible  Group,  or may  determine  that an Employee,  Agent or Field
Manager  not  described  above will be in the  Eligible  Group.  However,  as to
Employees,  the Plan is  intended  to cover  only those  Employees  who are in a
select group of management or highly compensated employees within the meaning of
ERISA  ss.ss.  201(2),  301(a)(3)  and  401(a)(1);  and,  accordingly,   if  any
interpretation  is issued by the  Department  of Labor  that would  exclude  any
Employee from satisfying that requirement,  such Employee immediately will cease
to be in the Eligible Group.

An Agent or  Field  Manager  will  cease to be in the  Eligible  Group as of the
earlier  of the date of  termination  of his  agent's  contract  DD713  (as such
contract may be amended from time to time, or successor  contracts to it), or as
of the date the  Company  sends  written  notice to him of  cancellation  of his
agent's  contract  DD713 (as such  contract may be amended from time to time, or
successor  contracts  to it), or as of such  earlier  date on which he ceases to
satisfy the requirements of the first paragraph of this definition.

                                       92

SECTION 2.02 -- NOTICE OF ELIGIBILITY.

The Company will notify each  Employee,  Agent and Field Manager prior to, or as
soon as administratively practicable after, his entry into the Eligible Group of
his eligibility to participate in the Plan.

SECTION 2.03 -- END OF ELIGIBILITY AND PARTICIPATION.

An Employee, Agent or Field Manager who is in the Eligible Group may continue as
an Active  Participant  for so long as the Plan remains in effect and he remains
in the Eligible Group. A Participant shall cease to be a Participant on the date
he has received a full  distribution  of all  benefits  payable to him under the
terms of the Plan.

                                   ARTICLE IIL

                              CONTRIBUTION CREDITS

SECTION 3.01 -- ELECTIVE DEFERRAL CREDITS.

An  Elective  Deferral  Credit  will  be  added  to  the  Account  of an  Active
Participant  for a given pay date if such  Participant  is  eligible  to and has
elected to have a Deferral  Eligible Amount that he would  otherwise  receive in
cash on such pay date  reduced in order to receive an Elective  Deferral  Credit
under this Plan. The Elective Deferral Credit for a given pay date will be added
on or as soon as  administratively  practicable  after the pay date in an amount
equal the amount of the reduction in the Deferral Eligible Amount.

The Plan provides for an automatic  election to have Elective  Deferral  Credits
made.  The  automatic  Elective  Deferral  Credit  shall be 6% of  Compensation,
excluding compensation received from an annual incentive pay plan.

An Active  Participant  may elect to reduce his Deferral  Eligible Amount by the
following:

(a)      With  respect  to  items  of  Compensation,   for  any  pay  date,  the
         Participant may elect to reduce his  Compensation  for such pay date by
         any whole percentage,  not more than fifteen percent (15%). However, an
         election to reduce  Compensation  for  purposes of  receiving  Elective
         Deferral  Credits  will be  effective  during a Plan Year only once the
         Participant has either:

         (i)      Received Elective Deferral  Contributions under the Associated
                  Plan equal to the maximum allowed under Code ss. 402(g); or

         (ii)     Received  Compensation  recognized  under the Associated  Plan
                  equal to the maximum  allowed to be recognized  under Code ss.
                  401(a)(17).

(b)      With respect to bonuses paid under an annual  incentive  pay plan,  the
         Participant  may elect to reduce the  payment by any whole  percentage,
         but not more than one-hundred percent (100%).

(c)      With respect to other amounts that the Corporate  Management  Committee
         determines  are Deferral  Eligible  Amounts,  the Corporate  Management
         Committee will establish such minimum and maximum  reduction  amount as
         it may determine appropriate in its sole and absolute discretion.

                                       93

An election (or the  modification  or revocation of an election) must be made in
such  manner and in  accordance  with such rules as may be  prescribed  for this
purpose  by the  Company  (including  by  means  of a voice  response  or  other
electronic system under circumstances authorized by the Company)

An election by an Employee with respect to any item of Compensation  (other than
annual  incentive  compensation)  must be made  prior to the  start of the first
payroll period to which such election  relates during the Plan Year. An election
by an Employee with respect to bonuses paid under an annual  incentive pay plan,
or any other  amounts that the Corporate  Management  Committee  determines  are
Deferral  Eligible  Amounts,  must be made by December 31st of the year prior to
the year with respect to which the bonus or other amount is earned; except that,
for the bonus or other amount payable for the year in which an Employee is first
notified of his  eligibility to participate in the Plan, an election may be made
within thirty (30) days after he is notified of his  eligibility  to participate
(and before the amount is made available in cash to the Employee).

An election by an Agent or Field  Manager with respect to any Deferral  Eligible
Amount must be made by December  31st of the year prior to the year in which the
Deferral  Eligible  Amount  would  otherwise  be payable in cash to the Agent or
Field Manager;  except that,  for such amounts  payable for the year in which an
Agent or Field Manager is first  notified of his  eligibility  to participate in
the Plan,  an election may be made within  thirty (30) days after he is notified
of his  eligibility to  participant  (and before the amount is made available in
cash to the Agent or Field Manager).

An  election  will  automatically  be carried  over and applied to the next Plan
Year.  Elective  Deferral Credits will  automatically  stop during the Plan Year
upon Termination of Service or upon otherwise  ceasing to be within the Eligible
Group,  or upon  termination  of the Plan.  For  Agents and Field  Managers,  an
election will be irrevocable  throughout the Plan Year (or the remaining portion
thereof);  except  that,  when an  election is made to cease  Elective  Deferral
Credits.

The Company may, in its sole discretion,  limit the minimum or maximum amount of
Elective  Deferral  Credits  that  are  allowed  under  the  Plan by any  Active
Participant or any group of Active Participants.

SECTION 3.02 -- COMPANY MATCH CREDITS.

A Company Match Credit will be added to the Account of an Active Participant for
a given pay date if such  Participant  receives an Elective  Deferral Credit for
such pay date under the ELECTIVE  DEFERRAL  CREDITS SECTION of this Article as a
result of an election to reduce  Compensation.  The amount of the Company  Match
Credit for a given pay date will equal the lesser of fifty  percent (50%) of the
Participant's  Elective Deferral Credit for such pay date, or three percent (3%)
of the Participant's Compensation for the payroll period.

SECTION 3.03 -- TRANSFER CREDITS.

If so elected by a  Participant  who is also a participant  in the  Nonqualified
Defined Contribution Plan for Designated Participants, a Transfer Credit will be
added to the Account of such Participant to reflect an automatic transfer of any
credit  under  the  Nonqualified   Defined   Contribution  Plan  for  Designated
Participants when the transfer credit becomes vested.

SECTION 3.04 -- ACCOUNTS.

An  Account  will be  maintained  under the Plan on behalf of each  Participant.
Separate  accounting  records  will be  maintained  to reflect the portion of an
Account attributable to:

                                       94

(a)  Elective  Deferral  Credits under the ELECTIVE  DEFERRAL CREDITS SECTION of
     this Article;

(b)  Company  Match  Credits  under the COMPANY  MATCH  CREDITS  SECTION of this
     Article;

(c)  Transfer Credits under the TRANSFER CREDITS SECTION of this Article.

Additional  Accounts may also be  maintained if  considered  appropriate  by the
Company in the administration of the Plan.

Accounts will have a cash balance expressed in United States Dollars.

Accounts are for bookkeeping  purposes only and the maintenance of Accounts will
not  require  any  segregation  of assets of the  Company  or any  Participating
Controlled Group Member.  Neither the Company nor any  Participating  Controlled
Group Member will have any obligation whatsoever to set aside funds for the Plan
or for the benefit of any  Participant  or  Beneficiary,  and no  Participant or
Beneficiary will have any rights to any amounts that may be set aside other than
the rights of an  unsecured  general  creditor of the  Company or  Participating
Controlled Group Member that employs (or employed) the Participant.

                                   ARTICLE IV

                                EARNINGS CREDITS

SECTION 4.01 -- ADJUSTMENT TO REFLECT EARNINGS CREDITS.

Accounts will be adjusted  (increased or decreased) as of each Valuation Date to
reflect  earnings  credits as determined  under the EARNINGS  CREDITS SECTION of
this Article IV.

SECTION 4.02 -- EARNINGS CREDITS.

The Company will  establish a procedure by which a Participant  (or  Beneficiary
following the death of a Participant) may elect to have his/her earnings credits
determined based on the performance of one or more investment  options deemed to
be available under the Plan. The Company, in its sole discretion, will determine
the investment  options that will be available as benchmarks for determining the
earnings credit, which may include mutual funds, common or commingled investment
funds,  group annuity contracts  (general account or separate  account),  a fund
that invests in Common Stock of the Parent or any other investment option deemed
appropriate  by the  Company.  The Company may at any time and from time to time
add to or remove from the investment  options  deemed to be available  under the
Plan.

A Participant (or Beneficiary  following the death of the  Participant)  will be
allowed on a  hypothetical  basis to direct the  investment  of his/her  Account
among the investment options available under the Plan.  Hypothetical  investment
directions  may be given with such  frequency  as is deemed  appropriate  by the
Company,  and must be made in such  percentage  or  dollar  increments,  in such
manner and in accordance  with such rules as may be prescribed  for this purpose
by the  Company  (including  by means of a voice  response  or other  electronic
system under  circumstances  so  authorized  by the  Company).  If an investment
option has a loss, the earnings credit  attributable  to such investment  option
will serve to reduce the Account; similarly, if an investment option has a gain,
the  earnings  credit  attributable  to such  investment  option  will  serve to
increase the Account.  If the Participant  fails to elect an investment  option,
the earnings  credit will be based on a money market  investment  option or such
other investment option as may be selected for this purpose by the Company.

An Account is subject to any minimum guarantees applicable under a group annuity
contract or other investment arrangement.

                                       95

SECTION 4.03 -- HYPOTHETICAL INVESTMENTS.

All  investment  directions  of  a  Participant  or  Beneficiary  will  be  on a
"hypothetical"  basis for the sole purpose of  establishing  the earnings credit
for his/her Account - that is, the Account will be adjusted for earnings credits
as if the Account were  invested  pursuant to the  investment  directions of the
Participant or Beneficiary,  but actual investments need not be made pursuant to
such directions.  However,  the Company,  in its sole discretion and without any
obligation, may direct that investments be made per the investment directions of
Participants  and  Beneficiaries  in order to hedge the liability of the Company
and Participating Controlled Group Members.

If the Company  directs  that  investments  actually be made in Common  Stock to
hedge  liability,  any  transactions  costs  (brokerage fees and commissions) on
purchases and sales of Common Stock may be charged to the Participant's Account.

SECTION 4.04 -- STATEMENTS.

The Company may cause benefit statements to be issued from time to time advising
Participants  and  Beneficiaries  of the  balance  and/or  investment  of  their
Accounts, but it is not required to issue benefits statements.

The Company may correct  errors that appear on benefit  statements  at any time,
and the  issuance  of a benefit  statement  (and any errors that may appear on a
statement)  will not in any way alter or affect the rights of a  Participant  or
Beneficiary with respect to the Plan. Each Participant or Beneficiary has a duty
to promptly review each benefit statement and to notify the Company of any error
that  appears  on such  statement  within  thirty  (30)  days of the  date  such
statement is provided or made available to the  Participant or Beneficiary  (for
example,  the date the  statement is sent by mail,  or the date the statement is
provided or made  available  electronically).  If a Participant  or  Beneficiary
fails to review a benefit  statement or fails to notify the Company of any error
that appears on such  statement  within such period of time, he will not be able
to bring any claim seeking relief or damages based on the error.

                                    ARTICLE V

                          WITHDRAWALS WHILE IN SERVICE

A  Participant  may  withdraw  any  part  of his  account  for an  unforeseeable
emergency (a financial  hardship due to an unanticipated  emergency,  as defined
under the Associated Plan).

A  Participant  may  withdraw  any part of his  account,  provided he pays a 10%
penalty on the amount  withdrawn  and  Elective  Deferral  Credits  cease for 12
months.

If a Participant  becomes  Totally and Permanently  Disabled,  a single lump sum
payment will be made as soon as administratively  practicable following proof of
disability,  unless a timely distribution election is on file. A Participant can
elect a 5 year or 10 year fixed period installment, if his account value exceeds
$25,000.

                                       96

                                   ARTICLE VI

                   DISTRIBUTIONS AFTER TERMINATION OF SERVICE

SECTION 6.01 -- BENEFIT ON TERMINATION OF SERVICE.

A Participant  will be eligible to receive a distribution of the full balance of
his Account  following  his/her  Termination  of Service in accordance  with the
terms of this Article.

SECTION 6.02 -- TIME AND FORM OF DISTRIBUTION.

A  distribution  will be made (or commence) in cash as soon as  administratively
practicable after Termination of Service in the following form:

(a)      In the case of a  Termination  of Service that occurs for reasons other
         than Retirement,  the distribution will be made in the form of a single
         lump-sum  payment.  A  Participant  can elect a 5-year or 10-year fixed
         period installment, if his account value exceeds $25,000.

(b)      For reasons of Retirement,  the distribution will be made in one of the
         following forms as elected by the Participant:

         (i) A single lump-sum payment;

         (ii)     A single life annuity with a certain period of ten years;

         (iii)    A single life annuity with installment refund;

         (iv)     A  survivorship  life  annuity with  installment  refund and a
                  survivorship percentage of fifty percent (50%);

         (v)      A fixed period annuity for any period of whole months which is
                  not less than 120 and does not exceed the life  expectancy  of
                  the Participant and the named Beneficiary.

         (vi)     Annual cash  installments each of an amount equal to any fixed
                  whole percentage, not less than ten percent (10%) and not more
                  than thirteen percent (13%), as elected by the Participant, of
                  his remaining  Account.  Such amount shall be payable annually
                  until his Account is exhausted.  Once elected, the amount will
                  not change.

To determine the amount of any annuity payments to a Participant, the balance of
his  Account  will be  converted  to an annuity  using  interest  and  mortality
assumptions deemed reasonable by the Corporate Management Committee.

In-kind distributions  (including in-kind distributions of Common Stock) are not
allowed under the Plan.

SECTION 6.03 -- DISTRIBUTION ELECTION PROCEDURES.

A distribution  election must be made in such manner and in accordance with such
rules as may be prescribed  for this purpose by the Company  (including by means
of a voice response or other electronic system under circumstances authorized by
the Company).  A distribution  election will be effective only if it is received
in properly  completed form by the Company as part of the Participant's  initial

                                       97

enrollment  in the Plan,  or  thereafter,  at least  twelve (12) months prior to
Termination of Service or Totally and Permanently Disabled.

Notwithstanding  the above, if a Participant's  Termination of Service occurs by
action of the Company within two (2) years following a Change in Control for any
reason other than  embezzlement  or engaging in any criminal act, a distribution
will be made in the form of a  single  lump-sum  payment  within  ten (10)  days
following Termination of Service.

SECTION 6.04 -- DEFAULT ELECTIONS.

If a Participant fails to file a timely election as to the form of distribution,
the distribution  will be made in the form of a single lump-sum  distribution of
the full balance of the Account.

SECTION 6.05 -- CASH-OUT OF SMALL ACCOUNTS AT OPTION OF COMMITTEE.

Notwithstanding any contrary election made by a Participant, if the balance of a
Participant's Account does not exceed $25,000 at Termination of Service or Total
and Permanent Disability, the Corporate Management Committee may in its sole and
absolute  discretion  direct that such full balance will be paid in a single-sum
distribution  in full  settlement  of all  obligations  under the Plan.  For the
annual payment distribution option at Retirement, a single-sum distribution will
be made when the balance reaches $5,000.

SECTION 6.06 -- VALUATION OF ACCOUNTS FOLLOWING TERMINATION OF SERVICE.

An Account will  continue to be credited  with the EARNINGS  CREDITS  SECTION of
Article IV until it is paid in full to the Participant or Beneficiary,  or it is
converted into an annuity pursuant to the TIME AND FORM OF DISTRIBUTION  SECTION
of this Article.

SECTION 6.07 -- DISTRIBUTIONS PURSUANT TO A DOMESTIC RELATIONS ORDER.

The Plan permits the benefits  actually  payable to a Participant  to be divided
with a spouse or former  spouse of a  participant  who meets the  definition  of
alternate  payee under ERISA ss.  206(d)  provided  that the Plan  Administrator
determines  that the domestic  relations order meets the criteria of a qualified
domestic  relations  order, as defined in ERISA ss. 206(d). A distribution to an
alternate payee is not allowed prior to payment (or  commencement)  of a benefit
to a  Participant,  and the Plan will not recognize a domestic  relations  order
that purports to create a separate interest to the alternate payee. In addition,
once a form of benefit  has  commenced,  the form of  measuring  life may not be
changed

The Company will establish reasonable procedures to determine whether a domestic
relations  order  meets the  criteria  of ERISA ss.  206(d).  Upon  receiving  a
domestic  relations  order, the Company promptly will notify the Participant and
an alternate payee named in the order,  in writing,  of the receipt of the order
and the Plan's  procedures  for  determining  the status of the order.  Within a
reasonable  period of time after  receiving the domestic  relations  order,  the
Company will  determine the status of the order and will notify the  Participant
and each alternate  payee, in writing,  of its  determination.  The Company will
provide  notice  under this  paragraph  by mailing to the  individual's  address
specified in the domestic relations order.

If any portion of the  Participant's  benefit under this Plan is payable  during
the period the Company is making its determination of the status of the domestic
relations  order, a separate  accounting will be made of the amount payable.  If
the  Company  determines  the order is a  domestic  relations  order  within the
criteria  of ERISA ss.  206(d)  within 18 months of the date  amounts  are first
payable  following receipt of the order, the payable amounts will be distributed
in accordance with the order. If the Company does not make its  determination of
the status of the order within the 18 month  determination  period,  the payable

                                       98

amounts will be distributed in the manner the Plan would distribute if the order
did not  exist and the order  will  apply  prospectively  if the  Company  later
determines the order meets the criteria of ERISA ss. 206(d).

The plan will make  payments or  distributions  required  under this  section by
separate benefit checks or other separate distribution to the alternate payee(s)
and report the  payments  accordingly,  provided  however,  that the Company may
report the  distributions  as income to the  Participant  as it determines to be
consistent with the requirements of the Code.

                                   ARTICLE VII

                            DISTRIBUTIONS AFTER DEATH

SECTION 7.01 -- SURVIVOR BENEFITS.

If a  Participant  dies  prior  to the full  distribution  of his  Account,  his
Beneficiary will be entitled to the following survivor benefit under the Plan:

(a)      If the Participant  dies while  receiving  installment  payments,  such
         installments will continue to his Beneficiary over the same period such
         installments would have been paid to the Participant;

(b)      If the Participant dies while receiving annuity payments,  such annuity
         payments will continue to his Beneficiary if and as consistent with the
         form of annuity payout being made under the Plan; or

(c)      Otherwise,  if the Participant dies prior to payment (or  commencement)
         of a benefit under  Article VI, the survivor  benefit will consist of a
         single lump-sum  payment in an amount equal to the total balance in the
         Account.

The  survivor  benefit  will be paid  (or  start  to be  paid)  on or as soon as
administratively  practicable  after  the  Company  determines  that a  survivor
benefit is payable  under the Plan - that is, the date the  Company is  provided
with the  documentation  reasonably  necessary to establish the fact of death of
the Participant and the identity and entitlement of the Beneficiary.

SECTION 7.02 -- CASH-OUT OF SURVIVOR BENEFITS AT OPTION OF COMMITTEE.

Notwithstanding  the  above,  if  periodic  payments  (either   installments  or
annuities)  are due to a  Beneficiary  under  the  above  rules,  the  Corporate
Management  Committee  may, in its sole  discretion,  elect to pay the  survivor
benefit in a single lump-sum payment in an amount equal to the remaining balance
in the Account (in the case of an  installment  payout) or the present  value of
the  annuity  (in the case of an  annuity  payout) in full  satisfaction  of the
survivor  benefit  otherwise  payable  under  the Plan.  Present  value for this
purpose will be  determined  using  interest and  mortality  assumptions  deemed
reasonable by the Corporate Management Committee.

SECTION 7.03 -- BENEFICIARIES.

A Participant may designate any person (natural or otherwise, including a trust)
as his/her  Beneficiary to receive the survivor benefit (if any) payable when he
dies, and may change or revoke a designation previously made without the consent
of any  Beneficiary.  If a  Beneficiary  designation  is not on  file,  or if no
designated  Beneficiary  survives the  Participant,  the Beneficiary will be the
person  designated  by the  Participant  under  the  Associated  Plan or, in the
absence of a designation,  the default Beneficiary under the Associated Plan. If
the  primary  Beneficiary  designated  by a  Participant  dies prior to complete
distribution of the survivor benefit,  the remaining benefit will be paid to any
contingent  Beneficiary  designated  by  the  Participant,  or  if  there  is no
surviving  contingent  Beneficiary,  a lump sum of the remaining benefit will be
paid to the estate of the primary Beneficiary.

A Beneficiary  designation must be made on such form and in accordance with such
rules as may be  prescribed  for this  purpose  by the  Company.  A  Beneficiary
designation will be effective (and will revoke all prior  designations) if it is

                                       99

received by the Company (or if sent by mail,  the  post-mark  of the mailing is)
prior to the date of death of the Participant

                                  ARTICLE VIII

                             ADMINISTRATION OF PLAN

SECTION 8.01 -- ADMINISTRATION.

The  Company is the  administrator  of the Plan with  authority  to control  and
manage the operation and  administration  of the Plan and make all decisions and
determinations   incident   thereto.   Action  on  behalf  of  the   Company  as
administrator may be taken by any of the following:

(a)      CORPORATE MANAGEMENT  COMMITTEE.  The Corporate Management Committee of
         the Company will be responsible for selecting the Employees, Agents and
         Field Managers who are in the Eligible Group. This committee shall have
         authority to make rules and regulations for the  administration  of the
         Plan, and its  interpretations  and decisions with regard thereto shall
         be final and conclusive.

(b)      BENEFIT  PLANS  INVESTMENT  COMMITTEE.  The  Benefit  Plans  Investment
         Committee  of the Company is  responsible  for all  investment  matters
         relating to the Plan,  including the investment of assets that may (but
         are not required to be) set aside to hedge  liabilities  resulting from
         the Plan,  and actual  investment  of the rabbi  trust,  including  the
         selection and monitoring  investment  providers (including the Trustee)
         with respect to the Plan.

         The members of the Benefit Plans Investment Committee will be appointed
         by the Chief Executive Officer of the Company.

Day-to-day non-discretionary  administration of the Plan may be performed by the
Human Resources Department.

SECTION 8.02 -- CORRECTION OF ERRORS AND DUTY TO REVIEW INFORMATION.

Errors may occur in the operation and  administration  of the Plan.  The Company
reserves the right to cause such equitable adjustments to be made to correct for
such errors as it considers appropriate (including adjustments to Participant or
Beneficiary  Accounts),  which will be final and binding on the  Participant  or
Beneficiary.

Each Participant and Beneficiary has the duty to promptly review any information
that is provided or made available to the  Participant  or Beneficiary  and that
relates  in any  way to the  operation  and  administration  of the  Plan or his
elections  under the Plan (for example,  to review  payroll stubs to make sure a
contribution  election is being  implemented  appropriately,  to review  benefit
statements   to  make  sure   investment   elections   are   being   implemented
appropriately,  to review summary plan descriptions and prospectuses,  etc.) and
to notify the Company of any error made in the  operation or  administration  of
the Plan that affects the Participant or Beneficiary  within thirty (30) days of
the date such  information is provided or made  available to the  Participant or
Beneficiary  (for example,  the date the information is sent by mail or the date
the  information  is  provided  or  made  available   electronically).   If  the
Participant  or Beneficiary  fails to review any  information or fails to notify

                                      100

the  Company of any error  within  such  period of time,  he will not be able to
bring any claim seeking relief or damages based on the error.  If the Company is
notified of an alleged error within the thirty (30) day time period, the Company
will  investigate  and either  correct  the error or notify the  Participant  or
Beneficiary  that it believes  that no error  occurred.  If the  Participant  or
Beneficiary  is not  satisfied  with the  correction  (or the  decision  that no
correction  is  necessary),  he will  have  sixty  (60)  days  from  the date of
notification  of the  correction  (or  notification  of  the  decision  that  no
correction  is  necessary),  to file a formal claim under the claims  procedures
under the CLAIMS PROCEDURES SECTION of this Article.

SECTION 8.03 -- CLAIMS PROCEDURES.

If a Participant or Beneficiary does not feel as if he has received full payment
of the benefit due such person under the Plan,  the  Participant  or Beneficiary
may file a written  claim  with the  Company  setting  forth  the  nature of the
benefit claimed,  the amount thereof,  and the basis for claiming entitlement to
such  benefit.  The  Vice  President  of Human  Resources  of the  Company  will
determine  the validity of the claim and  communicate a decision to the claimant
promptly  and,  in any event,  not later than ninety (90) days after the date of
the  claim.  The claim may be deemed by the  claimant  to have been  denied  for
purposes  of  further  review  described  below in the event a  decision  is not
furnished  to the  claimant  within such ninety (90) day period.  If  additional
information is necessary to make a determination  on a claim,  the claimant will
be advised of the need for such additional  information  within  forty-five (45)
days after the date of the claim.  The claimant  will have up to one hundred and
eighty (180) days to supplement the claim information,  and the claimant will be
advised  of the  decision  on the claim  within  forty-five  (45) days after the
earlier of the date the  supplemental  information is supplied or the end of the
one hundred and eighty (180) day period.

A claim for benefits  which is denied will be denied by written  notice  setting
forth in a manner calculated to be understood by the claimant:

(a)      The  specific  reason or reasons for the  denial,  including a specific
         reference to any provisions of the Plan  (including any internal rules,
         guidelines, protocols, criteria, etc.) on which the denial is based;

(b)      A  description  of any  additional  material  or  information  that  is
         necessary to process the claim; and

(c)      An explanation of the procedure for further reviewing the denial of the
         claim.

Within  sixty (60) days after the receipt of a denial on a claim,  a claimant or
his/her authorized  representative may file a written request for review of such
denial. Such review will be undertaken by the Corporate Management Committee and
will be a full and fair review.  The claimant  will have the right to review all
pertinent  documents.  The Corporate  Management Committee will issue a decision
not later  than sixty (60) days  after  receipt of a request  for review  from a
claimant  unless  special  circumstances,  such as the  need to hold a  hearing,
require a longer  period of time,  in which case a decision  will be rendered as
soon as  possible  but not later than one  hundred  and twenty  (120) days after
receipt of the claimant's  request for review. The decision on review will be in
writing and will include  specific  reasons for the decision written in a manner
calculated  to be  understood  by the claimant  with  specific  reference to any
provisions of the Plan on which the decision is based.

SECTION 8.04 -- INDEMNIFICATION.

The Company and the Participating Controlled Group Members jointly and severally
agree to indemnify  and hold  harmless,  to the extent  permitted  by law,  each
director, officer, and employee against any and all liabilities,  losses, costs,
or expenses  (including  legal fees) of  whatsoever  kind and nature that may be
imposed on,  incurred by, or asserted  against such person at any time by reason
of such person's  services in the  administration  of the Plan, but only if such

                                      101

person did not act dishonestly,  or in bad faith, or in willful violation of the
law or regulations under which such liability, loss, cost, or expense arises.

SECTION 8.05 -- EXERCISE OF AUTHORITY.

The Company and any person who has  authority  with  respect to the  management,
administration or investment of the Plan may exercise that authority in his full
discretion.  This discretionary  authority includes,  but is not limited to, the
authority to make any and all factual determinations and interpret all terms and
provisions of this document (or any other  document  established  for use in the
administration  of the Plan)  relevant  to the issue  under  consideration.  The
exercise of authority will be binding upon all persons;  and it is intended that
the  exercise  of  authority  be given  deference  in all  courts  of law to the
greatest extent allowed under law, and that it not be overturned or set aside by
any court of law unless found to be arbitrary and capricious.

SECTION 8.06 -- TELEPHONIC OR ELECTRONIC NOTICES AND TRANSACTIONS.

Any notice  that is  required  to be given  under the Plan to a  Participant  or
Beneficiary, and any action that can be taken under the Plan by a Participant or
Beneficiary   (including   enrollments,   changes   in   deferral   percentages,
withdrawals, distributions, investment changes, consents, etc.), may be by means
of voice response or other electronic  system to the extent so authorized by the
Company.

                                   ARTICLE IX

                       CONTRACTUAL OBLIGATIONS AND FUNDING

SECTION 9.01 -- CONTRACTUAL OBLIGATIONS.

The Plan creates a  contractual  obligation  on the part of the Company and each
Participating  Controlled  Group Member to provide  benefits as set forth in the
Plan with respect to:

(a)      Participants who are employed with or contract with the Company or that
         Participating Controlled Group Member;

(b)      Participants  who were  employed  with or contract  with the Company or
         that  Participating  Controlled  Group Member prior to  Termination  of
         Service; and

(c)      Beneficiaries of the Participants described in (a) and (b).

A  Participating  Controlled  Group  Member is not  responsible  for (and has no
contractual obligation with respect to) benefits payable to a Participant who is
or was employed  with or  contracted  with the Company or another  Participating
Controlled Group Member. If a Participant is employed with or contracts with two
or more employers (the Company and a Participating  Controlled Group Member,  or
two or more Participating  Controlled Group Members,  etc.), either concurrently
or at different times, each will be responsible for the benefit  attributable to
Elective Deferral Credits,  Company Match Credits and Transfer Credits made with
respect to the period while the Participant was employed with or contracted with
that employer, adjusted for earnings credits.

The Parent and the Company each will  guarantee and assume  secondary  liability
for the contractual  commitment of each  Participating  Controlled  Group Member
under this Section.

                                      102

SECTION 9.02 -- FUNDING.

The Company has  established a "rabbi"  trust to serve as a funding  vehicle for
benefits  payable  under  the  Plan.  However,   neither  the  Company  nor  any
Participating Controlled Group Member is obligated to fund such trust. The rabbi
trust will be invested in the manner directed by the Company.

The establishment and funding of the rabbi trust will not affect the contractual
obligations of the Company and  Participating  Controlled Group Member under the
CONTRACTUAL  OBLIGATIONS  SECTION of this Article,  except that such obligations
with respect to any Participant or Beneficiary will be offset to the extent that
payments actually are made from the trust to such Participant or Beneficiary.

The rabbi  trust used to fund  benefits  payable  under this Plan may be used to
fund benefits payable under any other non-qualified  deferred  compensation plan
maintained by the Company or a Participating Controlled Group.

                                    ARTICLE X

                               GENERAL PROVISIONS

SECTION 10.01 -- AMENDMENT AND TERMINATION.

The Board or its delegate  may amend or terminate  this Plan at any time and for
any reason by resolution of its Corporate Management Committee.

An amendment or  termination of the Plan may not have the effect of reducing the
balance of the Account of any Participant or Beneficiary.

After  termination  of the Plan,  no Elective  Deferral  Credits,  Company Match
Credits or  Transfer  Credits  will be added to the  Account of any  Participant
attributable  to periods after the date of termination.  Distribution  following
termination of the Plan will be made at the same time and in the same form as if
the  termination had not occurred,  and a Participant  will continue to have the
same options available to him to defer  distribution as otherwise provided under
the Plan.  However,  if so elected by a majority  of the  Participants  who have
Accounts at termination of the Plan (including Participants or Beneficiaries who
are receiving installments or annuity payouts), the termination of the Plan will
be treated as a termination  of employment  and each  Participant or Beneficiary
will receive a single sum payment of the full balance of his/her Account in full
satisfaction  of all  obligations  under  the Plan  and  without  regard  to any
distribution elections in place with respect to such Participant or Beneficiary.

SECTION 10.02-- EMPLOYMENT STATUS.

Nothing  contained  in this  Plan  gives an  Eligible  Employee  the right to be
retained in the Company's  employ or to interfere  with the  Company's  right to
discharge any Eligible Employee.

SECTION 10.03 -- RIGHTS TO PLAN ASSETS.

Neither the Company nor any Participating  Controlled Group Member will have any
obligation  whatsoever to set aside funds for the Plan or for the benefit of any
Participant or  Beneficiary,  and no  Participant  or Beneficiary  will have any
rights  to any  amounts  that  may be set  aside  other  than the  rights  of an
unsecured  general  creditor of the Company or  Participating  Controlled  Group
Member that employs (or employed) the Participant.

                                      103

SECTION 10.04 -- NONALIENATION OF BENEFITS.

Benefits payable under the Plan are not subject to the claims of any creditor of
any Participant or Beneficiary.  A Participant or Beneficiary  does not have any
rights to alienate, anticipate,  Commute, pledge, encumber or assign any of such
benefits. The preceding sentences shall also apply to the creation,  assignment,
or recognition  of a right to any benefit  payable with respect to a Participant
according to a domestic relations order,  unless such order is determined by the
Company  to be a domestic  relations  order,  as  defined  in ERISA Act  Section
206(d), or any domestic relations order entered before January 1, 1985.

SECTION 10.05-- CONSTRUCTION.

The  validity  of the Plan or any of its  provisions  is  determined  under  and
construed according to Federal law and, to the extent permissible,  according to
the laws of the state in which the Company has its principal office. In case any
provision  of  this  Plan is held  illegal  or  invalid  for  any  reason,  such
determination  shall not affect the remaining  provisions of this Plan,  and the
Plan shall be construed and enforced as if the illegal or invalid  provision had
never been included.

In the event of any conflict between the provisions of the Plan and the terms of
any contract or policy issued hereunder,  the provisions of the Plan control the
operation and administration of the Plan.

SECTION 10.06-- WORD USAGE.

The masculine gender, where used in this Plan, shall include the feminine gender
and the singular  words as used in this Plan may include the plural,  unless the
context indicates otherwise.

SECTION 10.07 -- LIMITATIONS.

Notwithstanding  anything to the contrary contained in the Plan, no action shall
be taken,  and no award or  distribution  shall be made,  under the Plan,  which
contains any term or condition  that would  violate any provision of the Plan of
Conversion of Principal Mutual Holding Company. Common Stock is not allowed as a
medium of distribution under the Plan.  However,  if the Plan ever is amended to
allow  distribution  in shares  of  Common  Stock,  the  number  of such  shares
distributed  hereunder  shall count against (i) the limit of six percent (6%) of
the  number of shares of Common  Stock  outstanding  immediately  following  the
effective  date  of the  Plan  of  Conversion  that  may  be  made  issuable  or
distributable  under all Company  Stock Plans  other than The  Principal  Select
Savings Plan for  Employees,  The Principal  Select  Savings Plan for Individual
Field and The Principal  Financial Group, Inc. Employee Stock Purchase Plan, and
(ii) the  guideline  set forth in The  Principal  Financial  Group,  Inc.  Stock
Incentive Plan limiting the maximum number of shares of Common Stock that may be
awarded or issued within  eighteen (18) months of the effective date of the Plan
of Conversion of Principal  Mutual Holding Company to forty percent (40%) of the
limit set forth in subclause (i).

The "Company  Stock Plans" for this purpose  means any stock option plan,  stock
incentive  plan,  stock purchase plan and share  ownership  plans related to the
Common  Stock  that are  customary  for  publicly  traded  companies,  and shall
include,  but is not limited to, the Principal  Financial Group, Inc.  Directors
Stock Plan, the Principal Financial Group Long-Term  Performance Plan, the Plan,
the Associated  Plans, the Principal  Financial Group, Inc. Stock Incentive Plan
and The Principal  Financial Group, Inc. Employee Stock Purchase Plan, and shall
also include,  if Common Stock is allowed as a  distribution,  this Plan and the
Non-Qualified Defined Contribution Plan for Designated Participants.

                                      104

         By executing this Plan, the Company  acknowledges  having  counseled to
the extent  necessary with selected legal and tax advisors  regarding the Plan's
legal and tax implications.

            Executed this 17TH day of December, 2003

                        PRINCIPAL LIFE INSURANCE COMPANY

                        By    /s/ JIM DEVRIES
                              ----------------------------------------
                              VICE PRESIDENT - HUMAN RESOURCES
                              ----------------------------------------
                                            Title

                                      105

                                                                    EXHIBIT 10.7

                                  THE PRINCIPAL

                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

                                  FOR EMPLOYEES

Restated January 1, 2003

                                      106

                                  INTRODUCTION

The Company established this Plan on January 1, 1982, to provide select eligible
employees  with  additional  benefits,  including  what they would have received
under the Associated  Plan, but for the limit imposed on the  compensation  that
can be taken into account under the such plan (Code ss.  401(a)(17)),  the limit
imposed on the benefits  accrued and payable under such plan (Code ss.  415(b)),
or the reduction in compensation that is taken into account under such plan as a
result of an  election to reduce  compensation  and  receive  Elective  Deferral
Credits under The Principal Select Savings Excess Plan. The Plan is designed and
intended to be a "top-hat" plan - that is, an unfunded plan maintained primarily
for  the  purpose  of  providing  retirement  benefits  for a  select  group  of
management  or highly  compensated  employees  within  the  meaning of ERISA ss.
201(2),  301(a)(3) and 401(a)(1),  and therefore is exempt from Parts 2, 3 and 4
of Title I of ERISA.  The Plan also is  intended to be a  nonqualified  plan for
purposes of Code ss. 401.

The Company is of the opinion that the Plan should be changed.  It believes that
the best means to accomplish  these changes is to completely  restate the Plan's
terms, provisions and conditions. The restatement, effective January 1, 2003, is
set forth in this document and is substituted in lieu of the prior document.

                                    ARTICLE I

                                   DEFINITIONS

SECTION 1.01 -- FORMAT.

Words and phrases defined in the  DEFINITIONS  SECTION of this Article will have
the defined meaning when used in this Plan, unless the context clearly indicates
otherwise. These words and phrases will have an initial capital letter to aid in
identifying them as defined terms.

Words and  phrases  with an initial  capital  letter that are not defined in the
DEFINITIONS  SECTION of this Article will have the meaning assigned to such word
or phase  under the  Associated  Plan,  unless  the  context  clearly  indicates
otherwise.

SECTION 1.02 -- DEFINITIONS.

ACTIVE PARTICIPANT means any Employee in the Eligible Group.

ACCRUED  SUPPLEMENTAL BENEFIT means the Supplemental Pension attributable to the
formula  specified in the ACCRUED  SUPPLEMENTAL  BENEFIT SECTION of Article III,
when  expressed as a Single Life Annuity  starting on the  Participant's  Normal
Retirement  Date (or on the  last day of the  month  that  includes  the date of
determination,  if the date of determination is after the  Participant's  Normal
Retirement Date).

ASSOCIATED PLAN means The Principal Pension Plan.

BENEFICIARY  means the  person or persons  designated  as such  pursuant  to the
BENEFICIARIES SECTION of Article VII.

CHANGE IN CONTROL means the occurrence of any of the following  events:  (i) the
acquisition  by any Person (as defined in Section  3(a)(9) of the Securities and
Exchange Act of 1934,  as amended (the  "Exchange  Act") and as used in Sections
13(d) and 14(d) thereof)), entity or "group" (as defined in Section 13(d) of the
Exchange Act) of fifty percent (50%) or more of the outstanding  voting power of
the Parent then outstanding voting securities; (ii) the merger, consolidation or

                                      107

reorganization of the Parent, as a result of which persons who were stockholders
of the Parent immediately prior to such merger, consolidation or reorganization,
do not,  immediately  thereafter,  own, directly or indirectly,  more than fifty
percent  (50%) of the combined  voting power  entitled to vote  generally in the
election of directors of the merged,  consolidated or reorganized company; (iii)
within any twelve  (12) month  period,  the persons  who were  directors  of the
Parent at the  beginning  of such period (the  "Incumbent  Directors")  cease to
constitute at least a majority of the Board,  provided that any director elected
to the  Board,  or  nominated  for  election,  by a  majority  of the  Incumbent
Directors  then still in office will be deemed to be an  Incumbent  Director for
purposes  of this clause  (iii);  (iv) the  liquidation  or  dissolution  of the
Parent; and (v) the sale,  transfer of other disposition,  in one transaction or
series of related  transactions,  of more than fifty  percent  (50%) of the fair
market  value of the assets of the Parent to any  Person.  For  purposes of this
definition,  the terms  "Person,"  "entity" and "group" will not include (a) the
Parent or any of its  subsidiaries  or controlled  affiliates;  (b) a trustee or
other fiduciary holding  securities under an employee benefit plan of the Parent
or any of its subsidiaries or affiliates; (c) an underwriter temporarily holding
securities of the Parent  pursuant to an offering of such  securities;  or (d) a
corporation owned, directly or indirectly,  by the shareholders of the Parent in
substantially the same proportions as their ownership of stock of the Parent.

CODE means the Internal Revenue Code of 1986, as amended.

COMPANY means Principal Life Insurance Company.

CONTROLLED GROUP MEMBER means any corporation or other business entity that is a
member of the same  controlled  group as, or is under common  control with,  the
Parent as determined under Code ss. 414(b) or (c).

ELIGIBLE  GROUP means the group of Employees who are eligible to  participate in
the Plan, as determined under the ELIGIBLE GROUP SECTION of Article II.

EMPLOYEE  means any  common-law  employee of the Company or a  Controlled  Group
Member (while it is such).

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

FROZEN BENEFIT means benefits accrued by Participants  employed prior to January
1, 2002 and who became reemployed on or after January 1, 2002.

PARENT means the Principal  Financial Group, Inc., a Delaware  corporation,  and
any successor thereto.

PARTICIPANT means any Active Participant,  or any current or former Employee who
is not an Active Participant but who has benefits due him under the Plan.

PARTICIPATING CONTROLLED GROUP MEMBER means any Controlled Group Member that has
adopted  the  Associated  Plan  and that  employs  one or more  Participants.  A
Participating Controlled Group Member will automatically cease to participate if
it ceases to be a Controlled Group Member.

PLAN means The Principal Supplemental Executive Retirement Plan for Employees.

PLAN YEAR means the calendar year.

SOCIAL SECURITY BENEFIT means the monthly payment of primary insurance  benefits
determined for a Participant by applying a salary scale, projected backwards, to
the  Participant's  pay as of any date of  determination.  The salary scale used
will be the actual  change in the average  wages from year to year as determined
by the Social Security Administration.

SUPPLEMENTAL  PENSION means the benefit  payable to a Participant in the form of
an annuity or in any other form of payment under the provisions of the Plan.

                                      108

TERMINATION OF SERVICE means resignation,  discharge,  retirement,  death or the
happening of any other event or  circumstance  that results in the  severance of
the  common-law   employer-employee   relationship  with  the  Company  and  all
Controlled  Group  Members,  unless the Employee  then becomes an Agent or Field
Manager.

In the  event  a  Participant  becomes  Totally  and  Permanently  Disabled  and
continues  to  participate  in the  Associated  Plan  during  the period of such
disability,  his Termination of Service will be deemed to have occurred upon his
Severance Date that occurs under the Associated Plan.

In the case of an Employee  working for a Controlled Group Member, a Termination
of  Service  will be deemed to have  occurred  upon the sale of the stock of the
employer (or a similar transaction) such that it is no longer a Controlled Group
Member. Similarly, a Termination of Employment will occur if an Employee resigns
or is  discharged  in  connection  with a sale of  assets  by the  Company  or a
Controlled  Group  Member,  regardless  of whether  the  Employee  then  accepts
employment with the purchaser of such assets.

VESTED  means  that  the  Participant  has a  termination  of  employment  under
circumstances where he is entitled to a Pension under the Associated Plan.

                                   ARTICLE II

                                  PARTICIPATION

SECTION 2.01 -- ELIGIBLE GROUP.

All  Employees  who are in the  Eligible  Group  will be  eligible  to  accrue a
Supplemental Pension benefit under this Plan.

An Employee is in the  Eligible  Group if he is eligible to  participate  in the
Associated Plan, and either:

a)   His  compensation  for the previous  year is  one-hundred  and  twenty-five
     percent  (125%) or more of the salary  minimum used in the  definition of a
     "highly compensated employee" under Code ss. 414(q) for that year;

b)   His  compensation  for the  current  year is  one-hundred  and  twenty-five
     percent  (125%) or more of the salary  minimum used in the  definition of a
     "highly compensated employee" under Code ss. 414(q) for the year; or

c)   He has been selected by the Corporate  Management  Committee to participate
     in this Plan.

The  Corporate  Management  Committee  in its sole and absolute  discretion  may
determine  that an Employee  described  in (a) above will not be in the Eligible
Group,  or may determine  that an Employee not described in (a) above will be in
the Eligible Group.  However, the Plan is intended to cover only those Employees
who are in a select group of management or highly  compensated  employees within
the meaning of ERISA ss. 201(2), 301(a)(3) and 401(a)(1);  and, accordingly,  if
any  interpretation  is issued by the Department of Labor that would exclude any
Employee from satisfying that requirement,  such Employee immediately will cease
to be in the Eligible Group.

                                      109

SECTION 2.02 -- ENROLLMENT.

Enrollment is not required;  rather,  an Employee will  automatically  become an
Active Participant on the date he enters the Eligible Group.

SECTION 2.03 -- END OF ELIGIBILITY AND PARTICIPATION.

An Employee who is in the Eligible Group will continue as an Active  Participant
for so long as the Plan remains in effect and he remains in the Eligible  Group.
A Participant  will cease to be a Participant on the date he has received a full
distribution of all benefits payable to him under the terms of the Plan.

                                   ARTICLE IIL

                          SUPPLEMENTAL PENSION BENEFITS

SECTION 3.01 -- ACCRUED SUPPLEMENTAL BENEFIT.

A Participant's  Accrued  Supplemental  Benefit as of any date of  determination
will be a Single Life Annuity  starting as of his Normal  Retirement Date (or as
of  the  last  day  of  the  calendar  month  that  next  follows  the  date  of
determination,  if such date is after the Normal Retirement Date) with a monthly
amount equal to A minus B, where:

"A" = The greater of A1or A2 where:

         "A1"     = The  Participant's  Cash Balance  Accrued  Benefit under the
                  Associated Plan determined without regard to:

                  (i)      The limit on  compensation  taken into account  under
                           the Associated Plan under Code ss. 401(a)(17);

                  (ii)     The limit on the benefit  accrued  and payable  under
                           the Associated Plan under Code ss. 415(b); and

                  (iii)    The exclusion of amounts  deferred by the Participant
                           under The Principal  Select  Savings  Excess Plan (or
                           other   non-qualified   deferred   compensation  plan
                           maintained or previously maintained by the Company or
                           Participating   Controlled  Group  Member)  from  the
                           compensation  base used in  determining  the  benefit
                           accrued and payable under the Associated Plan.

         "A2"     = In the  case of a  Participant  who has an  Accrued  Benefit
                  (Final Average Pay) accrued on his behalf under the Associated
                  Plan after  January 1, 2002,  A2 equals the  greater of A2a or
                  A2b where:
                  A2a =    The Participant's Accrued Benefit (Final Average Pay)
                           under the Associated Plan; or

                  A2b =    An amount equal to 1 + 2 - 3, where:

                           "1"      =  70.5%   of  the   Participant's   Average
                                    Compensation   multiplied   by  his  Accrued
                                    Benefit  Adjustment  (Pre-89) (Final Average
                                    Pay).

                                      110

                           "2"      =   65%   of   the   Participant's   Average
                                    Compensation   multiplied   by  his  Accrued
                                    Benefit Adjustment (Final Average Pay).

                           "3"      = The Participant's  Social Security Benefit
                                    multiplied by the sum of his Accrued Benefit
                                    Adjustment  (Pre-89) (Final Average Pay) and
                                    his  Accrued   Benefit   Adjustment   (Final
                                    Average Pay).

                  A2a and A2b will be determined without regard to:

                  (i)      The limit on  compensation  taken into account  under
                           the Associated Plan under Code ss. 401(a)(17);

                  (ii)     The limit on the benefit  accrued  and payable  under
                           the Associated Plan under Code ss. 415(b); and

                  (iii)    The exclusion of amounts  deferred by the Participant
                           under The Principal  Select  Savings  Excess Plan (or
                           other   non-qualified   deferred   compensation  plan
                           maintained or previously maintained by the Company or
                           Participating   Controlled  Group  Member)  from  the
                           compensation  base used in  determining  the  benefit
                           accrued and payable under the Associated Plan.

"B" = The greater of B1 or B2, where:

         "B1" = The Participant's Cash Balance Formula Accrued Benefit under the
         Associated  Plan; or "B2" = The  Participant's  Accrued  Benefit (Final
         Average Pay) under the Associated Plan.

However,  if the Participant  receives a distribution  under the Associated Plan
prior to  distribution of the  Supplemental  Pension  benefit,  the cash balance
account  in B above will  equal the  amount  that  would  have  accrued as if no
distribution in the Associated Plan would have occurred.

If a Participant does not have an Accrued Benefit (Final Average Pay) accrued on
his behalf under the  Associated  Plan after  January 1, 2002,  then his Accrued
Supplemental Benefit will be A1 minus B1, above. Similarly, if a Participant has
an  Accrued  Benefit  (Final  Average  Pay)  accrued  on his  behalf  under  the
Associated Plan after January 1, 2002, his Accrued  Supplemental Benefit will be
the greater of A1 or A2, minus the greater of B1 or B2, above.

SECTION 3.02 -- ENTITLEMENTS.

A  Participant  will have a Cash  Balance  Entitlement  under this Plan if he is
Vested and his  Supplemental  Accrued  Benefit (when  measured as of the Benefit
Commencement Date for his/her  Supplemental  Pension) is determined by reference
to A1 in the ACCRUED SUPPLEMENTAL BENEFIT SECTION of this Article III.

A Participant will have a Final Average Pay Entitlement under this Plan if he is
Vested and his  Supplemental  Accrued  Benefit (when  measured as of the Benefit
Commencement Date for his/her  Supplemental  Pension) is determined by reference
to A2 in the ACCRUED SUPPLEMENTAL BENEFIT SECTION of this Article III.

A Participant  who is not Vested will not be entitled to a Supplemental  Pension
under this Plan.

                                      111

SECTION 3.03 -- SUPPLEMENTAL PENSION - CASH BALANCE ENTITLEMENT.

A  Participant  who  has a  Cash  Balance  Entitlement  will  be  entitled  to a
Supplemental  Pension which, when expressed in the form of a Single Life Annuity
starting on the Participant's  Normal Retirement Date (or on the last day of the
month that includes the date of  determination,  if the date of determination is
after the Participant's Normal Retirement Date), will equal A minus B, where:

"A"      = The accrued  benefit that would be payable to the  Participant  under
         the  Associated  Plan if the  Pension  under the  Associated  Plan were
         determined under the Cash Balance Formula and without regard to:

         (i)      The  limit  on  compensation  taken  into  account  under  the
                  Associated Plan under Code ss. 401(a)(17);

         (ii)     The  limit  on the  benefit  accrued  and  payable  under  the
                  Associated Plan under Code ss. 415(b); and

         (iii)    The exclusion of amounts deferred by the Participant under The
                  Principal  Select Savings Excess Plan (or other  non-qualified
                  deferred compensation plan maintained or previously maintained
                  by the Company or Participating  Controlled Group Member) from
                  the compensation  base used in determining the benefit accrued
                  and payable under the Associated Plan.

"B" =  Accrued  benefit  that  would be  payable  to the  Participant  under the
Associated Plan.

A Participant who has a Cash Balance  Entitlement  may receive his  Supplemental
Pension upon his Termination of Service unless an election is on file,  pursuant
to Section 3.06. The Participant may defer payment to any later date that is not
later than the latest date the Participant could commence payment of his Pension
under the Associated Plan.

The Supplemental  Pension may be paid in any form available under the Associated
Plan for a Pension calculated under the Cash Balance Formula.

SECTION 3.04 -- SUPPLEMENTAL PENSION - FINAL AVERAGE PAY ENTITLEMENT.

A  Participant  who has a Final  Average Pay  Entitlement  will be entitled to a
Supplemental  Pension which, when expressed in the form of a Single Life Annuity
starting on the Participant's  Normal Retirement Date (or on the last day of the
month that includes the date of  determination,  if the date of determination is
after the  Participant's  Normal  Retirement  Date),  equals  the  Participant's
Accrued Supplemental Benefit.

A  Participant  who  has  a  Final  Average  Pay  Entitlement  may  receive  his
Supplemental  Pension as of the  earliest  date  following  his  Termination  of
Service  on  which he would  be  entitled  to  receive  his  Pension  under  the
Associated  Plan if such Pension were  determined  based on his Accrued  Benefit
(Final Average Pay), or the  Participant  may defer payment of the  Supplemental
Pension to any later date that is not later than the latest date the Participant
could commence payment of his Pension under the Associated Plan.

The Supplemental  Pension may be paid in any form available under the Associated
Plan for a Pension calculated under the Final Average Pay Formula.

                                      112

SECTION 3.05 - SUPPLEMENTAL PENSION - FROZEN BENEFIT ENTITLEMENT

A Participant may have a Frozen Benefit  entitlement under this Plan in addition
to his  Supplemental  Pension.  The  Frozen  Benefit  may be  paid  in any  form
available  under the Associated  Plan for a Pension  calculated  under the Final
Average Pay Formula.

SECTION 3.06 -- DISTRIBUTION ELECTION PROCEDURES.

A distribution  election must be made in such manner and in accordance with such
rules as may be prescribed  for this purpose by the Company  (including by means
of a voice response or other electronic system under circumstances authorized by
the Company).

A  distribution  election  will be effective  only if it is received in properly
completed  form  by the  Company  at  least  twelve  (12)  months  prior  to the
Participant's  Termination of Service or when the  Participant  first enters the
Eligible  Group (even if that is within twelve (12) months of the  Participant's
Termination  of Service).  However,  in the case of a Participant in the Plan on
January 1, 2004 (which is date on which optional payment forms separate from the
Associated Plan are first allowed under the Plan),  such  Participant may file a
distribution  election within thirty (30) days after January 1, 2004, which will
be  effective  immediately  (even if that is within  twelve  (12)  months of the
Participant's Termination of Service).

Notwithstanding  the above, if a Participant's  Termination of Service occurs by
action of the Company within two (2) years following a Change in Control for any
reason other than  embezzlement  or engaging in any criminal act, a distribution
will be made in the form of a  single  lump-sum  payment  within  ten (10)  days
following  Termination of Service.  Single lump-sum  payments will be determined
based on the actuarial assumptions of the Associated Plan.

SECTION 3.07 -- DEFAULT ELECTION.

If a Participant fails to file a timely distribution  election, his Supplemental
Pension will be paid in the form of a Single Life Annuity  commencing  as of his
Normal Retirement Date (or as of the last day of the month of his Termination of
Service if his Termination of Service is after his Normal Retirement Date).

SECTION 3.08 -- CASH-OUT OF SMALL BENEFITS AT OPTION OF COMMITTEE.

Notwithstanding  any contrary  election  made by a  Participant,  if the present
value of the  Participant's  Supplemental  Pension does not exceed five thousand
dollars ($5,000) at Termination of Service,  the Corporate  Management Committee
may in its sole and absolute  discretion  direct that such present value will be
paid in a single-sum  distribution in full  settlement of all obligations  under
the Plan.

The "present value" of a Supplemental  Pension for this purpose will be lump-sum
amount payable under the SUPPLEMENTAL PENSION - CASH BALANCE ENTITLEMENT SECTION
of  this  Article,  if  applicable,  or  the  actuarial  present  value  of  the
Supplemental  Pension payable under the SUPPLEMENTAL PENSION - FINAL AVERAGE PAY
ENTITLEMENT SECTION of this Article, if applicable, determined using an interest
and  mortality   assumption  deemed  reasonable  by  the  Corporate   Management
Committee.

SECTION 3.09 -- DISTRIBUTIONS PURSUANT TO A DOMESTIC RELATIONS ORDER.

The Plan permits the benefits  actually  payable to a Participant  to be divided
with a spouse or former  spouse of a  participant  who meets the  definition  of
alternate payee under ERISA ss. 206(d) provided that the Company determines that

                                      113

the  domestic  relations  order  meets  the  criteria  of a  qualified  domestic
relations  order, as defined in ERISA ss. 206(d). A distribution to an alternate
payee is not  allowed  prior to  payment  (or  commencement)  of a benefit  to a
Participant,  and the Plan will not  recognize a domestic  relations  order that
purports to create a separate interest in the alternate payee. In addition, once
a form of benefit has commenced, the form of measuring life may not be changed.

The Company will establish  procedures to determine whether a domestic relations
order  meets the  criteria  of ERISA  ss.  206(d).  Upon  receiving  a  domestic
relations  order,  the  Company  promptly  will  notify the  Participant  and an
alternate payee named in the order, in writing,  of the receipt of the order and
the  Plan's  procedures  for  determining  the  status  of the  order.  Within a
reasonable  period of time after  receiving the domestic  relations  order,  the
Company will  determine the status of the order and will notify the  Participant
and each alternate  payee, in writing,  of its  determination.  The Company will
provide  notice  under this  paragraph  by mailing to the  individual's  address
specified in the domestic relations order.

If any portion of the  Participant's  benefit under this Plan is payable  during
the period the Company is making its determination of the status of the domestic
relations  order, a separate  accounting will be made of the amount payable.  If
the  Company  determines  the order is a  domestic  relations  order  within the
criteria of ERISA ss. 206(d) within eighteen (18) months of the date amounts are
first  payable  following  receipt of the order,  the  payable  amounts  will be
distributed  in  accordance  with the order.  If the  Company  does not make its
determination  of the  status of the  order  within  the 18 month  determination
period,  the payable  amounts will be  distributed  in the manner the Plan would
distribute if the order did not exist and the order will apply  prospectively if
the Company later determines the order meets the criteria of ERISA ss. 206(d).

The Plan will make  payments or  distributions  required  under this  section by
separate benefit checks or other separate distribution to the alternate payee(s)
and report the  payments  accordingly,  provided  however,  that the Company may
report  distributions as income to the Participant for federal income tax and/or
Social Security or other withholding  purposes as it determines to be consistent
with the requirements of the Code.

                                   ARTICLE IV

                                     VESTING

SECTION 4.01 -- VESTING.

A Participant will be entitled to a Supplemental Pension under this Plan only if
he is has a fully vested and nonforfeitable interest.

SECTION 4.02 -- FORFEITURE.

If a  Participant  has a  Termination  of Service  before he is Vested,  he will
forfeit his Supplemental  Pension. If the Participant is subsequently rehired by
the Company or a Participating Controlled Group Member (while it is such) and he
is eligible to have his divested  benefits under the Associated Plan reinstated,
his  Supplemental  Pension also will be  reinstated  under this Plan (if it then
remains in effect). Otherwise, any forfeiture will be permanent.

                                      114

                                    ARTICLE V

                            DISTRIBUTIONS AFTER DEATH

SECTION 5.01 -- SURVIVOR  BENEFITS PRIOR TO PENSION  COMMENCEMENT - CASH BALANCE
ENTITLEMENT.

If a Vested Participant who has a Cash Balance Entitlement dies prior to payment
or commencement of his Supplemental Pension, his Beneficiary will be entitled to
a survivor  benefit  under the Plan in an amount equal to the  lump-sum  payment
that would have been payable to the Participant under the SUPPLEMENTAL PENSION -
CASH BALANCE  ENTITLEMENT  SECTION of Article III. This survivor benefit will be
paid as follows:

(a)      If the  Participant  has a  Spouse  to  whom he has  been  continuously
         married throughout the one-year period ending on the date of his death,
         and unless the  Participant  waives this form of payment or waives this
         survivor benefit and designates a Beneficiary  other than his Spouse in
         accordance with the BENEFICIARIES SECTION of this Article, the survivor
         benefit  will be payable to the  Participant's  Spouse in the form of a
         Single Life  Annuity for the life of the  Participant's  Spouse that is
         the Actuarial  Equivalent of the lump-sum  payment that would have been
         payable  to the  Participant  under  the  SUPPLEMENTAL  PENSION  - CASH
         BALANCE ENTITLEMENT SECTION of Article III.

         Actuarial  Equivalence  for this purpose will be  determined  using the
         following  actuarial  assumptions:   Interest  -  the  average  of  the
         "applicable  interest rates" prescribed by the Internal Revenue Service
         for  purposes of Code ss.  417(e) for  September,  October and November
         preceding the Plan Year in which the survivor benefit starts; Mortality
         - the "applicable  mortality table"  prescribed by the Internal Revenue
         Service for  purposes  of Code ss.  417(e) and  currently  set forth in
         Revenue Ruling 2001-62.

(b)      If the  Participant  does  not  have  a  Spouse  to  whom  he has  been
         continuously  married throughout the one-year period ending on the date
         of his death , or if the  Participant  waives the Single  Life  Annuity
         payment form provided under (a) or designates a Beneficiary  other than
         his  Spouse  in  accordance  with  the  BENEFICIARIES  SECTION  of this
         Article,  the survivor  benefit will be a lump-sum payment equal to the
         lump-sum payment that would have been payable to the Participant  under
         the SUPPLEMENTAL  PENSION - CASH BALANCE ENTITLEMENT SECTION of Article
         III.

The  survivor  benefit  will  be paid or  commence  as soon as  administratively
practicable  after  the  death of the  Participant  and the  entitlement  of the
Beneficiary as been determined.

SECTION 5.02 -- SURVIVOR BENEFITS PRIOR TO PENSION  COMMENCEMENT - FINAL AVERAGE
PAY ENTITLEMENT.

If a Vested  Participant who has a Final Average Pay  Entitlement  dies prior to
payment or  commencement  of his  Supplemental  Pension,  and the Participant is
survived by a Spouse to whom he has been  continuously  married  throughout  the
one-year  period ending on the date he dies and the  Participant  does not waive
this  survivor  benefit (as provided  below),  such Spouse will be entitled to a
survivor benefit under the Plan as follows:

(a)      If the Spouse is entitled to a survivor  benefit  under the  Associated
         Plan based on the  Participant's  Accrued  Benefit (Final Average Pay),
         the survivor  benefit under this Plan will be a monthly amount equal to
         A minus B where:

                                      115

         "A"      = The  monthly  amount  that  would  have been  payable to the
                  Spouse as a survivor  benefit under the Associated Plan if the
                  Participant's  Accrued  Benefit under the Associated Plan were
                  equal to his Supplemental Accrued Benefit.

          "B"     = The  monthly  amount  actually  payable  to the  Spouse as a
                  survivor benefit under the Associated Plan.

         This  survivor  benefit will be payable in the same form of payment and
         at the same time as the survivor  benefit being paid to the Participant
         under the Associated Plan

(b)      If the Spouse is entitled to a survivor  benefit  under the  Associated
         Plan based on the  Participant's  Cash Balance Formula Accrued Benefit,
         the survivor  benefit under this Plan will be a monthly amount equal to
         A minus B where:

         "A"      = The  monthly  amount  that  would  have been  payable to the
                  Spouse as a survivor  benefit under the Associated  Plan based
                  upon the Participant's  Accrued Benefit (Final Average Pay) if
                  his  Accrued  Benefit  (Final  Average  Pay) were equal to his
                  Supplemental Accrued Benefit.

         "B"      = The  monthly  amount  actually  payable  to the  Spouse as a
                  survivor  benefit  under the  Associated  Plan  based upon the
                  Participant's Cash Balance Formula Accrued Benefit.

         This  survivor  benefit  will be  payable  in the  form of a  Qualified
         Survivor Annuity  commencing as of the earliest date such annuity could
         commence  under the Associated  Plan if the survivor  benefit under the
         Associated Plan were based on the Accrued Benefit (Final Average Pay).

A Participant  describe above may waive the survivor benefit described above and
instead elect to have the survivor  benefit that is a lump -sum payment equal to
the lump-sum  payment that would have been payable to the Participant  under the
SUPPLEMENTAL PENSION - CASH BALANCE ENTITLEMENT SECTION of Article III

If a Vested  Participant who has a Final Average Pay  Entitlement  dies prior to
payment or commencement of his Supplemental  Pension, and the Participant is not
survived by a Spouse to whom he has been  continuously  married  throughout  the
one-year period ending on the date he dies, his Beneficiary  will be entitled to
a survivor benefit under the Plan in accordance with the SURVIVOR BENEFITS PRIOR
TO PENSION COMMENCEMENT - CASH BALANCE ENTITLEMENT SECTION of this Article.

SECTION 5.03 -- SURVIVOR BENEFITS AFTER PENSION COMMENCEMENT.

If a Vested  Participant  elects an  annuity  with a  survivor  component  as an
optional form of payment and dies after  commencement of such annuity,  payments
will  continue  consistent  with  the  form of  payment  being  received  by the
Participant.  If the annuity elected by the Participant does not have a survivor
component (e.g., a Single Life Annuity),  then no survivor  benefits are payable
to  anyone  if  the  Participant  dies  after  payment  or  commencement  of his
Supplemental Pension.

SECTION 5.04 -- CASH-OUT OF SURVIVOR BENEFITS AT OPTION OF COMMITTEE.

Notwithstanding the above, if survivor benefits are payable in annuity form to a
Beneficiary  under the above rules, the Corporate  Management  Committee may, in
its sole  discretion,  elect to pay the survivor  benefits in a single  lump-sum
payment  in an  amount  equal  to the  present  value  of the  annuity  in  full
satisfaction of the survivor benefit otherwise  payable under the Plan.  Present
value  for  this  purpose  will  be  determined  using  interest  and  mortality
assumptions deemed reasonable by the Corporate Management Committee.

                                      116

SECTION 5.05 -- BENEFICIARIES.

A Participant may designate any person (natural or otherwise, including a trust)
as his  Beneficiary  to receive the  survivor  benefit (if any)  payable when he
dies, and may change or revoke a designation previously made without the consent
of any Beneficiary.

In the case of a Participant  who has a Spouse to whom he has been  continuously
married  throughout  the one-year  period ending on the date of his death,  such
Spouse will be his Beneficiary unless he has designated a different Beneficiary.
In the case of a  Participant  who  does  not have a Spouse  to whom he has been
continuously  married  throughout the one-year  period ending on the date of his
death, if a Beneficiary  designation is not on file for such Participant,  or if
no designated Beneficiary survives the Participant,  the Beneficiary will be the
person  designated  by the  Participant  under  the  Associated  Plan or, in the
absence of a designation,  the default Beneficiary under the Associated Plan. If
the  primary  Beneficiary  designated  by a  Participant  dies prior to complete
distribution of the survivor benefit,  the remaining benefit will be paid to any
contingent  Beneficiary  designated  by  the  Participant,  or  if  there  is no
surviving  contingent  Beneficiary,  a lump sum of the remaining benefit will be
paid to the estate of the primary Beneficiary.

A Beneficiary  designation must be made on such form and in accordance with such
rules as may be  prescribed  for this  purpose  by the  Company.  A  Beneficiary
designation will be effective (and will revoke all prior  designations) if it is
received by the Company (or if sent by mail,  the  post-mark  of the mailing is)
prior to the date of death of the Participant

                                   ARTICLE VI

                             ADMINISTRATION OF PLAN

SECTION 6.01 -- ADMINISTRATION.

The  Company is the  administrator  of the Plan with  authority  to control  and
manage the operation and  administration  of the Plan and make all decisions and
determinations   incident   thereto.   Action  on  behalf  of  the   Company  as
administrator may be taken by any of the following:

(a)      CORPORATE MANAGEMENT  COMMITTEE.  The Corporate Management Committee of
         the Company will be responsible  for selecting the Employees who are in
         the Eligible  Group.  This committee shall have authority to make rules
         and   regulations  for  the   administration   of  the  Plan,  and  its
         interpretations  and decisions  with regard  thereto shall be final and
         conclusive.

(b)      BENEFIT  PLANS  INVESTMENT  COMMITTEE.  The  Benefit  Plans  Investment
         Committee  of the Company is  responsible  for all  investment  matters
         relating to the Plan,  including the investment of assets that may (but
         are not required to be) set aside to hedge  liabilities  resulting from
         the Plan, and actual investment of the rabbi trust asset, including the
         selection and monitoring  investment  providers (including the Trustee)
         with respect to the Plan.

         The members of the Benefit Plans Investment Committee will be appointed
         by the Chief Executive Officer of the Company.

Day-to-day non-discretionary  administration of the Plan may be performed by the
Human Resources Department.

                                      117

SECTION 6.02 -- CORRECTION OF ERRORS AND DUTY TO REVIEW INFORMATION.

Errors may occur in the operation and  administration  of the Plan.  The Company
reserves the right to cause such equitable adjustments to be made to correct for
such errors as it considers appropriate (including adjustments to Participant or
Beneficiary  benefits),  which will be final and binding on the  Participant  or
Beneficiary.

Each Participant and Beneficiary has the duty to promptly review any information
that is provided or made available to the  Participant  or Beneficiary  and that
relates  in any  way to the  operation  and  administration  of the  Plan or his
elections  under the Plan (for example,  to review  payroll stubs to make sure a
contribution  election is being  implemented  appropriately,  to review  benefit
statements   to  make  sure   investment   elections   are   being   implemented
appropriately,  to review summary plan descriptions and prospectuses,  etc.) and
to notify the Company of any error made in the  operation or  administration  of
the Plan that affects the Participant or Beneficiary  within thirty (30) days of
the date such  information is provided or made  available to the  Participant or
Beneficiary  (for example,  the date the information is sent by mail or the date
the  information  is  provided  or  made  available   electronically).   If  the
Participant  or Beneficiary  fails to review any  information or fails to notify
the  Company of any error  within  such  period of time,  he will not be able to
bring any claim seeking relief or damages based on the error.  If the Company is
notified of an alleged error within the thirty (30) day time period, the Company
will  investigate  and either  correct  the error or notify the  Participant  or
Beneficiary  that it believes  that no error  occurred.  If the  Participant  or
Beneficiary  is not  satisfied  with the  correction  (or the  decision  that no
correction  is  necessary),  he will  have  sixty  (60)  days  from  the date of
notification  of the  correction  (or  notification  of  the  decision  that  no
correction  is  necessary),  to file a formal claim under the claims  procedures
under the CLAIMS PROCEDURES SECTION of this Article.

SECTION 6.03 -- CLAIMS PROCEDURES.

If a Participant or Beneficiary does not feel as if he has received full payment
of the benefit due such person under the Plan,  the  Participant  or Beneficiary
may file a written  claim  with the  Company  setting  forth  the  nature of the
benefit claimed,  the amount thereof,  and the basis for claiming entitlement to
such  benefit.  The  Vice  President  of Human  Resources  of the  Company  will
determine  the validity of the claim and  communicate a decision to the claimant
promptly  and,  in any event,  not later than ninety (90) days after the date of
the  claim.  The claim may be deemed by the  claimant  to have been  denied  for
purposes  of  further  review  described  below in the event a  decision  is not
furnished  to the  claimant  within such ninety (90) day period.  If  additional
information is necessary to make a determination  on a claim,  the claimant will
be advised of the need for such additional  information  within  forty-five (45)
days after the date of the claim.  The claimant  will have up to one hundred and
eighty (180) days to supplement the claim information,  and the claimant will be
advised  of the  decision  on the claim  within  forty-five  (45) days after the
earlier of the date the  supplemental  information is supplied or the end of the
one hundred and eighty (180) day period.

A claim for benefits  which is denied will be denied by written  notice  setting
forth in a manner calculated to be understood by the claimant:

(a)      The  specific  reason or reasons for the  denial,  including a specific
         reference to any provisions of the Plan  (including any internal rules,
         guidelines, protocols, criteria, etc.) on which the denial is based;

(b)      A  description  of any  additional  material  or  information  that  is
         necessary to process the claim; and

(c)      An explanation of the procedure for further reviewing the denial of the
         claim.

                                      118

Within  sixty (60) days after the receipt of a denial on a claim,  a claimant or
his  authorized  representative  may file a written  request  for review of such
denial.  Such review will be  undertaken  by the  Benefit  Plans  Administration
Committee  and will be a full and fair review.  The claimant will have the right
to review all pertinent documents.  The Benefit Plans  Administration  Committee
will issue a decision not later than sixty (60) days after  receipt of a request
for review from a claimant  unless  special  circumstances,  such as the need to
hold a hearing,  require a longer  period of time, in which case a decision will
be rendered as soon as possible  but not later than one hundred and twenty (120)
days after receipt of the claimant's  request for review. The decision on review
will be in writing and will include specific reasons for the decision written in
a manner calculated to be understood by the claimant with specific  reference to
any provisions of the Plan on which the decision is based.

SECTION 6.04 -- INDEMNIFICATION.

The Company and the Participating Controlled Group Members jointly and severally
agree to indemnify  and hold  harmless,  to the extent  permitted  by law,  each
director, officer, and employee against any and all liabilities,  losses, costs,
or expenses  (including  legal fees) of  whatsoever  kind and nature that may be
imposed on,  incurred by, or asserted  against such person at any time by reason
of such person's  services in the  administration  of the Plan, but only if such
person did not act dishonestly,  or in bad faith, or in willful violation of the
law or regulations under which such liability, loss, cost, or expense arises.

SECTION 6.05 -- EXERCISE OF AUTHORITY.

The  Company,   the   Corporate   Management   Committee,   the  Benefit   Plans
Administration  Committee,  the Benefit Plans Investment Committee and any other
person or body who has authority with respect to the management,  administration
or  investment  of the Plan may  exercise  that  authority in  its/his/her  full
discretion.  This discretionary  authority includes,  but is not limited to, the
authority to make any and all factual determinations and interpret all terms and
provisions of this document (or any other  document  established  for use in the
administration  of the Plan)  relevant  to the issue  under  consideration.  The
exercise of authority will be binding upon all persons;  and it is intended that
the  exercise  of  authority  be given  deference  in all  courts  of law to the
greatest extent allowed under law, and that it not be overturned or set aside by
any court of law unless found to be arbitrary and capricious.

SECTION 6.06 -- TELEPHONIC OR ELECTRONIC NOTICES AND TRANSACTIONS.

Any notice  that is  required  to be given  under the Plan to a  Participant  or
Beneficiary, and any action that can be taken under the Plan by a Participant or
Beneficiary, may be by means of voice response or other electronic system to the
extent so authorized by the Company.

                                   ARTICLE VII

                       CONTRACTUAL OBLIGATIONS AND FUNDING

SECTION 7.01 -- CONTRACTUAL OBLIGATIONS.

The Plan creates a  contractual  obligation  on the part of the Company and each
Participating  Controlled  Group Member to provide  benefits as set forth in the
Plan with respect to: .

(a)      Participants  who are  employed  with the  Company  or a  Participating
         Controlled Group Member;

                                      119

(b)      Participants  who were  employed  with the  Company or a  Participating
         Controlled Group Member prior to Termination of Service; and

(c)      Beneficiaries of the Participants described in (a) and (b).

A  Participating  Controlled  Group  Member is not  responsible  for (and has no
contractual obligation with respect to) benefits payable to a Participant who is
or was  employed  with the  Company or another  Participating  Controlled  Group
Member. If a Participant is employed with two or more employers (the Company and
a Participating Controlled Group Member, or two or more Participating Controlled
Group Members,  etc.),  either  concurrently or at different times, each will be
responsible  for the  benefit  attributable  to the period of service  with that
employer.

The Parent and the Company each will  guarantee and assume  secondary  liability
for the contractual  commitment of each  Participating  Controlled  Group Member
under this Section.

SECTION 7.02 -- FUNDING.

The Company has  established a "rabbi"  trust to serve as a funding  vehicle for
benefits  payable  under  the  Plan.  However,   neither  the  Company  nor  any
Participating Controlled Group Member is obligated to fund such trust. The rabbi
trust will be invested in the manner  directed by the Benefit  Plans  Investment
Committee.

The establishment and funding of the rabbi trust will not affect the contractual
obligations of the Company and  Participating  Controlled Group Members,  except
that such  obligations  with respect to any  Participant or Beneficiary  will be
offset to the  extent  that  payments  actually  are made from the trust to such
Participant or Beneficiary.

The rabbi  trust used to fund  benefits  payable  under this Plan may be used to
fund benefits payable under any other non-qualified  deferred  compensation plan
maintained by the Company or a Participating Controlled Group Member.

                                  ARTICLE VIII

                               GENERAL PROVISIONS

SECTION 8.01 -- AMENDMENT AND TERMINATION.

The Board or its delegate  may amend or terminate  this Plan at any time and for
any reason by resolution of its Corporate Management Committee.

An amendment or  termination of the Plan may not have the effect of reducing the
overall benefit attributable to the period prior to amendment or termination and
payable to the Participant under the Associated Plan or this Plan. This will not
prohibit an amendment that reduces or eliminates the benefit accrued and payable
under  this  Plan  and  shifts  the   liability  for  such  benefit  to  another
non-qualified  retirement  plan  maintained by the Company or to the  Associated
Plan.

After  termination of the Plan, no additional  benefits  attributable to periods
after the date of  termination  will accrue under the Plan for any  Participant.
The Supplemental Pension payable to any Participant after the termination of the
Plan will equal the  Supplemental  Pension  determined  as if the  Participant's
Termination of Employment occurred on the date of termination of the Plan.

                                      120

Distribution following termination of the Plan will be made at the same time and
in the  same  form as  otherwise  provided  for  under  the  Plan  prior to such
termination.

SECTION 8.02 -- EMPLOYMENT STATUS.

Nothing  contained  in this  Plan  gives an  Eligible  Employee  the right to be
retained in the Company's or Controlled  Group  Member's  employ or to interfere
with the Company's or Controlled  Group Member's right to discharge any Eligible
Employee.

SECTION 8.03 -- RIGHTS TO PLAN ASSETS.

Neither the Company nor any  Controlled  Group  Member will have any  obligation
whatsoever to set aside funds for the Plan or for the benefit of any Participant
or  Beneficiary,  and no Participant or Beneficiary  will have any rights to any
amounts  that may be set aside  other  than the rights of an  unsecured  general
creditor of the Company or  Controlled  Group Member that employs (or  employed)
the Participant.

SECTION 8.04 -- NONALIENATION OF BENEFITS.

Benefits payable under the Plan are not subject to the claims of any creditor of
any Participant or Beneficiary.  A Participant or Beneficiary  does not have any
rights to alienate, anticipate,  commute, pledge, encumber or assign any of such
benefits. The preceding sentences will not apply to the creation, assignment, or
recognition  of a right to any benefit  payable  with  respect to a  Participant
according to a domestic relations order, as defined in ERISA Act Section 206(d),
or any domestic relations order entered before January 1, 1985.

SECTION 8.05 -- CONSTRUCTION.

The  validity  of the Plan or any of its  provisions  is  determined  under  and
construed according to Federal law and, to the extent permissible,  according to
the laws of the state in which the Company has its principal office. In case any
provision  of  this  Plan is held  illegal  or  invalid  for  any  reason,  such
determination  will not affect the remaining  provisions  of this Plan,  and the
Plan will be construed  and enforced as if the illegal or invalid  provision had
never been included.

In the event of any conflict between the provisions of the Plan and the terms of
any contract or policy issued hereunder,  the provisions of the Plan control the
operation and administration of the Plan.

SECTION 8.06 -- WORD USAGE.

The masculine gender,  where used in this Plan, will include the feminine gender
and the singular  words as used in this Plan may include the plural,  unless the
context indicates otherwise.

                                      121

         By executing this Plan, the Company  acknowledges  having  counseled to
the extent  necessary with selected legal and tax advisors  regarding the Plan's
legal and tax implications.

         Executed this 17TH day of December, 2003

                        PRINCIPAL LIFE INSURANCE COMPANY

                        By    /s/ JIM DEVRIES
                              ---------------------------------------
                              Vice President - Human Resources

                                      122

                                                                      Exhibit 12

                         PRINCIPAL FINANCIAL GROUP, INC.

                 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO

                                                     FOR THE
                                                   THREE MONTHS
                                                      ENDED                                    FOR THE
                                                    MARCH 31,                          YEAR ENDED DECEMBER 31,
                                             ------------------------ ------------------------------------------------------------
                                                2004         2003        2003        2002       2001       2000         1999
                                             ------------ ----------- ---------- ------------ ---------- ----------- -------------
                                                                                  ($ IN MILLIONS)

1.  Income from continuing operations
      before income taxes................     $  265.4       $ 222.2    $  953.7  $   665.8    $  464.1  $  840.2     $1,066.4
2.  Interest expense.....................         27.0          25.4       104.3       99.2        96.7     116.8        145.4
3.  Interest factor of rental expense....          1.3           2.2         5.0        8.9        10.3      16.1         10.5
4.  Undistributed income from equity
      investees..........................          -            (1.1)      (18.3)       4.3       (17.4)    (27.1)       (99.7)
                                             ------------ ----------- ---------- ------------ ---------- ----------- -------------
5.  Earnings before interest credited on
      investment products................        293.7         248.7     1,044.7      778.2       553.7     946.0      1,122.6
6.  Interest credited on investment
      products...........................        179.7         178.8       735.7      743.4       773.1     723.5        709.5
                                             ------------ ----------- ---------- ------------ ---------- ----------- -------------
7.  Earnings.............................     $  473.4       $ 427.5    $1,780.4  $ 1,521.6    $1,326.8  $1,669.5     $1,832.1
                                             ============ =========== ========== ============ ========== =========== =============
8.  Interest expense.....................     $   27.0       $  25.4    $  104.3  $    99.2        96.7  $  116.8     $  145.4
9.  Interest factor of rental expense....          1.3           2.2         5.0        8.9        10.3      16.1         10.5
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....         28.5          28.3       110.5      108.5       107.0     132.9        155.9
12. Interest credited on investment
      products...........................        179.7         178.8       735.7      743.4       773.1     723.5        709.5
                                             ------------ ----------- ---------- ------------ ---------- ----------- -------------
13. Fixed charges........................     $  208.2       $ 207.1    $  846.2  $   851.9    $  880.1  $  856.4     $  865.4
                                             ============ =========== ========== ============ ========== =========== =============
14. Ratio of earnings to fixed charges
      before interest credited on
      investment products
      (Line item 5/Line item 11).........         10.3           8.8         9.5        7.2         5.2       7.1          7.2
15. Ratio of earnings to fixed charges
      (Line item 7/Line item 13).........          2.3           2.1         2.1        1.8         1.5       1.9          2.1

                                      123

                                                                    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:  May 5, 2004                     /S/ J. BARRY GRISWELL
                                       -----------------------------------------
                                       J. Barry Griswell
                                       Chairman, President and Chief Executive
                                       Officer

                                      124

                                                                    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:  May 5, 2004

                                       /S/ MICHAEL H. GERSIE
                                       -----------------------------------------
                                       Michael H. Gersie
                                       Executive Vice President and Chief
                                       Financial Officer

                                      125

                                                                    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 March 31, 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 March 31, 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:  May 5, 2004

                                      126

                                                                    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 March 31, 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 March 31, 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:  May 5, 2004

                                      127