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 September 30, 2004

                                       OR

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

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

                                     1-16725
                            (Commission file number)

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

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

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

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

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

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

The total number of shares of the  registrant's  Common Stock,  $0.01 par value,
outstanding as of October 28, 2004 was 306,960,217.

                         PRINCIPAL FINANCIAL GROUP, INC.
                                TABLE OF CONTENTS

                                                                           PAGE
PART I - FINANCIAL INFORMATION
     Item 1. Financial Statements
              Consolidated Statements of Financial Position at
                  September 30, 2004 (Unaudited) and December 31, 2003..... 3
              Unaudited Consolidated Statements of Operations for the
                  three months and nine months ended September 30, 2004
                  and 2003................................................. 4
              Unaudited Consolidated Statements of Stockholders' Equity
                  for the nine months ended September 30, 2004 and 2003.... 6
              Unaudited Consolidated Statements of Cash Flows for the
                  nine months ended September 30, 2004 and 2003............ 7
              Notes to Unaudited Consolidated Financial Statements -
                  September 30, 2004....................................... 9
     Item 2. Management's Discussion and Analysis of Financial Condition
                  and Results of Operations................................ 43
     Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 96
     Item 4. Controls and Procedures....................................... 102

PART II - OTHER INFORMATION
     Item 1.  Legal proceedings............................................ 102
     Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.. 103
     Item 6.  Exhibits..................................................... 104
     Signature............................................................. 105

                                       2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         PRINCIPAL FINANCIAL GROUP, INC.
                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                                                                  SEPTEMBER 30,       DECEMBER 31,
                                                                                     2004                2003
                                                                               ------------------ ------------------
                                                                                   (Unaudited)        (Note 1)
                                                                                           (IN MILLIONS)
                                                                                               
ASSETS
Fixed maturities, available-for-sale........................................     $    39,681.6       $   37,418.4
Fixed maturities, trading...................................................             101.2              102.9
Equity securities, available-for-sale.......................................             797.7              699.2
Mortgage loans..............................................................          11,548.8           11,251.6
Real estate.................................................................           1,072.7            1,526.1
Policy loans................................................................             809.7              804.1
Other investments...........................................................           1,223.6            1,412.1
                                                                               ------------------ ------------------
   Total investments........................................................          55,235.3           53,214.4

Cash and cash equivalents...................................................           1,902.5            1,192.5
Accrued investment income...................................................             650.4              656.6
Premiums due and other receivables..........................................             874.9              714.9
Deferred policy acquisition costs...........................................           1,739.1            1,568.9
Property and equipment......................................................             431.5              445.2
Goodwill....................................................................             234.9              175.8
Other intangibles...........................................................             155.7              121.0
Separate account assets.....................................................          47,593.1           43,407.8
Assets of discontinued operations...........................................               -              5,425.1
Other assets................................................................             959.0              832.2
                                                                               ------------------ ------------------
   Total assets.............................................................     $   109,776.4       $  107,754.4
                                                                               ================== ==================
LIABILITIES
Contractholder funds........................................................     $    31,547.2       $   28,896.4
Future policy benefits and claims...........................................          15,738.1           15,450.8
Other policyholder funds....................................................             726.8              709.1
Short-term debt.............................................................             145.4              702.8
Long-term debt..............................................................             847.2            1,374.3
Income taxes payable........................................................             729.7              113.9
Deferred income taxes.......................................................           1,119.6            1,198.9
Separate account liabilities................................................          47,593.1           43,407.8
Liabilities of discontinued operations......................................               -              4,575.3
Other liabilities...........................................................           3,634.9            3,925.5
                                                                               ------------------ ------------------
   Total liabilities........................................................         102,082.0          100,354.8

STOCKHOLDERS' EQUITY
Common stock,  par value  $.01 per share - 2,500.0  million  shares
   authorized, 378.3 million and 377.4 million shares issued, and 307.0
   million and 320.7 million shares outstanding in 2004 and 2003,
   respectively.............................................................               3.8                3.8
Additional paid-in capital..................................................           7,231.1            7,153.2
Retained earnings...........................................................           1,242.5              630.4
Accumulated other comprehensive income......................................           1,282.2            1,171.3
Treasury stock, at cost (71.3 million and 56.7 million shares in 2004 and
   2003, respectively)......................................................          (2,065.2)          (1,559.1)
                                                                               ------------------ ------------------
   Total stockholders' equity...............................................           7,694.4            7,399.6
                                                                               ------------------ ------------------
   Total liabilities and stockholders' equity...............................     $   109,776.4       $  107,754.4
                                                                               ================== ==================

SEE ACCOMPANYING NOTES.

                                       3

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

                                                     FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                           SEPTEMBER 30,                      SEPTEMBER 30,
                                                 -------------------------------    --------------------------------
                                                       2004             2003             2004            2003
                                                 -------------- ----------------    ---------------  ---------------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                           
REVENUES
Premiums and other considerations..............      $  923.8         $  867.8         $2,736.8        $ 2,648.2
Fees and other revenues........................         363.6            289.3          1,060.4            832.6
Net investment income..........................         822.5            821.4          2,397.9          2,423.2
Net realized/unrealized capital losses.........         (21.3)            (6.4)          (130.1)           (90.6)
                                                 -------------- ----------------    ---------------  ---------------
   Total revenues..............................       2,088.6          1,972.1          6,065.0          5,813.4

EXPENSES
Benefits, claims and settlement expenses.......       1,238.0          1,174.4          3,645.2          3,554.3
Dividends to policyholders.....................          72.0             78.7            219.7            232.7
Operating expenses.............................         543.3            494.5          1,593.9          1,470.1
                                                 -------------- ----------------    ---------------  ---------------
   Total expenses..............................       1,853.3          1,747.6          5,458.8          5,257.1
                                                 -------------- ----------------    ---------------  ---------------
Income from continuing operations before
   income taxes................................         235.3            224.5            606.2            556.3

Income taxes...................................          40.7             55.8            119.3            136.9
                                                 -------------- ----------------    ---------------  ---------------
Income from continuing operations, net of
   related income taxes........................         194.6            168.7            486.9            419.4

Income from discontinued operations, net of
   related income taxes........................         104.2             19.2            130.9            126.4
                                                 -------------- ----------------    ---------------  ---------------
Income before cumulative effect of
   accounting changes..........................         298.8            187.9            617.8            545.8
Cumulative effect of accounting changes, net
   of related income taxes.....................           -               (3.4)            (5.7)            (3.4)
                                                 -------------- ----------------    ---------------  ---------------
Net income.....................................      $  298.8         $  184.5         $  612.1        $   542.4
                                                 ============== ================    ===============  ===============

                                       4

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

                                                     FOR THE THREE MONTHS ENDED        FOR THE NINE MONTHS ENDED
                                                            SEPTEMBER 30,                    SEPTEMBER 30,
                                                   -------------------------------- --------------------------------
                                                        2004            2003             2004            2003
                                                   --------------- ---------------- --------------- ----------------
                                                                   (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                            
EARNINGS PER COMMON SHARE
Basic earnings per common share:
   Income from continuing operations, net of
     related income taxes.....................        $  0.62         $ 0.52           $  1.54          $ 1.28
   Income from discontinued operations, net
     of related income taxes..................           0.34           0.06              0.41            0.39
                                                   --------------- ---------------- --------------- ----------------
   Income before cumulative effect of
     accounting changes.......................           0.96           0.58              1.95            1.67
   Cumulative effect of accounting changes,
     net of related income taxes..............           -             (0.01)            (0.02)          (0.01)
                                                   --------------- ---------------- --------------- ----------------
   Net income.................................        $  0.96         $ 0.57           $  1.93          $ 1.66
                                                   =============== ================ =============== ================

Diluted earnings per common share:
   Income from continuing operations, net of
     related income taxes.....................        $  0.62         $ 0.52           $  1.53          $ 1.28
   Income from discontinued operations, net
     of related income taxes..................           0.33           0.06              0.41            0.39
                                                   --------------- ---------------- --------------- ----------------
   Income before cumulative effect of
     accounting changes.......................           0.95           0.58              1.94            1.67
   Cumulative effect of accounting changes,
     net of related income taxes..............           -             (0.01)            (0.02)          (0.01)
                                                   --------------- ---------------- --------------- ----------------
   Net income.................................        $  0.95         $ 0.57           $  1.92          $ 1.66
                                                   =============== ================ =============== ================

SEE ACCOMPANYING NOTES.

                                       5

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

                                                                              ACCUMULATED
                                                  ADDITIONAL                    OTHER                        TOTAL
                                     COMMON        PAID-IN      RETAINED     COMPREHENSIVE    TREASURY    STOCKHOLDERS'  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.......................       -              14.9          -             -                -            14.9         578.0
Stock-based compensation........       -              18.0          -             -                -            18.0
Treasury stock acquired and
  sold, net.....................       -               3.2          -             -             (366.0)       (362.8)    (12,156.3)
Comprehensive income:
  Net income....................       -               -          542.4           -                -           542.4
  Net unrealized gains..........       -               -            -           816.6              -           816.6
  Provision for deferred income
    taxes.......................       -               -            -          (294.7)             -          (294.7)
  Net foreign currency
    translation adjustment......       -               -            -            35.5              -            35.5
  Cumulative effect of
    accounting change, net of
    related income taxes........       -               -            -             9.2              -             9.2
                                                                                                        ---------------
Comprehensive income............                                                                             1,109.0
                                 -------------- ------------- ----------- ----------------- ----------- --------------- ------------
BALANCES AT SEPTEMBER 30, 2003..      $3.8        $7,142.4     $  571.8      $1,202.4        $(1,484.1)     $7,436.3     322,841.0
                                 ============== ============= =========== ================= =========== =============== ============

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...................                      36.2          -             -                -            36.2         850.7
Stock-based compensation and
  additional related tax
  benefits......................       -              33.3          -             -                -            33.3
Tax benefits related to
  initial public offering.......       -               8.4          -             -                -             8.4
Treasury stock acquired.........       -               -            -             -             (506.1)       (506.1)    (14,558.0)
Comprehensive income:
  Net income....................       -               -          612.1           -                -           612.1
  Net unrealized gains..........       -               -            -           142.2              -           142.2
  Provision for deferred income
    tax benefit.................       -               -            -           (26.6)             -           (26.6)
  Net foreign currency
    translation adjustment, net
    of related income taxes.....       -               -            -            (7.2)             -            (7.2)
  Minimum pension liability, net
    of related income taxes.....       -               -            -             2.5              -             2.5
                                                                                                        ---------------
Comprehensive income............                                                                               723.0
                                 -------------- ------------- ----------- ----------------- ----------- --------------- ------------
BALANCES AT SEPTEMBER 30, 2004..      $3.8        $7,231.1     $1,242.5      $1,282.2        $(2,065.2)     $7,694.4     306,960.2
                                 ============== ============= =========== ================= =========== =============== ============

SEE ACCOMPANYING NOTES.

                                       6

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

                                                            FOR THE NINE MONTHS ENDED
                                                                  SEPTEMBER 30,
                                                      -----------------------------------
                                                             2004             2003
                                                      ------------------ ----------------
                                                                   (IN MILLIONS)
                                                                      
OPERATING ACTIVITIES
Net income............................................     $   612.1        $    542.4
Adjustments to reconcile net income to net cash
    provided by operating activities:
    Income from discontinued operations, net of
       related income taxes...........................        (130.9)           (126.4)
    Cumulative effect of accounting changes,
       net of related income taxes....................           5.7               3.4
    Amortization of deferred policy acquisition costs.         151.6             139.6
    Additions to deferred policy acquisition costs....        (338.9)           (253.0)
    Accrued investment income.........................           6.2              21.7
    Premiums due and other receivables................           6.9               4.0
    Contractholder and policyholder liabilities
       and dividends..................................       1,247.7           1,366.2
    Current and deferred income taxes.................         496.7             246.7
    Net realized/unrealized capital losses............         130.1              90.6
    Depreciation and amortization expense.............          82.8              78.6
    Mortgage loans held for sale, acquired or
       originated.....................................        (728.9)           (716.7)
    Mortgage loans held for sale, sold or repaid, net
       of gain........................................         711.1             738.9
    Real estate acquired through operating activities.         (25.9)            (22.9)
    Real estate sold through operating activities.....          60.9               4.4
    Stock-based compensation..........................          30.9              16.2
    Other.............................................        (323.0)             (9.4)
                                                       ----------------- ----------------
Net adjustments.......................................       1,383.0           1,581.9
                                                       ----------------- ----------------
Net cash provided by operating activities.............       1,995.1           2,124.3

INVESTING ACTIVITIES
Available-for-sale securities:
    Purchases.........................................      (7,531.1)         (7,406.5)
    Sales.............................................       1,548.5           1,653.7
    Maturities........................................       3,788.6           4,002.0
Mortgage loans acquired or originated.................      (1,652.9)         (1,725.4)
Mortgage loans sold or repaid.........................       1,340.4             929.0
Real estate acquired..................................        (205.8)           (198.0)
Real estate sold......................................         233.4              57.0
Net change in property and equipment..................         (35.0)            (15.6)
Net proceeds from sales of subsidiaries...............         819.7              33.6
Purchases of interest in subsidiaries, net of
    cash acquired.....................................        (106.2)            (95.4)
Net change in other investments.......................           7.5              27.0
                                                       ----------------- ----------------
Net cash used in investing activities.................      (1,792.9)         (2,738.6)

                                       7

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

                                                           FOR THE NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                      ----------------------------------
                                                             2004             2003
                                                      ----------------- ----------------
                                                                  (IN MILLIONS)
                                                                       
FINANCING ACTIVITIES
Issuance of common stock, net of call options........           22.4              14.9
Acquisition of treasury stock........................         (506.1)           (378.0)
Proceeds from financing element derivatives..........          104.6             114.2
Payments for financing element derivatives...........          (62.3)            (85.1)
Issuance of long-term debt...........................            8.6               4.4
Principal repayments of long-term debt...............         (442.3)            (84.4)
Net repayments of short-term borrowings..............         (430.2)             (9.0)
Investment contract deposits.........................        5,841.6           7,039.5
Investment contract withdrawals......................       (4,004.9)         (6,310.7)
Net increase (decrease) in banking operation
   deposits..........................................          (23.6)            197.3
                                                      ----------------- ----------------
Net cash provided by financing activities............          507.8             503.1
                                                      ----------------- ----------------
Net increase (decrease) in cash and cash equivalents.          710.0            (111.2)

Cash and cash equivalents at beginning of period.....        1,192.5             727.8
                                                      ----------------- ----------------
Cash and cash equivalents at end of period...........      $ 1,902.5         $   616.6
                                                      ================= ================

SEE ACCOMPANYING NOTES.

                                       8

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

1.   NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on  Issue  03-1,  THE  MEANING  OF   OTHER-THAN-TEMPORARY   IMPAIRMENT  AND  ITS
APPLICATION TO CERTAIN  INVESTMENTS ("EITF 03-1"). EITF 03-1 provides accounting
guidance  regarding  the  determination  of  when  an  impairment  of  debt  and
marketable equity securities and investments accounted for under the cost method
should be considered  other-than-temporary  and recognized in income.  This EITF
was  originally  effective for the period  beginning July 1, 2004.  However,  on
September 30, 2004, the Financial Accounting Standards Board (the "FASB") issued
FASB Staff  Position  ("FSP") EITF 03-1-1  delaying the  effective  date for the
accounting and measurement  provisions of EITF 03-1 until further  clarification
can be  provided.  In  September  2004,  the FASB  also  issued a  proposed  FSP
providing this  additional  clarification.  The comment period for this proposed
FSP ends  October 29,  2004,  with the FASB  expecting to issue the final FSP in
November 2004. Due to the uncertainties that still exist with this guidance,  we
are  unable to  estimate  the  impact  EITF  03-1 will have to our  consolidated
financial statements.

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

                                       9

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

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

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

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

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

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

SEPARATE ACCOUNTS

At September 30, 2004 and December 31, 2003,  the separate  accounts  included a
separate  account  valued at $736.7  million and $833.9  million,  respectively,
which  primarily  includes shares of our stock that were allocated and issued to
eligible  participants of qualified employee benefit plans administered by us as
part of the policy  credits issued under the  demutualization.  These shares are
included in both basic and diluted earnings per share calculations. The separate
account  shares are recorded at fair value and are reported as separate  account
assets  and  separate  account  liabilities  in the  consolidated  statement  of
financial  position.  Changes in fair value of the separate  account  shares are
reflected in both the separate account assets and separate account liabilities.

STOCK-BASED COMPENSATION

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

                                       10

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

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

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

                                                    FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                                         SEPTEMBER 30,                    SEPTEMBER 30,
                                               -------------------------------  ------------------------------
                                                   2004            2003             2004            2003
                                               ---------------- --------------  --------------- --------------
                                                            (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                      
Net income, as reported.......................    $ 298.8        $  184.5         $ 612.1         $542.4
Add:  Stock-based compensation expense
  included in reported net income, net
  of related tax effects......................        7.5             5.1            20.1           14.2
Deduct:  Total stock-based compensation
  expense determined under fair value
  based method for all awards, net of
  related tax effects.........................        8.3             5.9            22.6           16.7
                                                --------------- --------------  --------------- --------------
Pro forma net income..........................    $ 298.0        $  183.7         $ 609.6         $539.9
                                                =============== ==============  =============== ==============
Basic earnings per share:
  As reported.................................    $   0.96       $    0.57        $   1.93        $  1.66
  Pro forma...................................        0.96            0.57            1.92           1.65

Diluted earnings per share:
  As reported.................................    $   0.95       $    0.57        $   1.92        $  1.66
  Pro forma...................................        0.95            0.57            1.92           1.65

2. DISCONTINUED OPERATIONS

PRINCIPAL INTERNATIONAL ARGENTINA S.A.

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

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

                                       11

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

2.   DISCONTINUED OPERATIONS (CONTINUED)

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

                                                             AS OF
                                              ----------------------------------
                                                SEPTEMBER 30,      DECEMBER 31,
                                                   2004               2003
                                              ------------------ ---------------
                                                          (IN MILLIONS)
ASSETS
Total investments............................  $      -               $31.3
All other assets.............................         -                10.9
                                              ------------------ ---------------
  Total assets...............................  $      -               $42.2
                                              ================== ===============
LIABILITIES
Policyholder liabilities.....................  $      -               $31.1
All other liabilities........................         -                 2.1
                                              ------------------ ---------------
  Total liabilities..........................  $      -               $33.2
                                              ================== ===============

                                                      FOR THE THREE MONTHS           FOR THE NINE MONTHS
                                                      ENDED SEPTEMBER 30,             ENDED SEPTEMBER 30,
                                                ----------------------------     ----------------------------
                                                    2004            2003            2004            2003
                                                -------------    -----------     ------------    ------------
                                                                       (IN MILLIONS)

Total revenues..............................    $      -          $  2.3             $ 5.8        $   8.0
                                                =============    ===========     ============    ============
Income (loss) from discontinued
  operations:
  Income (loss) before income taxes.........    $      -          $  0.8             $ 0.3        $  (1.8)
  Income taxes..............................           -             0.2               0.1            0.2
                                                -------------    -----------     ------------    ------------
  Income (loss) from discontinued
     operations, net of related income
     taxes..................................           -             0.6               0.2           (2.0)
  Income on disposal of discontinued
     operations, net of related income
     taxes..................................          10.1           -                10.1            -
                                                -------------    -----------     ------------    ------------
Net income (loss) ..........................    $     10.1        $  0.6             $10.3        $  (2.0)
                                                =============    ===========     ============    ============

PRINCIPAL RESIDENTIAL MORTGAGE, INC.

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

Our Mortgage Banking segment,  which includes Principal Residential Mortgage, is
accounted for as a discontinued  operation,  under SFAS 144 and  therefore,  the
results of operations  (excluding corporate overhead) have been removed from our
results of continuing operations, cash flows, and segment operating earnings for
all periods  presented.  Corporate  overhead  allocated to our Mortgage  Banking
segment does not qualify for  discontinued  operations  treatment under SFAS 144
and was included in our results of continuing  operations and segment  operating
earnings prior to July 1, 2004.

                                       12

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

2.   DISCONTINUED OPERATIONS (CONTINUED)

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

                                                         AS OF
                                          -------------------------------------
                                              SEPTEMBER 30,      DECEMBER 31,
                                                2004               2003
                                          ------------------ ------------------
                                                        (IN MILLIONS)
ASSETS
Mortgage loans..........................   $      -                $2,256.5
Mortgage loan servicing rights..........          -                 1,951.9
Cash and cash equivalents...............          -                   674.6
All other assets........................          -                   675.8
                                          ------------------ ------------------
  Total assets..........................   $      -                $5,558.8
                                          ================== ==================
LIABILITIES
Short-term debt.........................   $      -                $1,450.9
Long-term debt..........................          -                 1,393.0
All other liabilities...................          -                 2,242.8
                                          ------------------ ------------------
  Total liabilities.....................   $      -                $5,086.7
                                          ================== ==================

                                                     FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                       ENDED SEPTEMBER 30,            ENDED SEPTEMBER 30,
                                                ----------------------------     -----------------------------
                                                    2004            2003            2004            2003
                                                -------------    -----------     ------------    -------------
                                                                         (IN MILLIONS)
                                                                                        
Total revenues...............................    $      -           $238.5          $ 446.1         $1,095.5
                                                =============    ===========     ============    =============
Loss from continuing operations, net of                                     .
   related income taxes (corporate
   overhead) ................................    $      -           $ (5.0)         $ (10.3)        $  (13.4)

Income from discontinued
   operations:
   Income before income taxes................           -              5.1             48.3            175.6
   Income taxes..............................           -              1.5             18.3             66.2
                                                -------------    -----------     ------------    -------------
   Income from discontinued
     operations, net of related income
     taxes...................................           -              3.6             30.0            109.4
   Income on disposal of discontinued
     operations, net of related income taxes.          94.1            -               94.1              -
Cumulative effect of accounting change, net
   of related income taxes...................           -            (10.0)             -              (10.0)
                                                -------------    -----------     ------------    -------------
Net income (loss) ...........................    $     94.1         $(11.4)         $ 113.8         $   86.0
                                                =============    ===========     ============    =============

                                       13

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

2.   DISCONTINUED OPERATIONS (CONTINUED)

Our U.S.  Asset  Management  and  Accumulation  segment  held $804.8  million of
residential  mortgage banking escrow deposits (reported as other liabilities) as
of December 31, 2003. The balance of banking escrow deposits were transferred as
a result of the sale. U.S. Asset Management and Accumulation total revenues from
this  arrangement  reclassified to discontinued  operations for the three months
ended  September  30,  2003,  were  $7.1  million.   Revenues   reclassified  to
discontinued operations,  for the nine months ended September 30, 2004 and 2003,
were  $(5.6)  million  and  $20.2  million,  respectively.  Income  (loss)  from
discontinued  operations net of related income taxes, for the three months ended
September  30,  2003,  was  $2.6  million.   Income  (loss)  from   discontinued
operations, net of related income taxes, for the nine months ended September 30,
2004 and 2003, was $(3.5) million and $7.7 million, respectively.

3.  FEDERAL INCOME TAXES

The effective income tax rate on income from continuing operations for the three
months and nine months ended  September  30, 2004,  and 2003,  is lower than the
prevailing  corporate  federal  income  tax rate  primarily  due to  income  tax
deductions allowed for corporate  dividends received and interest exclusion from
taxable  income.  The  effective  income tax rate for the three  months and nine
months  ended  September  30,  2004,  was also reduced due to tax credits on our
investment in a synthetic fuel production facility.  In addition,  the effective
income tax rate for the nine months ended  September 30, 2004,  was also reduced
due to a tax benefit associated with the sale of a foreign investment.

4.  EMPLOYEE AND AGENT BENEFITS

COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):

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

Service cost..........................    $  12.8       $  12.3        $ 2.3         $ 3.1
Interest cost.........................       18.3          16.7          3.9           4.5
Expected return on plan assets........      (21.5)        (18.7)        (6.8)         (6.4)
Amortization of prior service
  cost (benefit)......................        0.4           0.4         (0.8)         (0.8)
Amortization of transition asset......        -            (0.1)         -             -
Recognized net actuarial loss.........        4.1           4.4          0.1           0.6
Effect of special events (1)..........      (12.0)          -           (5.4)          -
                                        ------------- -------------- ------------- --------------
Net periodic benefit cost (income)....    $   2.1       $  15.0        $(6.7)        $ 1.0
                                        ============= ============== ============= ==============

- ------------------------
(1)  For the three months ended September 30, 2004, the effect of special events
     reflects the gain on  curtailment  of $13.8 million and loss on contractual
     termination  benefits of $1.8  million,  related to pension  benefits and a
     gain on  curtailment  of $5.4  million,  related  to  other  postretirement
     benefits.  The  gain on  curtailment  and loss on  contractual  termination
     benefits are  reflected in the  discontinued  operations as a result of the
     Principal Residential Mortgage sale and are further discussed below.

                                       14

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

 4.  EMPLOYEE AND AGENT BENEFITS (CONTINUED)

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

Service cost..........................    $  38.4       $  36.8        $ 6.8         $ 9.2
Interest cost.........................       55.0          50.2         11.6          13.4
Expected return on plan assets........      (64.6)        (56.1)       (20.5)        (19.3)
Amortization of prior service
  cost (benefit)......................        1.3           1.2         (2.1)         (2.4)
Amortization of transition asset......       (0.1)         (0.4)         -             -
Recognized net actuarial loss.........       12.2          13.4          0.5           2.1
Effect of special events (1)..........      (12.0)          -           (5.4)          -
                                        ------------- -------------- ------------- --------------
Net periodic benefit cost (income)....    $  30.2       $  45.1        $(9.1)        $ 3.0
                                        ============= ============== ============= ==============

- -----------------------
(1)  For the nine months  ended  September  30, 2004,  effect of special  events
     reflects the gain on  curtailment  of $13.8 million and loss on contractual
     termination  benefits of $1.8  million,  related to pension  benefits and a
     gain on  curtailment  of $5.4  million,  related  to  other  postretirement
     benefits.  The  gain on  curtailment  and loss on  contractual  termination
     benefits are  reflected in the  discontinued  operations as a result of the
     Principal Residential Mortgage sale and are further discussed below.

IMPACT OF PRINCIPAL RESIDENTIAL MORTGAGE DIVESTITURE

On May 11,  2004,  we  entered  into a  definitive  agreement  for  the  sale of
Principal Residential Mortgage to CitiMortgage,  Inc. We closed the sale on July
1, 2004. The sale resulted in curtailment and termination accounting recognition
under SFAS No. 88,  EMPLOYERS'  ACCOUNTING FOR SETTLEMENTS  AND  CURTAILMENTS OF
DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION  BENEFITS ("SFAS 88"), for the
home office plans that provided  pension  benefits to the Principal  Residential
Mortgage participants. The effect of the curtailment and contractual termination
benefits is reflected in the  discontinued  operations of Principal  Residential
Mortgage.

The sale of Principal  Residential Mortgage also resulted in a curtailment under
SFAS No. 106,  EMPLOYERS'  ACCOUNTING  FOR  POSTRETIREMENT  BENEFITS  OTHER THAN
PENSIONS  ("SFAS 106"),  for the home office plans that provided  retiree health
and life insurance benefits to the Principal Residential Mortgage  participants.
The effects of the  curtailment is reflected in the  discontinued  operations of
Principal Residential Mortgage.

The  home  office  pension  plans  were  remeasured  as of  July  1,  2004.  The
assumptions  used to determine the benefit  obligations  as of July 1, 2004, for
the home office  pension  plans were a discount rate of 6.5%, a weighted rate of
compensation  increase of 5.0%, and an expected  long-term return on plan assets
of 8.5%.  These same  assumptions  were used to develop the net periodic pension
benefit cost for the fourth  quarter of 2004 for the home office  pension plans.
We use an October 1 measurement date, which results in a three-month lag between
the  measurement  date and the  fiscal  year-end.  Therefore,  the July 1, 2004,
remeasurement  would first affect the net periodic  pension  benefit cost within
continuing operations in fourth quarter of 2004.

                                       15

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

4.  EMPLOYEE AND AGENT BENEFITS (CONTINUED)

The home office retiree health and life insurance  benefit plans were remeasured
as of July 1, 2004. The assumptions used to determine the benefit obligations as
of July 1, 2004, for the home office  retiree  health and life  insurance  plans
were a discount rate of 6.5%, a weighted rate of compensation  increase of 5.0%,
a weighted  average  expected  long-term  return on plan  assets of 7.3%,  and a
health care cost initial  trend rate of 12.0%  decreasing to an ultimate rate of
5.0% in the year 2011.  These  same  assumptions  were used to  develop  the net
periodic  other  postretirement  benefit cost for the fourth quarter of 2004 for
the home  office  retiree  health and life  insurance  plans.  The July 1, 2004,
remeasurement would first affect the net periodic other  postretirement  benefit
cost within continuing operations in fourth quarter of 2004.

CONTRIBUTIONS

We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans. We contributed approximately $0.5 million and $0.9 million during
the three months ended and nine months ended September 30, 2004, respectively.

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 are not required to fund a minimum  annual
contribution under ERISA for the qualified pension plan. However, it is possible
that we may fund the plans in 2004 in the range of $30  million  to $50  million
for both the qualified and nonqualified plans. During the three months ended and
nine months ended September 30, 2004,  $10.5 million and $21.0 million have been
contributed to the nonqualified plans, respectively.

REVERSAL OF THE ADDITIONAL MINIMUM LIABILITY

After  remeasuring  the pension  plan as of July 1, 2004,  we no longer have the
need to record an  additional  minimum  liability,  as the assets now exceed the
accumulated  benefit obligation under the qualified plan and the accrued pension
cost for the nonqualified plans exceeds the minimum  liability.  As a result, we
reversed  the minimum  liability  of $3.9  million  (less the tax impact of $1.4
million),  originally recorded during 2003, through other  comprehensive  income
during the third quarter of 2004.

EXPECTED IMPACT OF MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT
OF 2003

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  prescription  drug benefit plans that are deemed
to be  actuarially  equivalent to the Medicare Part D program.  On May 19, 2004,
the FASB issued Staff Position No. 106-2, ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED  TO THE  MEDICARE  PRESCRIPTION  DRUG  MODERNIZATION  ACT OF 2003  ("FSP
106-2").  FSP 106-2  provides  guidance on the accounting for the effects of the
Act. In accordance  with the deferral  provision of FSP 106-2, we elected not to
incorporate the prescription  drug subsidies into our calculation  prior to July
1, 2004,  as we had not yet  determined  that the benefits  provided by the plan
were  actuarially  equivalent to Medicare.  After both the issuance of FSP 106-2
and our decision to defer, the Centers of Medicare and Medicaid Services ("CMS")
issued  proposed  regulations  on July 26, 2004,  that provided  guidance on the
definition of actuarially  equivalent retiree prescription drug coverage.  These
regulations aided in our determination  during the third quarter,  2004 that the
majority of our  retiree  prescription  drug  benefit  coverage  is  actuarially
equivalent.  As a result,  we remeasured our accumulated  benefit  obligation to
incorporate  the  impact  of  the  Act.  This  resulted  in a  reduction  to the

                                       16

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

4.  EMPLOYEE AND AGENT BENEFITS (CONTINUED)

accumulated  benefit obligation of $22.4 million.  The remeasurement will result
in a reduction of the net periodic  postretirement  benefit cost of $0.7 million
within  continuing  operations  in the  fourth  quarter  of 2004  since we use a
three-month lag between our measurement date and fiscal year end.

The effect of the  subsidy on the  measurement  of net  periodic  postretirement
costs for the fourth quarter 2004 is amortization  of actuarial  experience gain
of $0.1 million,  a decrease in service cost of $0.2 million,  and a decrease in
interest cost of $0.4 million.

Assumptions  used in the calculation of the decrease in the accumulated  benefit
obligation include:

o    A federal  subsidy of $418 and $522 (in 2006  dollars)  per home office and
     agent/manager participants, respectively, beginning in 2006,
o    The subsidy  will  increase  with the assumed  health care trend rate after
     2006,
o    Receipt of  reimbursements  from  Medicare in the same year that we pay our
     drug claims, and
o    No changes in retiree participation rates.

                                       17

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

5. COMPREHENSIVE INCOME (LOSS)

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

                                                FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                      SEPTEMBER 30,                      SEPTEMBER 30,
                                              -------------------------------    ------------------------------
                                                   2004             2003             2004             2003
                                              --------------    -------------    -------------    -------------
                                                                                          
COMPREHENSIVE INCOME (LOSS):
Net income...............................       $  298.8            $ 184.5        $   612.1          $  542.4
Net change in unrealized gains and
  losses on fixed maturities,
  available-for-sale.....................          906.0             (464.9)           132.6             920.3
Net change in unrealized gains and
  losses on equity securities,
  available-for-sale.....................            4.0               (6.1)            (6.5)              7.9
Net change in unrealized gains and
  losses on equity method subsidiaries
  and minority interest adjustments......          (15.4)              11.9            (23.5)              6.6
Adjustments for assumed changes in
  amortization patterns:
  Deferred policy acquisition costs......          (66.4)              60.2             13.9             (78.7)
  Sales inducements......................           (5.3)               -               (2.2)              -
  Unearned revenue reserves..............            2.2               (6.5)            (2.6)             (0.4)
Net change in unrealized gains and
  losses on derivative instruments.......            3.7               36.8             42.7              54.9
Adjustments to unrealized gains and
  losses for Closed Block
  policyholder dividend obligation.......          (90.4)              38.2            (12.2)            (94.0)
Provision for deferred income tax
  benefit (expense)......................         (255.5)             103.7            (26.6)           (294.7)
Change in net foreign currency
  translation adjustment, net of
  related income taxes...................           35.7               (0.7)            (7.2)             35.5
Change in minimum pension liability,
  net of related income taxes............            2.5                -                2.5               -
Cumulative effect of accounting change,
  net of related income taxes............            -                  9.2              -                 9.2
                                              --------------    -------------    -------------    -------------
Comprehensive income (loss)..............       $  819.9            $ (33.7)       $   723.0          $1,109.0
                                              ==============    =============    =============    =============

                                       18

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

6. DEBT

LONG-TERM DEBT

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

                                                                            AS OF                AS OF
                                                                         SEPTEMBER 30,         DECEMBER 31
                                                                            2004                 2003
                                                                     ------------------- -------------------
                                                                                      
7.95% notes payable, due 2004.......................................    $      -            $   200.0
8.2% notes payable, due 2009........................................         464.1              464.0
7.875% surplus notes payable, due 2024..............................           -                199.0
8% surplus notes payable, due 2044..................................          99.2               99.2
Nonrecourse mortgages and notes payable.............................         216.2              340.7
Other mortgages and notes payable...................................          67.7               71.4
                                                                     ------------------- -------------------
Total long-term debt................................................    $    847.2          $ 1,374.3
                                                                     =================== ===================

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

On March 10, 1994, our subsidiary,  Principal Life Insurance Company ("Principal
Life") issued $300.0  million of surplus  notes,  including  $200.0  million due
March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million
due March 1, 2044, at an 8% annual interest rate. After receiving  approval from
the  Commissioner  of Insurance of the State of Iowa (the  "Commissioner"),  the
surplus notes due March 1, 2024, were  optionally  redeemed by Principal Life on
March 1, 2004, in whole at a redemption  price of  approximately  103.6% of par.
Total cash paid for the surplus  note  redemption  on March 1, 2004,  was $207.2
million.

7.  CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS

LITIGATION

We are regularly involved in litigation,  both as a defendant and as a plaintiff
but  primarily as a defendant.  Litigation  naming us as a defendant  ordinarily
arises out of our  business  operations  as a provider of asset  management  and
accumulation  products and services,  and life, health and disability insurance.
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.

In  October  of 2004,  several  lawsuits  were  filed  against  other  insurance
companies  and  insurance  brokers  alleging  improper  conduct  relating to the
payment and non-disclosure of contingent  compensation and bid-rigging activity.
Several of these suits were filed as purported  class actions.  No lawsuits have
been filed  against us relating to these  issues.  We have been  monitoring  the
regulatory and legal issues raised by these lawsuits.

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.

                                       19

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

7.  CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

GUARANTEES AND INDEMNIFICATIONS

In the normal course of business,  we have provided  guarantees to third parties
primarily related to a former subsidiary,  joint ventures and industrial revenue
bonds.  These  agreements  generally  expire from 2004 through 2019. The maximum
exposure  under these  agreements  as of September 30, 2004,  was  approximately
$197.0  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,  were  determined  to be
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. $180.0 million as of September 30, 2004).
New  Zealand  securities  regulations  allow  Australian  issuers to issue their
securities  in New Zealand  provided that certain  documents  are  appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to  constitutions  and compliance plans be filed in
New Zealand.  In April 2003, the New Zealand  Securities  Commission opined that
such late filings would result in certain New Zealand  investors  having a right
to the 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,
Principal  Residential  Mortgage,  and  other  divestitures,   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; 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.  We
have accrued for the fair value of such indemnifications issued after January 1,
2003.

8.  SEGMENT INFORMATION

We provide financial products and services through the following segments:  U.S.
Asset   Management  and   Accumulation,   International   Asset  Management  and
Accumulation  and Life and Health  Insurance.  In addition,  there is a Mortgage

                                       20

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

8.  SEGMENT INFORMATION (CONTINUED)

Banking (discontinued  operations) and 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 Chile,  Mexico,  and Hong Kong and joint  ventures  in
Brazil,  India,  Japan  and  Malaysia.  On June  28,  2004,  we  entered  into a
definitive  agreement for the sale of all the stock of our Argentine  companies,
described  further  in Note 2.  Consequently,  the  results  of  operations  for
Argentina are reported as other after-tax adjustments for all periods presented.

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

On May 11,  2004,  we  entered  into a  definitive  agreement  for  the  sale of
Principal Residential Mortgage to CitiMortgage,  Inc. We closed the sale on July
1, 2004. Our Mortgage  Banking  segment,  which includes  Principal  Residential
Mortgage,  is  accounted  for as a  discontinued  operation  under SFAS 144 and,
therefore,  the results of operations  (excluding  corporate overhead) have been
removed  from our results of  continuing  operations,  cash  flows,  and segment
operating  earnings for all periods  presented.  Corporate overhead allocated to
our  Mortgage  Banking  segment  does not  qualify for  discontinued  operations
treatment  under  SFAS  144  and  was  included  in our  results  of  continuing
operations and segment operating  earnings prior to July 1, 2004. See Note 2 for
further explanation.

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.

                                       21

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

8.  SEGMENT INFORMATION (CONTINUED)

The Corporate and Other segment results reflect any differences  between the tax
returns and the estimated resolution of any disputes.

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

                                                            AS OF SEPTEMBER 30,       AS OF DECEMBER 31,
                                                                   2004                     2003
                                                          ----------------------   ---------------------
                                                                          (IN MILLIONS)
                                                                                    
ASSETS:
U.S. Asset Management and Accumulation ...............         $   90,264.3               $ 83,904.8
International Asset Management and Accumulation.......              3,375.5                  3,011.4
Life and Health Insurance.............................             12,899.4                 12,171.8
Mortgage Banking......................................                  -                    5,558.8
Corporate and Other ..................................              3,237.2                  3,107.6
                                                          ----------------------   ---------------------
  Total consolidated assets...........................         $  109,776.4               $107,754.4
                                                          ======================   =====================

                                                FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                       SEPTEMBER 30,                     SEPTEMBER 30,
                                              --------------------------------   ------------------------------
                                                   2004             2003             2004             2003
                                              --------------    --------------   --------------   -------------
                                                                          (IN MILLIONS)
                                                                                         
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation....      $   931.3          $  864.8        $ 2,731.4         $2,606.7
International Asset Management and
   Accumulation...........................          136.0              98.3            371.3            279.0
Life and Health Insurance.................        1,051.8             995.7          3,117.8          3,009.8
Corporate and Other.......................           (7.3)             18.9            (17.6)            19.9
                                              --------------    --------------   --------------   -------------
  Total segment operating revenues........        2,111.8           1,977.7          6,202.9          5,915.4
Net realized/unrealized capital losses,
  including recognition of front-end fee
  revenues and certain market value
  adjustments to fee revenues.............          (23.2)             (5.6)          (137.9)          (102.0)
                                              --------------    --------------   --------------   -------------
  Total revenue per consolidated
     statements of operations.............      $ 2,088.6          $1,972.1        $ 6,065.0         $5,813.4
                                              ==============    ==============   ==============   =============

                                       22

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

8.  SEGMENT INFORMATION (CONTINUED)

                                                FOR THE THREE MONTHS ENDED         FOR THE NINE MONTHS ENDED
                                                       SEPTEMBER 30,                     SEPTEMBER 30,
                                              --------------------------------   -------------------------------
                                                    2004             2003             2004             2003
                                              --------------    --------------   --------------   --------------
                                                                        (IN MILLIONS)
                                                                                          
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ...        $ 123.5           $ 107.9         $ 364.7           $ 308.5
International Asset Management and
  Accumulation............................           10.9               7.8            28.8              26.3
Life and Health Insurance.................           71.6              52.8           203.3             174.8
Mortgage Banking..........................            -                (5.0)          (10.3)            (13.4)
Corporate and Other ......................           (0.8)              3.8           (21.4)            (11.6)
                                              --------------    --------------   --------------   --------------
  Total segment operating earnings........          205.2             167.3           565.1             484.6
Net realized/unrealized capital gains
  (losses), as adjusted...................          (10.6)              1.4           (78.2)            (65.2)
Other after-tax adjustments (1)...........          104.2              15.8           125.2             123.0
                                              --------------    --------------   --------------   --------------
  Net income per consolidated statements
    of operations.........................        $ 298.8           $ 184.5         $ 612.1           $ 542.4
                                              ==============    ==============   ==============   ==============

- --------------------------
(1)  For the three months ended September 30, 2004, other after-tax  adjustments
     of $104.2  million  included the positive  effect of the estimated  gain on
     disposal  of  Principal   Residential  Mortgage  ($94.1  million)  and  the
     estimated gain on disposal of our Argentine companies ($10.1 million).

     For the three months ended September 30, 2003, other after-tax  adjustments
     of $15.8  million  included  the  positive  effects:  (a) a  change  in the
     estimated  loss on disposal of BT  Financial  Group  ($12.4  million);  (b)
     income  from  discontinued  operations  related  to the  sale of  Principal
     Residential  Mortgage  ($6.2  million);  and (c) income  from  discontinued
     operations related to the sale our Argentine companies ($0.6 million);  and
     (2) the negative effect of a cumulative effect of accounting change related
     to the implementation of FIN 46 ($3.4 million).

     For the nine months ended  September 30, 2004,  other after tax adjustments
     of $125.2  million  included  the  positive  effects  of: (1)  discontinued
     operations  related to the sale of Principal  Residential  Mortgage ($120.6
     million)  and  (2)  discontinued  operations  related  to the  sale  of our
     Argentine  companies  ($10.3  million);  and  the  negative  effect  from a
     cumulative change in accounting  principle related to the implementation of
     SOP 03-1 ($5.7 million).

     For the nine months ended September 30, 2003,  other after-tax  adjustments
     of $123.0  million (1)  included  the  positive  effect of: (a) income from
     discontinued  operations  related  to the  sale  of  Principal  Residential
     Mortgage  ($117.1  million)  and  (b) a  change  in the  estimated  loss on
     disposal  of BT  Financial  Group  ($11.3  million);  and (2) the  negative
     effects of: (a) a cumulative  effect of  accounting  change  related to the
     implementation  of FIN 46 ($3.4  million) and (b) a loss from  discontinued
     operations related to the sale of our Argentine companies ($2.0 million).

9. STOCKHOLDERS' EQUITY

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

                                       23

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

10.  EARNINGS PER SHARE

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

                                   FOR THE THREE MONTHS ENDED              FOR THE NINE MONTHS ENDED
                                         SEPTEMBER 30,                           SEPTEMBER 30,
                                ----------------------------------   ----------------------------------
                                      2004             2003                2004             2003
                                ----------------- ----------------   ----------------- ----------------
                                                  (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                              
Income from continuing
  operations, net of related
  income taxes...............     $ 194.6            $168.7             $486.9            $419.4
                                ================= ================   ================= ================
Weighted-average shares
  outstanding:
  Basic......................       311.7             323.5              316.8             327.2
  Dilutive effect:
    Stock options............         1.0               0.6                1.0               0.5
    Restricted stock units...         0.3               -                  0.2               -
                                ----------------- ----------------   ----------------- ----------------
  Diluted....................       313.0             324.1              318.0             327.7
                                ================= ================   ================= ================
Income from continuing
  operations per share:
  Basic......................     $   0.62           $  0.52            $  1.54           $  1.28
                                ================= ================   ================= ================
  Diluted....................     $   0.62           $  0.52            $  1.53           $  1.28
                                ================= ================   ================= ================

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

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

                                       24

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                               SEPTEMBER 30, 2004

                                  PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE      SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY            COMBINED (1)       ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- -------------------- ----------------- ---------------
                                                                   (IN MILLIONS)
                                                                                        
ASSETS
Investments, excluding
   investment in
   unconsolidated entities......   $     -          $ 50,809.2        $  5,420.6       $ (1,179.5)     $   55,050.3
Investment in unconsolidated
   entities.....................     7,204.9             335.0           5,624.6        (12,979.5)            185.0
Cash and cash equivalents.......       489.0             640.1           2,081.5         (1,308.1)          1,902.5
Other intangibles...............         -                 4.1             151.6              -               155.7
Separate account assets.........         -            46,856.5             736.6              -            47,593.1
All other assets................         1.5           4,110.3             960.0           (182.0)          4,889.8
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total assets.................   $ 7,695.4        $102,755.2        $ 14,974.9       $(15,649.1)     $  109,776.4
                                ============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............   $     -          $ 31,710.3        $      7.1       $   (170.2)     $   31,547.2
Future policy benefits and
   claims.......................         -            14,182.6           1,555.5              -            15,738.1
Other policyholder funds........         -               723.5               3.3              -               726.8
Short-term debt.................         -                 -               392.2           (246.8)            145.4
Long-term debt..................         -               183.5             898.2           (234.5)            847.2
Income taxes currently
   payable......................         -               236.0             604.1           (110.4)            729.7
Deferred income taxes...........         -               912.3             222.0            (14.7)          1,119.6
Separate account liabilities....         -            46,856.5             736.6              -            47,593.1
Other liabilities...............         1.0           1,548.5           3,351.0         (1,265.6)          3,634.9
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total liabilities............         1.0          96,353.2           7,770.0         (2,042.2)        102,082.0
STOCKHOLDERS' EQUITY
Common stock....................         3.8               2.5               -               (2.5)              3.8
Additional paid-in capital......     7,231.1           5,094.7           6,842.0        (11,936.7)          7,231.1
Retained earnings (deficit).....     1,242.5              44.0            (919.3)           875.3           1,242.5
Accumulated other
   comprehensive income.........     1,282.2           1,260.8           1,282.2         (2,543.0)          1,282.2
Treasury stock, at cost.........    (2,065.2)              -                 -                -            (2,065.2)
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total stockholders' equity...     7,694.4           6,402.0           7,204.9        (13,606.9)          7,694.4
                                -------------- ---------------- -------------------- ----------------- ---------------
   Total liabilities and
   stockholders' equity.........   $ 7,695.4        $102,755.2        $ 14,974.9       $(15,649.1)     $  109,776.4
                                ============== ================ ==================== ================= ===============

- -----------------------
(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)
                               SEPTEMBER 30, 2004
                                   (UNAUDITED)

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2003

                                   PRINCIPAL    PRINCIPAL LIFE    PRINCIPAL FINANCIAL                  PRINCIPAL
                                   FINANCIAL      INSURANCE       SERVICES, INC. AND                   FINANCIAL
                                  GROUP, INC.      COMPANY        OTHER SUBSIDIARIES                   GROUP, INC.
                                  PARENT ONLY       ONLY            COMBINED (1)       ELIMINATIONS   CONSOLIDATED
                                -------------- ---------------- --------------------- -------------- ---------------
                                                                    (IN MILLIONS)
                                                                                        
ASSETS
Investments, excluding
   investment in
   unconsolidated entities......    $    -         $ 48,156.9         $  6,247.5       $ (1,357.2)     $   53,047.2
Investment in unconsolidated
   entities.....................     7,234.0            793.8            5,693.3        (13,553.9)            167.2
Cash and cash equivalents.......       173.8            640.5              684.2           (306.0)          1,192.5
Other intangibles...............         -                4.5              116.5              -               121.0
Separate account assets.........         -           42,753.4              632.2             22.2          43,407.8
Assets of discontinued
   operations...................         -                -              5,601.1           (176.0)          5,425.1
All other assets................         1.7          3,825.7              766.6           (200.4)          4,393.6
                                -------------- ---------------- --------------------- -------------- ---------------
   Total assets.................    $7,409.5       $ 96,174.8         $ 19,741.4       $(15,571.3)     $  107,754.4
                                ============== ================ ===================== ============== ===============
LIABILITIES
Contractholder funds............    $    -         $ 29,040.4         $      5.8       $   (149.8)     $   28,896.4
Future policy benefits and
   claims.......................         -           14,025.3            1,425.5              -            15,450.8
Other policyholder funds........         -              706.2                2.9              -               709.1
Short-term debt.................         -                -                888.8           (186.0)            702.8
Long-term debt..................         -              423.3            1,237.7           (286.7)          1,374.3
Income taxes currently
   payable......................         -              160.0               28.2            (74.3)            113.9
Deferred income taxes...........         8.2            974.0              221.8             (5.1)          1,198.9
Separate account liabilities....         -           42,753.4              632.2             22.2          43,407.8
Liabilities of discontinued
   operations...................         -                -              4,834.1           (258.8)          4,575.3
Other liabilities...............         1.7          1,226.1            3,230.4           (532.7)          3,925.5
                                -------------- ---------------- --------------------- -------------- ---------------
   Total liabilities............         9.9         89,308.7           12,507.4         (1,471.2)        100,354.8
STOCKHOLDERS' EQUITY
Common stock....................         3.8              2.5                -               (2.5)              3.8
Additional paid-in capital......     7,153.2          5,052.1            6,796.9        (11,849.0)          7,153.2
Retained earnings (deficit).....       630.4            594.6             (734.3)           139.7             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            7,234.0        (14,100.1)          7,399.6
                                -------------- ---------------- --------------------- -------------- ---------------
   Total liabilities and
   stockholders' equity.........    $7,409.5       $ 96,174.8         $ 19,741.4       $(15,571.3)     $  107,754.4
                                ============== ================ ===================== ============== ===============

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

                                       26

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

                                       PRINCIPAL    PRINCIPAL LIFE   PRINCIPAL FINANCIAL                    PRINCIPAL
                                       FINANCIAL      INSURANCE      SERVICES, INC. AND                     FINANCIAL
                                      GROUP, INC.      COMPANY       OTHER SUBSIDIARIES                    GROUP, INC.
                                      PARENT ONLY       ONLY            COMBINED (1)       ELIMINATIONS    CONSOLIDATED
                                    -------------- ----------------- -------------------- -------------- -----------------
                                                                       (IN MILLIONS)
                                                                                            
REVENUES
Premiums and other
   considerations...................     $   -        $ 2,550.2              $ 186.6        $     -        $ 2,736.8
Fees and other revenues.............         -            760.1                475.3           (175.0)       1,060.4
Net investment income...............         3.0        2,160.4                216.8             17.7        2,397.9
Net realized/unrealized
   capital losses...................         -           (131.4)                (4.3)             5.6         (130.1)
                                    -------------- ----------------- -------------------- -------------- -----------------
   Total revenues...................         3.0        5,339.3                874.4           (151.7)       6,065.0

EXPENSES
Benefits, claims, and settlement
   expenses.........................         -          3,389.6                263.5             (7.9)       3,645.2
Dividends to policyholders..........         -            219.7                  -                -            219.7
Operating expenses..................         7.8        1,206.8                529.6           (150.3)       1,593.9
                                    -------------- ----------------- -------------------- -------------- -----------------
   Total expenses...................         7.8        4,816.1                793.1           (158.2)       5,458.8
                                    -------------- ----------------- -------------------- -------------- -----------------
Income (loss) from continuing
   operations before income taxes...        (4.8)         523.2                 81.3              6.5          606.2

Income taxes (benefits).............        (1.8)         119.2                 (0.8)             2.7          119.3
Equity in the net income of
   subsidiaries, excluding
   discontinued operations and
   cumulative effect of
   accounting change................       489.9          175.1                407.8         (1,072.8)           -
                                    -------------- ----------------- -------------------- -------------- -----------------
Income from continuing operations,
   net of related income taxes......       486.9          579.1                489.9         (1,069.0)         486.9

Income (loss) from discontinued
   operations, net of related income
   taxes............................       130.9           (3.3)               130.9           (127.6)         130.9
                                    -------------- ----------------- -------------------- -------------- -----------------
Income before cumulative effect of
   accounting change................       617.8          575.8                620.8         (1,196.6)         617.8

Cumulative effect of accounting
   change, net of related income
   taxes............................        (5.7)          (2.5)                (5.7)             8.2           (5.7)
                                    -------------- ----------------- -------------------- -------------- -----------------
Net income..........................     $ 612.1      $   573.3              $ 615.1        $(1,188.4)     $   612.1
                                    ============== ================= ==================== ============== =================

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

                                       27

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

                                      PRINCIPAL     PRINCIPAL LIFE    PRINCIPAL FINANCIAL                      PRINCIPAL
                                      FINANCIAL       INSURANCE        SERVICES, INC. AND                      FINANCIAL
                                     GROUP, INC.       COMPANY         OTHER SUBSIDIARIES                      GROUP, INC.
                                     PARENT ONLY        ONLY             COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                    ------------- ------------------ --------------------- ---------------- --------------
                                                                         (IN MILLIONS)
                                                                                                
REVENUES
Premiums and other considerations..     $   -          $2,507.2            $ 141.0            $     -          $2,648.2
Fees and other revenues............         -             607.1              355.4               (129.9)          832.6
Net investment income..............         2.6         2,201.0              203.8                 15.8         2,423.2
Net realized/unrealized capital
   gains (losses)..................         -             (97.6)              38.9                (31.9)          (90.6)
                                    ------------- ------------------ --------------------- ---------------- --------------
   Total revenues..................         2.6         5,217.7              739.1               (146.0)        5,813.4

EXPENSES
Benefits, claims, and settlement
   expenses........................         -           3,368.8              191.0                 (5.5)        3,554.3
Dividends to policyholders.........         -             232.7                -                    -             232.7
Operating expenses.................         7.0         1,144.2              447.9               (129.0)        1,470.1
                                    ------------- ------------------ --------------------- ---------------- --------------
  Total expenses...................         7.0         4,745.7              638.9               (134.5)        5,257.1
                                    ------------- ------------------ --------------------- ---------------- --------------

Income (loss) from continuing
   operations before income taxes..        (4.4)          472.0              100.2                (11.5)          556.3

Income taxes (benefits)............        (1.5)          109.6               38.2                 (9.4)          136.9
Equity in the net income of
   subsidiaries, excluding
   discontinued operations.........       422.3           113.0              360.3               (895.6)            -
                                    ------------- ------------------ --------------------- ---------------- --------------
Income from continuing
   operations, net of related
   income taxes....................       419.4           475.4              422.3               (897.7)          419.4

Income (loss) from discontinued
   operations, net of related
   income taxes....................       126.4            (4.9)             126.4               (121.5)          126.4
                                    ------------- ------------------ --------------------- ---------------- --------------
Income before cumulative effect of
   accounting change...............       545.8           470.5              548.7             (1,019.2)          545.8

Cumulative effect of accounting
   change, net of related income
   taxes...........................        (3.4)            -                 (3.4)                 3.4            (3.4)
                                    ------------- ------------------ --------------------- ---------------- --------------
Net income.........................     $ 542.4        $  470.5            $ 545.3            $(1,015.8)       $  542.4
                                    ============= ================== ===================== ================ ==============

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

                                       28

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

                                    PRINCIPAL     PRINCIPAL LIFE    PRINCIPAL FINANCIAL                     PRINCIPAL
                                    FINANCIAL       INSURANCE       SERVICES, INC. AND                      FINANCIAL
                                   GROUP, INC.       COMPANY        OTHER SUBSIDIARIES                      GROUP, INC.
                                   PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                  -------------- ----------------- --------------------- --------------- ----------------
                                                                       (IN MILLIONS)
                                                                                             
OPERATING ACTIVITIES
Net cash provided by (used in)
   operating activities...........    $  (1.7)     $ 1,505.5          $  1,831.4          $ (1,340.1)       $ 1,995.1

INVESTING ACTIVITIES
Available-for-sale securities:
   Purchases......................        -         (6,367.0)             (972.4)             (191.7)        (7,531.1)
   Sales..........................        -            926.7               621.8                 -            1,548.5
   Maturities.....................        -          3,200.2               588.4                 -            3,788.6
Mortgage loans acquired or
   originated.....................        -         (1,632.1)              (57.0)               36.2         (1,652.9)
Mortgage loans sold or repaid.....        -          1,279.9               144.9               (84.4)         1,340.4
Real estate acquired..............        -           (185.0)              (20.8)                -             (205.8)
Real estate sold..................        -            164.0                69.4                 -              233.4
Net change in property and
   equipment......................        -            (28.1)               (6.9)                -              (35.0)
Net proceeds from sale of
   subsidiaries...................        -              -                 819.7                 -              819.7
Purchases of interest in
   subsidiaries, net of cash
   acquired.......................        -              -                (106.2)                -             (106.2)
Dividends received from
   unconsolidated entities........      800.0          206.9               (64.3)             (942.6)             -
Net change in other investments...        0.6          414.4               (12.8)             (394.7)             7.5
                                  -------------- ----------------- --------------------- --------------- ----------------
Net cash provided by (used in)
   investing activities...........      800.6       (2,020.1)            1,003.8            (1,577.2)        (1,792.9)

                                       29

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

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

FINANCING ACTIVITIES
Issuance of common stock........       22.4             -                    -                    -              22.4
Acquisition of treasury stock...     (506.1)            -                    -                    -            (506.1)
Proceeds from financing
   element derivatives..........        -             104.6                  -                    -             104.6
Payments for financing element
   derivatives..................        -             (62.3)                 -                    -             (62.3)
Issuance of long-term debt......        -               8.4                  0.2                  -               8.6
Principal repayments of long-
   term debt....................        -            (249.2)              (245.3)                52.2          (442.3)
Net repayments of short-term
   borrowings...................        -               -                 (369.2)               (61.0)         (430.2)
Dividends paid to parent........        -          (1,124.0)              (800.0)             1,924.0             -
Investment contract deposits....        -           5,841.6                  -                    -           5,841.6
Investment contract
   withdrawals..................        -          (4,004.9)                 -                    -          (4,004.9)
Net decrease in banking
   operation deposits...........        -               -                  (23.6)                 -             (23.6)
                                -------------- ---------------- ----------------------- --------------- ----------------
Net cash provided by (used in)
   financing activities.........     (483.7)          514.2             (1,437.9)             1,915.2           507.8
                                -------------- ---------------- ----------------------- --------------- ----------------
Net increase (decrease) in cash
   and cash equivalents.........      315.2            (0.4)             1,397.3             (1,002.1)          710.0

Cash and cash equivalents at
   beginning of year............      173.8           640.5                684.2               (306.0)        1,192.5
                                -------------- ---------------- ----------------------- --------------- ----------------
Cash and cash equivalents at
   end of year..................    $ 489.0       $   640.1            $ 2,081.5        $    (1,308.1)     $  1,902.5
                                ============== ================ ======================= =============== ================

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

                                       30

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

 11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

                                  PRINCIPAL      PRINCIPAL LIFE   PRINCIPAL FINANCIAL                    PRINCIPAL
                                  FINANCIAL       INSURANCE       SERVICES, INC. AND                     FINANCIAL
                                 GROUP, INC.       COMPANY        OTHER SUBSIDIARIES                     GROUP, INC.
                                 PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS    CONSOLIDATED
                                -------------- ---------------- --------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                          
OPERATING ACTIVITIES
Net cash provided by (used in)
   operating activities.........      $ (2.2)        $1,462.2          $1,057.4         $ (393.1)        $ 2,124.3

INVESTING ACTIVITIES
Available-for-sale securities:
    Purchases...................         -           (6,010.2)         (1,450.0)            53.7          (7,406.5)
    Sales.......................         -            1,311.1             342.6              -             1,653.7
    Maturities..................         -            3,286.9             715.1              -             4,002.0
Net cash flows from trading
   securities...................         -                -                 2.0             (2.0)              -
Mortgage loans acquired or
   originated...................         -           (1,264.7)           (475.7)            15.0          (1,725.4)
Mortgage loans sold or repaid...         -              755.7             216.4            (43.1)            929.0
Real estate acquired............         -             (182.4)            (15.6)             -              (198.0)
Real estate sold................         -               30.8              26.2              -                57.0
Net change in property and
   equipment....................         -              (11.4)             (4.2)             -               (15.6)
Net proceeds from sales of
   subsidiaries.................         -               27.6              33.6            (27.6)             33.6
Purchases of interest in
   subsidiaries, net of cash
   acquired.....................         -              (26.0)            (69.4)             -               (95.4)
Dividends received from
   (contributions to)
   unconsolidated entities......       300.0             61.2             (81.9)          (279.3)              -
Net change in other investments.         -               49.3             (81.8)            59.5              27.0
                                -------------- ---------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
   investing activities.........       300.0         (1,972.1)           (842.7)          (223.8)         (2,738.6)

                                       31

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

                                  PRINCIPAL      PRINCIPAL LIFE   PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE       SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY        OTHER SUBSIDIARIES                       GROUP, INC.
                                 PARENT ONLY        ONLY            COMBINED (1)         ELIMINATIONS     CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                           
FINANCING ACTIVITIES
Issuance of common stock........       14.9            -                    -                -                14.9
Acquisition of treasury stock...     (378.0)           -                    -                -              (378.0)
Proceeds from financing
   element derivatives..........        -            114.2                  -                -               114.2
Payments for financing
   element derivatives..........        -            (85.1)                 -                -               (85.1)
Issuance of long-term debt......        -              -                    4.4              -                 4.4
Principal repayments of long-
   term debt....................        -            (16.3)               (96.2)            28.1             (84.4)
Net repayments of short-term
   borrowings...................        -            (30.5)                18.3              3.2              (9.0)
Dividends paid to parent........        -              -                 (300.0)           300.0               -
Investment contract deposits....        -          7,039.5                  -                -             7,039.5
Investment contract
   withdrawals..................        -         (6,310.7)                 -                -            (6,310.7)
Net increase in banking
   operation deposits...........        -              -                  197.3              -               197.3
                                -------------- ---------------  ---------------------- ---------------- ----------------
Net cash provided by (used in)
   financing activities.........     (363.1)         711.1               (176.2)           331.3             503.1
                                -------------- ---------------  ---------------------- ---------------- ----------------
Net increase in cash and cash
   equivalents..................      (65.3)         201.2                 38.5           (285.6)           (111.2)

Cash and cash equivalents at
   beginning of year............      332.1          585.7                391.9           (581.9)            727.8
                                -------------- ---------------  ---------------------- ---------------- ----------------
Cash and cash equivalents at
   end of year..................    $ 266.8       $  786.9              $ 430.4          $(867.5)         $  616.6
                                ============== ===============  ====================== ================ ================

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

                                       32

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

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

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                               SEPTEMBER 30, 2004

                                                                     PRINCIPAL LIFE
                                  PRINCIPAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                  FINANCIAL       FINANCIAL           COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY               COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                           
ASSETS
Investments, excluding
   investment in
   unconsolidated entities......   $     -          $    14.4        $  55,035.9        $       -         $  55,050.3
Investment in unconsolidated
   entities.....................     7,204.9          7,404.6              185.0          (14,609.5)            185.0
Cash and cash equivalents.......       489.0          1,426.2            1,135.3           (1,148.0)          1,902.5
Other intangibles...............         -                -                155.7                -               155.7
Separate account assets.........         -                -             47,593.1                -            47,593.1
All other assets................         1.5            353.8            4,559.0              (24.5)          4,889.8
                                -------------- ---------------- ---------------------- ---------------- ----------------
   Total assets.................   $ 7,695.4        $ 9,199.0        $ 108,664.0         $(15,782.0)      $ 109,776.4
                                ============== ================ ====================== ================ ================

                                       33

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

                                                                     PRINCIPAL LIFE
                                  PRINCIPAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                  FINANCIAL       FINANCIAL           COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY               COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                          
LIABILITIES
Contractholder funds...........   $     -          $     -           $  31,547.2        $        -       $  31,547.2
Future policy benefits and
   claims......................         -                -              15,738.1                 -          15,738.1
Other policyholder funds.......         -                -                 726.8                 -             726.8
Short-term debt................         -                -                 145.4                 -             145.4
Long-term debt.................         -              464.2               383.0                 -             847.2
Income taxes currently
   payable.....................         -               10.4               730.1               (10.8)          729.7
Deferred income taxes..........         -               14.4             1,114.2                (9.0)        1,119.6
Separate account liabilities...         -                -              47,593.1                 -          47,593.1
Other liabilities..............         1.0          1,505.1             3,281.5            (1,152.7)        3,634.9
                               --------------- ---------------- ---------------------- ---------------- ----------------
   Total liabilities...........         1.0          1,994.1            101,259.4           (1,172.5)      102,082.0

STOCKHOLDERS' EQUITY
Common stock...................         3.8              -                  16.8               (16.8)            3.8
Additional paid-in capital.....     7,231.1          6,842.0             5,928.0           (12,770.0)        7,231.1
Retained earnings (deficit)....     1,242.5           (919.3)              178.4               740.9         1,242.5
Accumulated other
   comprehensive income........     1,282.2          1,282.2             1,281.4            (2,563.6)        1,282.2
Treasury stock, at cost........    (2,065.2)             -                   -                   -          (2,065.2)
                               --------------  ---------------- ---------------------- ---------------- ----------------
   Total stockholders' equity..     7,694.4          7,204.9             7,404.6           (14,609.5)        7,694.4
                               --------------  ---------------- ---------------------- ---------------- ----------------
   Total liabilities and
   stockholders' equity........   $ 7,695.4        $ 9,199.0         $ 108,664.0        $  (15,782.0)    $ 109,776.4
                               ==============  ================ ====================== ================ ================

                                       34

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2003

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

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

                                       35

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

                                                                       PRINCIPAL LIFE
                                    PRINCIPAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                    FINANCIAL       FINANCIAL           COMPANY AND                          FINANCIAL
                                   GROUP, INC.     SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                   PARENT ONLY        ONLY               COMBINED         ELIMINATIONS      CONSOLIDATED
                                  -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                           
REVENUES
Premiums and other
   considerations.................   $     -           $   -             $ 2,736.8        $     -         $ 2,736.8
Fees and other revenues...........         -               -               1,061.3             (0.9)        1,060.4
Net investment income.............         3.0             6.9             2,387.2              0.8         2,397.9
Net realized/unrealized
   capital losses.................         -             (32.1)              (98.0)             -            (130.1)
                                  -------------- ---------------- ---------------------- ---------------- ----------------
   Total revenues.................         3.0           (25.2)            6,087.3             (0.1)        6,065.0

EXPENSES
Benefits, claims, and settlement
   expenses.......................         -               -               3,645.2              -           3,645.2
Dividends to policyholders........         -               -                 219.7              -             219.7
Operating expenses................         7.8            42.3             1,543.9             (0.1)        1,593.9
                                  -------------- ---------------- ---------------------- ---------------- ----------------
   Total expenses.................         7.8            42.3             5,408.8             (0.1)        5,458.8
                                  -------------- ---------------- ---------------------- ---------------- ----------------
Income (loss) from continuing
   operations before income
   taxes..........................        (4.8)          (67.5)              678.5              -             606.2

Income taxes (benefits)...........        (1.8)          (30.0)              151.1              -             119.3
Equity in the net income of
   subsidiaries, excluding
   discontinued operations and
   cumulative effect of
   accounting change..............       489.9           527.4                 -           (1,017.3)            -
                                  -------------- ---------------- ---------------------- ---------------- ----------------
Income from continuing
   operations, net of related
   income taxes...................       486.9           489.9               527.4         (1,017.3)          486.9

Income from discontinued
   operations, net of related
   income taxes...................       130.9           130.9               114.6           (245.5)          130.9
                                  -------------- ---------------- ---------------------- ---------------- ----------------
Income before cumulative effect
   of accounting change...........       617.8           620.8               642.0         (1,262.8)          617.8

Cumulative effect of accounting
   change, net of related income
   taxes..........................        (5.7)           (5.7)               (5.7)            11.4            (5.7)

                                  -------------- ---------------- ---------------------- ---------------- ----------------
Net income........................   $   612.1         $ 615.1           $   636.3        $(1,251.4)      $   612.1
                                  ============== ================ ====================== ================ ================

                                       36

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

                                                                     PRINCIPAL LIFE
                                  PRINCIPAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                  FINANCIAL       FINANCIAL           COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY               COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                            
REVENUES
Premiums and other
   considerations...............       $  -          $   -              $ 2,648.2      $     -             $2,648.2
Fees and other revenues.........          -              -                  833.3           (0.7)             832.6
Net investment income...........          2.6           17.6              2,402.4            0.6            2,423.2
Net realized/unrealized capital
   losses.......................          -             (5.2)               (85.4)           -                (90.6)
                                -------------- ---------------- ---------------------- ---------------- ----------------
   Total revenues...............          2.6           12.4              5,798.5           (0.1)           5,813.4

EXPENSES
Benefits, claims, and settlement
   expenses.....................          -              -                3,554.3            -              3,554.3
Dividends to policyholders......          -              -                  232.7            -                232.7
Operating expenses..............          7.0           49.1              1,414.1           (0.1)           1,470.1
                                -------------- ---------------- ---------------------- ---------------- ----------------
   Total expenses...............          7.0           49.1              5,201.1           (0.1)           5,257.1
                                -------------- ---------------- ---------------------- ---------------- ----------------
Income (loss) from continuing
   operations before income
   taxes........................         (4.4)         (36.7)               597.4            -                556.3

Income taxes (benefits).........         (1.5)         (27.0)               165.4            -                136.9
Equity in the net income of
   subsidiaries, excluding
   discontinued operations......        422.3          432.0                  -           (854.3)                -
                                -------------- ---------------- ---------------------- ---------------- ----------------
Income from continuing
   operations, net of related
   income taxes.................        419.4          422.3                432.0         (854.3)             419.4

Income from discontinued
   operations, net of related
   income taxes.................        126.4          126.4                 73.5         (199.9)             126.4
                                -------------- ---------------- ---------------------- ---------------- ----------------
Income before cumulative effect
   of accounting change.........        545.8          548.7                505.5       (1,054.2)             545.8

Cumulative effect of accounting
   change, net of related income
   taxes........................         (3.4)          (3.4)                (3.4)           6.8               (3.4)
                                -------------- ---------------- ---------------------- ---------------- ----------------
Net income......................       $542.4        $ 545.3            $   502.1      $(1,047.4)          $  542.4
                                ============== ================ ====================== ================ ================

                                       37

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

                                                                     PRINCIPAL LIFE
                                  PRINCIPAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                  FINANCIAL       FINANCIAL           COMPANY AND                          FINANCIAL
                                 GROUP, INC.     SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY        ONLY               COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                           
OPERATING ACTIVITIES
Net cash provided by (used in)
   operating activities..........   $   (1.7)      $  926.2         $ 2,001.8           $  (931.2)        $ 1,995.1

INVESTING ACTIVITIES
Available-for-sale securities:
   Purchases.....................        -            (70.1)         (7,461.0)                -            (7,531.1)
   Sales.........................        -           (160.6)          1,709.1                 -             1,548.5
   Maturities....................        -              -             3,788.6                 -             3,788.6
Mortgage loans acquired or
   originated....................        -              -            (1,652.9)                -            (1,652.9)
Mortgage loans sold or repaid....        -              -             1,340.4                 -             1,340.4
Real estate acquired.............        -              -              (205.8)                -              (205.8)
Real estate sold.................        -              -               233.4                 -               233.4
Net change in property and
   equipment.....................        -              -               (35.0)                -               (35.0)
Net proceeds from sale of
   subsidiaries..................        -             10.5             809.2                 -               819.7
Purchases of interest in
   subsidiaries, net of cash
   acquired......................        -            (25.7)            (80.5)                -              (106.2)
Dividends received from
   unconsolidated entities.......      800.0        1,127.9               -              (1,927.9)              -
Net change in other investments..        0.6          145.3            (121.3)              (17.1)              7.5
                                -------------- ---------------- ---------------------- ---------------- ----------------
Net cash provided by (used in)
   investing activities..........      800.6        1,027.3          (1,675.8)           (1,945.0)         (1,792.9)

                                       38

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

                                     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..........       22.4            -                     -                -              22.4
Acquisition of treasury stock.....     (506.1)           -                     -                -            (506.1)
Proceeds from financing element
   derivatives....................        -              -                   104.6              -             104.6
Payments for financing element
   derivatives....................        -              -                   (62.3)             -             (62.3)
Issuance of long-term debt........        -              -                     8.6              -               8.6
Principal repayments of
   long-term debt.................        -           (200.0)               (242.3)             -            (442.3)
Net proceeds (repayments) of
   short-term borrowings..........        -           (400.0)                (40.9)            10.7          (430.2)
Dividends paid to parent..........        -           (800.0)             (1,141.2)         1,941.2             -
Investment contract deposits......        -              -                 5,841.6              -           5,841.6
Investment contract withdrawals...        -              -                (4,004.9)             -          (4,004.9)
Net decrease in banking
   operation deposits.............        -              -                   (23.6)             -             (23.6)
                                  -------------- ---------------- ---------------------- ---------------- ----------------
Net cash provided by (used in)
   financing activities...........     (483.7)      (1,400.0)                439.6          1,951.9           507.8
                                  -------------- ---------------- ---------------------- ---------------- ----------------
Net increase (decrease) in cash
   and cash equivalents...........      315.2          553.5                 765.6           (924.3)          710.0

Cash and cash equivalents at
    beginning of year.............      173.8          872.7                 369.7           (223.7)        1,192.5
                                  -------------- ---------------- ---------------------- ---------------- ----------------
Cash and cash equivalents at end
   of year........................    $ 489.0       $1,426.2            $  1,135.3        $(1,148.0)       $1,902.5
                                  ============== ================ ====================== ================ ================

                                       39

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

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

                                  PRINCIPAL                          PRINCIPAL LIFE
                                  FINANCIAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                  GROUP, INC.     FINANCIAL           COMPANY AND                          FINANCIAL
                                   PARENT        SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                    ONLY            ONLY               COMBINED         ELIMINATIONS      CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                    (IN MILLIONS)
                                                                                           
OPERATING ACTIVITIES
Net cash provided by (used in)
   operating activities.........  $     (2.2)      $  877.7        $  1,554.9            $(306.1)         $  2,124.3

INVESTING ACTIVITIES
Available-for-sale securities:
   Purchases....................         -            (24.7)         (7,381.8)               -              (7,406.5)
   Sales........................         -            (27.2)          1,680.9                -               1,653.7
   Maturities...................         -              -             4,002.0                -               4,002.0
Mortgage loans acquired or
   originated...................         -              -            (1,725.4)               -              (1,725.4)
Mortgage loans sold or repaid...         -              -               929.0                -                 929.0
Real estate acquired............         -              -              (198.0)               -                (198.0)
Real estate sold................         -              -                57.0                -                  57.0
Net change in property and
   equipment....................         -              -               (15.6)               -                 (15.6)
Net proceeds from sales of
   subsidiaries.................         -              -                33.6                -                  33.6
Purchases of interest in
   subsidiaries, net of cash
   acquired.....................         -              -               (95.4)               -                 (95.4)
Dividends received from
   unconsolidated entities......       300.0          (30.6)            118.9             (388.3)                -
Net change in other investments.         -            (81.5)             42.6               65.9                27.0
                                -------------- ---------------- ---------------------- ---------------- ----------------
Net cash provided by (used in)
   investing activities.........       300.0         (164.0)         (2,552.2)            (322.4)           (2,738.6)

                                       40

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

 11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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

                                   PRINCIPAL                           PRINCIPAL LIFE
                                   FINANCIAL       PRINCIPAL            INSURANCE                           PRINCIPAL
                                   GROUP, INC.     FINANCIAL           COMPANY AND                          FINANCIAL
                                   PARENT         SERVICES, INC.     OTHER SUBSIDIARIES                     GROUP, INC.
                                   ONLY              ONLY                COMBINED         ELIMINATIONS     CONSOLIDATED
                                -------------- ---------------- ---------------------- ---------------- ----------------
                                                                     (IN MILLIONS)
                                                                                         
FINANCING ACTIVITIES
Issuance of common stock........       14.9            -                    -               -                 14.9
Acquisition of treasury stock...     (378.0)           -                    -               -               (378.0)
Proceeds from financing element
   derivatives..................        -              -                  114.2             -                114.2
Payments for financing element
   derivatives..................        -              -                  (85.1)            -                (85.1)
Issuance of long-term debt......        -              0.1                  4.4            (0.1)               4.4
Principal repayments of long-
   term debt....................        -              -                  (84.5)            0.1              (84.4)
Net proceeds of short-term
   borrowings...................        -             67.5                (65.5)          (11.0)              (9.0)
Dividends paid to parent........        -           (300.0)               (52.4)          352.4                -
Investment contract deposits....        -              -                7,039.5             -              7,039.5
Investment contract withdrawals.        -              -               (6,310.7)            -             (6,310.7)
Net increase in banking
   operation deposits...........        -              -                  197.3             -                197.3
                                -------------- ---------------- ---------------------- ---------------- ----------------
Net cash provided by (used in)
   financing activities.........     (363.1)        (232.4)               757.2           341.4              503.1
                                -------------- ---------------- ---------------------- ---------------- ----------------
Net increase (decrease) in cash
   and cash equivalents.........      (65.3)         481.3               (240.1)         (287.1)            (111.2)

Cash and cash equivalents at
   beginning of year............      332.1          977.7                 (9.4)         (572.6)             727.8
                                -------------- ---------------- ---------------------- ---------------- ----------------
Cash and cash equivalents at end
   of year......................    $ 266.8       $1,459.0            $  (249.5)       $ (859.7)        $    616.6
                                ============== ================ ====================== ================ ================

                                       41

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

12. SUBSEQUENT EVENT

On October 22,  2004,  our Board of  Directors  declared  an annual  dividend of
approximately $166.4 million,  equal to $0.55 per share, payable on December 17,
2004, to shareholders of record as of November 12, 2004.

                                       42

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

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

FORWARD-LOOKING INFORMATION

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

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

                                       43

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 Chile, Mexico and Hong Kong and joint ventures in Brazil,  India, Japan,
     and Malaysia.  On June 28, 2004, we entered into a definitive agreement for
     the sale of all the  stock  of our  Argentine  companies.  We  closed  this
     transaction  on July 2, 2004.  Consequently,  the results of operations for
     Argentina  are  reported  as other  after-tax  adjustments  for all periods
     presented.  Prior to October 31,  2002,  the segment  included BT Financial
     Group, an Australia based asset manager.  We sold  substantially  all of BT
     Financial Group,  effective October 31, 2002. See  "Transactions  Affecting
     Comparability of Results of Operations" for further information about these
     two dispositions.

o    Life and Health Insurance, which provides individual life insurance, health
     insurance as well as specialty  benefits in the U.S.  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.

o    Mortgage  Banking,  which engaged in originating,  purchasing,  selling and
     servicing  residential  mortgage  loans in the  U.S.  On May 11,  2004,  we
     entered into a definitive  agreement for the sale of Principal  Residential
     Mortgage,  Inc. ("Principal  Residential Mortgage") to CitiMortgage,  Inc.,
     described  further in "Transactions  Affecting  Comparability of Results of
     Operations".  We closed the sale on July 1, 2004. As a result,  the results
     of  operations  (excluding  corporate  overhead)  for Mortgage  Banking are
     reported as other after-tax adjustments for all periods presented.

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

RECENT EVENTS

STOCKHOLDER DIVIDEND

On October 22,  2004,  our Board of  Directors  declared  an annual  dividend of
approximately $166.4 million,  equal to $0.55 per share, payable on December 17,
2004, to shareholders of record as of November 12, 2004.

RATINGS

On September 10, 2004, the rating agency  Moody's  Investors  Service  announced
that it has upgraded  Principal Life's financial strength rating to Aa2 from Aa3
with a stable outlook. In addition,  Moody's Investors Service also upgraded the
commercial  paper  rating of  Principal  Financial  Services,  Inc.  ("PFSI") to
Prime-1 from Prime-2.

                                       44

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

ACQUISITIONS

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

COLUMBUS  CIRCLE  INVESTORS.  On October 14,  2004,  we agreed to purchase a 70%
interest  in  Columbus  Circle  Investors  ("Columbus  Circle").  We expect  the
acquisition  of  Columbus  Circle to increase  our assets  under  management  by
approximately  $3.5 billion.  Columbus Circle has  specialized  expertise in the
management of growth  equities.  The  transaction  is expected to close in early
2005 and its  operations  will be  reported  in our U.S.  Asset  Management  and
Accumulation segment.

PRINCIPAL FUND MANAGEMENT  (HONG KONG) LIMITED.  On January 31, 2004, our wholly
owned subsidiary, Principal Asset Management Company (Asia) Limited, purchased a
100% ownership of Dao Heng Fund Management in Hong Kong from Guoco Group Limited
("Guoco").  Effective September 17, 2004, we changed the name of this subsidiary
to Principal Fund Management (Hong Kong) Limited. This acquisition 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,
we  report  these   operations  in  our   International   Asset  Management  and
Accumulation segment.

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

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

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

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

POST ADVISORY GROUP. On August 21, 2003, we agreed to purchase approximately 68%
of Post Advisory  Group ("Post  Advisory")  for  approximately  $101.6  million.
Effective  October 15,  2003,  we owned 23% of Post  Advisory  and  purchased an
additional 45% on, January 5, 2004. Our assets under  management  have increased
$5.9 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.

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

                                       45

Vida, Caja Madrid and Mapfre Tepeyac for MX$590.0  million Mexican Pesos ("MX$")
(approximately  U.S. $53.5  million).  The operations of AFORE Tepeyac have been
integrated into Principal  International,  Inc., as a part of our  International
Asset Management and Accumulation segment.

DISPOSITIONS

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

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

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

                                                         AS OF,
                                        -------------------------------------
                                           SEPTEMBER 30,      DECEMBER 31,
                                              2004               2003
                                        ------------------ ------------------
                                                    (IN MILLIONS)
ASSETS
Total investments......................      $    -             $   31.3
All other assets.......................           -                 10.9
                                        ------------------ ------------------
  Total assets.........................      $    -             $   42.2
                                        ================== ==================
LIABILITIES
Policyholder liabilities...............      $    -             $   31.1
All other liabilities..................           -                  2.1
                                        ------------------ ------------------
  Total liabilities....................      $    -             $   33.2
                                        ================== ==================

                                                     FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                      ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                               -----------------------------     ----------------------------
                                                   2004            2003             2004            2003
                                               -------------    ------------     ------------    ------------
                                                                       (IN MILLIONS)
                                                                                      
Total revenues............................         $   -         $ 2.3              $ 5.8         $  8.0
                                               =============    ============     ============    ============
Income (loss) from discontinued
operations:
    Income (loss) before income taxes.....         $   -         $ 0.8              $ 0.3         $ (1.8)
    Income taxes..........................             -           0.2                0.1            0.2
                                               -------------    ------------     ------------    ------------
    Income (loss) from discontinued
       operations, net of related income
       taxes..............................             -           0.6                0.2           (2.0)
    Income on disposal of discontinued
       operations, net of related income
       taxes..............................            10.1         -                 10.1            -
                                               -------------    ------------     ------------    ------------
Net income (loss) ........................         $  10.1       $ 0.6              $10.3         $ (2.0)
                                               =============    ============     ============    ============

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

                                       46

Our Mortgage Banking segment,  which includes Principal Residential Mortgage, is
accounted for as a discontinued  operation,  under SFAS 144 and  therefore,  the
results of operations  (excluding corporate overhead) have been removed from our
results of continuing operations, cash flows, and segment operating earnings for
all periods  presented.  Corporate  overhead  allocated to our Mortgage  Banking
segment does not qualify for  discontinued  operations  treatment under SFAS 144
and therefore was included in our results of continuing  operations  and segment
operating earnings prior to July 1, 2004.

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

                                                          AS OF,
                                          -------------------------------------
                                             SEPTEMBER 30,       DECEMBER 31,
                                                2004               2003
                                          ------------------ ------------------
ASSETS
Mortgage loans...........................   $    -                $  2,256.5
Mortgage loan servicing rights...........        -                   1,951.9
Cash and cash equivalents................        -                     674.6
All other assets.........................        -                     675.8
                                          ------------------ ------------------
  Total assets...........................   $    -                $  5,558.8
                                          ================== ==================

                                                          AS OF
                                          -------------------------------------
                                             SEPTEMBER 30,       DECEMBER 31,
                                                2004               2003
                                          ------------------ ------------------
                                                     (IN MILLIONS)
LIABILITIES
Short-term debt..........................   $   -                 $  1,450.9
Long-term debt...........................       -                    1,393.0
All other liabilities....................       -                    2,242.8
                                          ------------------ ------------------

  Total liabilities.......................  $   -                 $  5,086.7
                                          ================== ==================

                                                    FOR THE THREE MONTHS                 FOR THE NINE MONTHS
                                                     ENDED SEPTEMBER 30,                 ENDED SEPTEMBER 30,
                                                -----------------------------     -----------------------------
                                                    2004            2003            2004            2003
                                                -------------    ------------     ------------    -------------
                                                                       (IN MILLIONS)
                                                                                         
Total revenues..........................        $      -            $ 238.5         $446.1           $1,095.5
                                                =============    ============     ============    =============
Loss from continuing operations, net of
    related income taxes (corporate
    overhead)...........................        $      -            $  (5.0)        $(10.3)          $  (13.4)

Income from discontinued
   operations:
   Income before income taxes...........               -                5.1           48.3              175.6
   Income taxes.........................               -                1.5           18.3               66.2
                                               -------------    -------------     ------------    -------------
   Income from discontinued
     operations, net of related income
     taxes..............................                -               3.6           30.0              109.4
   Income on disposal of discontinued
     operations, net of related income
     taxes..............................              94.1              -             94.1                -
Cumulative effect of accounting change,
   net of related income taxes..........               -              (10.0)           -                (10.0)
                                                -------------    ------------     ------------    -------------
Net income (loss) ......................        $     94.1          $ (11.4)        $113.8           $   86.0
                                                =============    ============     ============    =============

                                       47

Our U.S.  Asset  Management  and  Accumulation  segment  held $804.8  million of
residential  mortgage banking escrow deposits (reported as other liabilities) as
of December 31, 2003. The balance of banking escrow deposits were transferred as
a result of the sale. U.S. Asset Management and Accumulation total revenues from
this  arrangement  reclassified to discontinued  operations for the three months
ended  September  30,  2003,  were  $7.1  million.   Revenues   reclassified  to
discontinued operations,  for the nine months ended September 30, 2004 and 2003,
were  $(5.6)  million  and  $20.2  million,  respectively.  Income  (loss)  from
discontinued  operations net of related income taxes, for the three months ended
September  30,  2003,  was  $2.6  million.   Income  (loss)  from   discontinued
operations, net of related income taxes, for the nine months ended September 30,
2004 and 2003, was $(3.5) million and $7.7 million, respectively.

BT  FINANCIAL  GROUP.  On October  31,  2002,  we sold  substantially  all of BT
Financial Group to Westpac Banking Corporation ("Westpac").  As of September 30,
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.  $109.0  million).  The  contingent
proceeds will be based on Westpac's future success in growing retail funds under
management. We do not anticipate receiving the contingent proceeds.

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

As of December 31, 2002, we accrued for an estimated  after-tax loss on disposal
of $208.7 million. During the three months ended and nine months ended September
30, 2003,  we incurred an  after-tax  gain of $12.4  million and $11.3  million,
respectively,  related to the change in the  estimated  loss on  disposal  of BT
Financial  Group.  These  gains are  recorded  in the income  from  discontinued
operations in the consolidated statements of operations. During the three months
ended and nine months ended  September  30, 2004, we did not incur any after-tax
gain or loss associated with the loss on disposal of BT Financial Group.

BT Financial  Group is accounted for as a discontinued  operation and therefore,
the results of  operations  have been  removed  from our  results of  continuing
operations,   cash  flows,  and  segment  operating  earnings  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.  $180.0  million as of  September  30,  2004).  New Zealand
securities regulations allow Australian issuers to issue their securities in New
Zealand  provided that certain  documents are  appropriately  filed with the New
Zealand Registrar of Companies.  Specifically, the regulations required that any
amendments to  constitutions  and compliance  plans be filed in New Zealand.  In
April 2003, the New Zealand Securities  Commission opined that such late filings
would result in certain New Zealand  investors having a right to return of their
investment  plus interest at 10% per annum from the date of investment.  We view
these  potential  late  filings as a  technical  matter as we believe  investors
received the information that is required to be provided  directly to them. This
technical  issue  affected  many in the  industry.  On April 15,  2004,  the New
Zealand government enacted  legislation that will provide issuers,  including BT
Financial  Group,  the opportunity for retroactive  relief from such late filing
violations.  The  law  allows  issuers  to  apply  for  judicial  validation  of
non-compliant  issuances  resulting from late filings.  The law further provides
that  judicial  relief is  mandatory  and  unconditional  unless an investor was
materially  prejudiced by the late filing. A related judicial action is pending.
Although we cannot  predict the  outcome of this matter or  reasonably  estimate
losses,  we do not believe that it would result in a material  adverse effect on
our business or financial position. It is possible,  however, that it could have
a  material  adverse  effect on net  income in a  particular  quarter  or annual
period.

OTHER TRANSACTIONS

SYNTHETIC  FUEL  PRODUCTION  FACILITY.  In June 2004,  we acquired a significant
variable  interest in a coal-based  synthetic fuel production  facility where we
are not the primary beneficiary. Our minority ownership interest was acquired in
exchange for consideration of $37.0 million,  which is primarily  comprised of a

                                       48

non-recourse note payable for $36.0 million, as well as a commitment to fund our
pro-rata  share  of the  operations.  We have  also  agreed  to make  additional
payments  to the seller  based on our  pro-rata  allocation  of the tax  credits
generated by the facility.  The synthetic fuel produced at the facility  through
2007  qualifies for tax credits  pursuant to Section 29 of the Internal  Revenue
Code  (currently  credits are not available for fuel produced  after 2007).  Our
obligation to support the entity's future operations is,  therefore,  limited to
the tax benefit we expect to receive.

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  negatively  impacted $0.7 million and $0.4 million for the three
months ended  September 30, 2004 and 2003 and  positively  impacted $0.4 million
and  negatively  impacted  $5.3 million for the nine months ended  September 30,
2004 and 2003, respectively,  as a result of fluctuations in foreign currency to
U.S.  dollar  exchange  rates.  For a discussion  of our  approaches  to foreign
currency  exchange  rate  risk,  see  Item  3.   "Quantitative  and  Qualitative
Disclosures about Market Risk."

IMPACT OF CURTAILMENT ON PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The  divestiture  of Principal  Residential  Mortgage  created a pre-tax gain of
approximately  $19.2  million in  curtailment  accounting  under the pension and
other postretirement benefit plans. In addition, a pre-tax loss of approximately
$1.8  million  was  recognized  related  to  contractual   termination  benefits
associated  with  the  divestiture.  The  gain  and  loss  are  included  in the
discontinued operations for the three months and nine months ended September 30,
2004, respectively.

IMPACT OF REMEASUREMENT ON PENSION BENEFIT EXPENSE

Due to the  curtailment  accounting  related  to the  divestiture  of  Principal
Residential  Mortgage discussed above, we conducted a mid-year  remeasurement as
of July 1, 2004 of the 2004 home office pension and other postretirement benefit
expense.  The July 1, 2004 remeasurement and fourth quarter 2004 pension expense
for the home  office  employees  was based on a 6.5%  discount  rate and an 8.5%
expected long-term return on assets assumption.  We use an October 1 measurement
date,  which results in a three-month lag between the  measurement  date and the
fiscal  year-end.  Therefore,  the July 1, 2004  remeasurement  will  affect the
fourth quarter 2004 pension expense. The pension expense for fourth quarter will
be $9.5 million.  The Principal  Residential Mortgage divestiture did not affect
the pension plans or other postretirement  benefit plans covering the agents and
managers.  The agents' pension expense continues to be based on a 6.25% discount
rate and 8.5% expected  long-term  return on assets  assumption,  which were the
assumptions used as of 2003 fiscal year end.

Excluding the curtailment  gains and losses,  the remeasured 2004 annual pension
benefit  expense for  substantially  all of our employees and certain  agents is
approximately  $51.8 million pre-tax,  which is a $4.6 million decrease from the
original  2004  pre-tax  pension  expense of $56.4  million and an $8.4  million
decrease from the 2003 pre-tax pension expense of $60.2 million. The decrease in
the remeasured 2004 expense  compared to the original 2004 expense is due to the
removal of Principal  Residential Mortgage employees,  higher discount rate, and
higher-than-expected  return on plan assets as of July 1, 2004. In addition, the
decrease  in expense  over 2003 is due to the plan's  liability  experience,  an
increase in the turnover assumption, and the asset performance. Excluding the

                                       49

curtailment gains and losses,  approximately  $14.1 million and $42.3 million of
pre-tax pension expense was reflected in the determination of net income for the
three months and nine months ended September 30, 2004, respectively.

IMPACT OF REMEASUREMENT AND MEDICARE ACT ON OTHER POSTRETIREMENT BENEFIT EXPENSE

The recognition of the Medicare Prescription Drug, Improvement and Modernization
Act (the "Medicare Act") will be reflected in the other  postretirement  benefit
expense in fourth  quarter.  The Medicare Act  introduces  a  prescription  drug
benefit under Medicare  (Medicare Part D), as well as a federal tax-free subsidy
to sponsors of retiree  prescription  drug plans. The prescription drug benefits
offered by the  sponsor  must be at least  actuarially  equivalent  to  benefits
offered  under  Medicare  Part D to qualify  for the  subsidy.  This  subsidy is
effective in 2006 and would only apply to benefits paid for qualifying  retirees
who have not enrolled in Medicare Part D.

On July 26, 2004, the Centers of Medicare and Medicaid  Services  ("CMS") issued
proposed  regulations  that provided  guidance on the  definition of actuarially
equivalent  retiree  prescription drug coverage.  These regulations aided in our
third quarter, 2004, determination that the majority of our retiree prescription
drug  benefit   coverage  is  actuarially   equivalent  to  Medicare's   Part  D
prescription  drug plan and thus  makes us  eligible  for the  tax-free  subsidy
beginning in 2006.  Accordingly,  we conducted a mid-year  remeasurement  during
third quarter 2004 of our retiree  medical plans covering home office  employees
and agents and managers.

The third quarter 2004  remeasurement  and fourth  quarter other  postretirement
benefit expense was based on a 6.5% discount rate and a 7.3% expected  long-term
return on assets  assumption.  The  recognition  of the Medicare Act reduced the
retiree medical  obligations by approximately  11%. Since there is a three month
lag between the measurement date and the fiscal year-end, the third quarter 2004
remeasurement  will first  affect the fourth  quarter  2004  expense.  The other
postretirement  benefit  income  in the  fourth  quarter  of  2004  will be $2.1
million.

Excluding the  curtailment  gains and losses noted above,  the  remeasured  2004
annual  other  postretirement  benefit  income  is  approximately  $5.8  million
pre-tax,  which is a $0.9 million  increase from the original 2004 pre-tax other
postretirement  benefit  income of $4.9 million.  The increase in the remeasured
2004  income  compared  to the  original  2004  income is due to the  removal of
Principal  Residential  Mortgage  employees,   higher  discount  rate,  and  the
recognition  of the Medicare Act.  Excluding the  curtailment  gains and losses,
approximately  $1.2  million and $3.7  million of pre-tax  other  postretirement
benefit  income was reflected in the  determination  of net income for the three
months and nine months ended September 30, 2004, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on  Issue  03-1,  THE  MEANING  OF   OTHER-THAN-TEMPORARY   IMPAIRMENT  AND  ITS
APPLICATION TO CERTAIN  INVESTMENTS ("EITF 03-1"). EITF 03-1 provides accounting
guidance  regarding  the  determination  of  when  an  impairment  of  debt  and
marketable equity securities and investments accounted for under the cost method
should be considered  other-than-temporary  and recognized in income.  This EITF
was  originally  effective for the period  beginning July 1, 2004.  However,  on
September  30,  2004,  the FASB issued FASB Staff  Position  ("FSP") EITF 03-1-1
delaying the effective  date for the accounting  and  measurement  provisions of
EITF 03-1 until further  clarification  can be provided.  In September 2004, the
FASB also issued a proposed FSP providing  this  additional  clarification.  The
comment  period for this  proposed  FSP ends  October  29,  2004,  with the FASB
expecting to issue the final FSP in November 2004. Due to the uncertainties that

                                       50

still exist with this  guidance,  we are unable to estimate the impact EITF 03-1
will have to our consolidated financial statements.

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

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

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

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

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

RECENT CHANGES TO U.S. TAX LAW

The American Jobs Creation Act of 2004, ("the Act") which took effect on October
22, 2004,  affects us in a number of ways. It allows  domestic  corporations  to
deduct a portion of the dividends  received  from foreign  affiliates in 2004 or
2005 in computing taxable income for that year if certain conditions are met. We
are reviewing the implications of that provision.  In addition, the Act contains
a number of international  tax reforms that make it easier to engage in business
in other  countries.  The Act also  contains  specific  rules  for  nonqualified
deferred  compensation  plans and thus makes the administration of such plans by
providers such as us less problematic.  Finally,  the Act also contains a number
of rules to discourage  corporate  tax shelters and penalties on taxpayers  that
fail to report such transactions to the Internal Revenue Service,  but we do not
expect those provisions to have a material impact to us.

BROKER COMPENSATION ISSUES

Regarding  the current  issues  related to  compensation  of insurance  brokers,
specifically  the  New  York  Attorney  General's  investigation  of  contingent
commissions and bid-rigging:
o    We have not received any subpoena on this matter.

                                       51

o    We are conducting a thorough  internal  review to ensure policies are being
     adhered to by employees.
o    Through this stage of the review,  we have not  identified any instances of
     bid-rigging.
o    We do pay  compensation  in some  situations  based  on  factors  including
     volume,   profitability,   and  persistency,   and  are  therefore  closely
     monitoring legal and regulatory developments around contingent compensation
     arrangements, as well as developments in industry practice.

RESULTS OF OPERATIONS

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

                                                             FOR THE THREE                   FOR THE NINE
                                                             MONTHS ENDED                    MONTHS ENDED
                                                             SEPTEMBER 30,                   SEPTEMBER 30,
                                                      ---------------------------   ---------------------------
                                                          2004            2003         2004            2003
                                                      ------------    -----------   ------------   ------------
                                                                              (IN MILLIONS)
                                                                                        
INCOME STATEMENT DATA:
Revenues:
   Premiums and other considerations...............    $   923.8      $   867.8      $ 2,736.8      $ 2,648.2
   Fees and other revenues.........................        363.6          289.3        1,060.4          832.6
   Net investment income...........................        822.5          821.4        2,397.9        2,423.2
   Net realized/unrealized capital losses..........        (21.3)          (6.4)        (130.1)         (90.6)
                                                      ------------    -----------   ------------   ------------
     Total revenues................................      2,088.6        1,972.1        6,065.0        5,813.4

Expenses:
   Benefits, claims and settlement expenses........      1,238.0        1,174.4        3,645.2        3,554.3
   Dividends to policyholders......................         72.0           78.7          219.7          232.7
   Operating expenses..............................        543.3          494.5        1,593.9        1,470.1
                                                      ------------    -----------   ------------   ------------
     Total expenses................................      1,853.3        1,747.6        5,458.8        5,257.1
                                                      ------------    -----------   ------------   ------------
Income from continuing operations before income
   taxes...........................................        235.3          224.5          606.2          556.3
Income taxes.......................................         40.7           55.8          119.3          136.9
                                                      ------------    -----------   ------------   ------------
Income from continuing operations, net of related
   income taxes....................................        194.6          168.7          486.9          419.4

Income from discontinued operations, net of
   related income taxes............................        104.2           19.2          130.9          126.4
                                                      ------------    -----------   ------------   ------------
Income before cumulative effect of accounting
   changes.........................................        298.8          187.9          617.8          545.8

Cumulative effect of accounting changes, net of
   related income taxes............................           -            (3.4)          (5.7)          (3.4)
                                                      ------------    -----------   ------------   ------------
     Net income ...................................    $   298.8      $   184.5      $   612.1      $   542.4
                                                      ============    ===========   ============   ============

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

Premiums and other  considerations  increased  $56.0  million,  or 6%, to $923.8
million for the three months ended  September 30, 2004,  from $867.8 million for
the three  months ended  September  30,  2003.  The  increase  reflected a $29.5
million increase from the Life and Health segment  primarily due to strong sales
and favorable  retention in our specialty benefits business and health insurance
rate increases  partially offset by a decline in premiums resulting from a shift
in marketing  emphasis from individual  traditional  life insurance  products to
individual  universal and individual variable universal life insurance products.
In  addition,  the  increase  was  due to a  $13.7  million  increase  from  the
International  Asset  Management and Accumulation  segment,  primarily due to an
increase in Chile,  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.
Furthermore,  the increase was also due to an $11.8  million  increase  from the
U.S.  Asset  Management  and  Accumulation  segment,  primarily  a result  of an
increase in  individual  payout  annuity  sales due to  stronger  sales from our
outside distribution channels.

                                       52

Fees and other revenues  increased $74.3 million,  or 26%, to $363.6 million for
the three months ended  September  30, 2004,  from $289.3  million for the three
months ended September 30, 2003. The increase was largely due to a $44.3 million
increase from the U.S.  Asset  Management  and  Accumulation  segment  primarily
related  to  increased  fees  from our  separate  accounts,  due to  prior  year
improvements in the equity markets and net cash flow from customers,  which have
led to higher account values.  In addition,  Life and Health  Insurance fees and
other revenues increased $23.7 million primarily due to growth in the individual
universal life and individual variable universal life insurance business and the
acquisition of the Molloy Companies effective January 2, 2004.

Net  investment  income  increased  $1.1 million to $822.5 million for the three
months ended  September 30, 2004, from $821.4 million for the three months ended
September 30, 2003. The increase was primarily related to a $2,448.0 million, or
5%,  increase  in average  invested  assets and cash.  The  annualized  yield on
average  investments  and cash was 5.9% for the three months ended September 30,
2004,  compared to 6.2% for the three months  ended  September  30,  2003.  This
reflects  lower yields on invested  assets due in part to a lower  interest rate
environment and a larger average cash balance that earns a lower yield.

Net realized/unrealized  capital losses increased $14.9 million to $21.3 million
for the three months ended  September 30, 2004,  from $6.4 million for the three
months  ended  September  30,  2003.  The  increase in net  realized  losses was
primarily due to higher mark to market losses  related to derivative  activities
and fewer  gains  related  to mark to market of certain  seed money  investments
offset by lower  other than  temporary  declines  in the value of certain  fixed
maturity  securities and lower losses on fixed maturity sales.  During the three
months ended  September 30, 2004, we also had lower  commercial  mortgage losses
primarily driven by the decrease in the commercial mortgage valuation allowance.

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

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

Fixed maturity securities (1)...  $     0.3           $     7.4          $    36.2          $    43.9
Equity securities (2)...........       (2.8)                7.3                -                  4.5
Mortgage loans on real
  estate (3)....................        7.7                 -                  -                  7.7
Real estate.....................        -                   3.2                -                  3.2
Derivatives.....................        -                   -                (81.2)             (81.2)
Other (4).......................        -                   2.2               (1.6)               0.6
                                 ---------------------------------------------------------------------------
  Total.........................  $     5.2           $    20.1          $   (46.6)         $   (21.3)
                                 ===========================================================================

- -----------------------
(1)  Impairments  include $3.7 million of impairment  losses and $4.0 million in
     recoveries on the sale of previously  impaired  assets.  Net realized gains
     (losses) on disposal  includes  gross  realized  gains of $10.0 million and
     gross realized  losses of $2.6 million.  The realized  losses are primarily
     related to sales of credit impaired securities.
(2)  Impairments  include $2.8 million of impairment  losses. Net realized gains
     (losses) on disposal  includes  gross  realized  gains of $7.8  million and
     gross realized losses of $0.5 million.
(3)  Includes  $0.7  million in  realized  losses due to sale,  foreclosure,  or
     impairment write-down of mortgage loans and an $8.4 million decrease in the
     commercial  mortgage  valuation  allowance  resulting  from a change in the
     economic state assumption in our valuation calculation.

                                       53

(4)  Net realized gains  (losses) on disposal  includes $6.6 million in realized
     gains on seed  money and $4.5  million  in losses  related to the sale of a
     foreign investment.

Benefits,  claims and settlement  expenses  increased  $63.6 million,  or 5%, to
$1,238.0  million for the three months ended  September 30, 2004,  from $1,174.4
million for the three months ended  September  30, 2003.  The increase  resulted
from  a  $33.5  million  increase  in the  International  Asset  Management  and
Accumulation  segment,  primarily  due  to  an  increase  in  Chile  related  to
inflation,  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. In addition, the increase resulted from a $19.4 million increase in
the U.S.  Asset  Management  and  Accumulation  segment  due to  higher  benefit
payments  and an  increase  in reserves  due to our  growing  individual  payout
annuity business and to a lesser extent an increase in cost of interest credited
associated with our deferred annuity business.

Dividends to policyholders  decreased $6.7 million,  or 9%, to $72.0 million for
the three months ended  September  30,  2004,  from $78.7  million for the three
months ended  September 30, 2003.  The decrease  primarily  resulted from a $5.4
million decrease in dividends to policyholders for the Life and Health Insurance
segment  due to changes  in the  individual  life  insurance  dividend  interest
crediting rates resulting from a declining interest rate environment.

Operating  expenses  increased $48.8 million,  or 10%, to $543.3 million for the
three months ended  September 30, 2004, from $494.5 million for the three months
ended  September  30,  2003.  The  increase  was largely due to a $29.4  million
increase  from the U.S  Asset  Management  and  Accumulation  segment  due to an
increase in amortization of DPAC and non-deferrable  expenses.  The increase was
also due to a $22.1 million increase from the Life and Health Insurance  segment
due to growth in our specialty benefits business,  the acquisition of the Molloy
Companies in 2004, and increased DPAC amortization.

Income taxes  decreased  $15.1  million,  or 27%, to $40.7 million for the three
months ended  September  30, 2004 from $55.8  million for the three months ended
September 30, 2003.  The effective  income tax rate was 17% for the three months
ended  September 30, 2004 and 25% for the three months ended September 30, 2003.
The effective income tax rates for the three months ended September 30, 2004 and
2003 were  lower than the  corporate  income  tax rate of 35%  primarily  due to
income tax deductions allowed for corporate  dividends received and in 2004, tax
credits on our investment in a synthetic fuel production facility.  The decrease
in the effective tax rate to 17% for the three months ended  September 30, 2004,
from 25% for the three months ended  September  30, 2003,  was  primarily due to
increased corporate dividends received,  reduced state income taxes and 2004 tax
credits on our investment in a synthetic fuel production facility.

As a  result  of  the  foregoing  factors  and  the  inclusion  of  income  from
discontinued  operations and the cumulative change in accounting principle,  net
income increased $114.3 million,  or 62%, to $298.8 million for the three months
ended  September  30,  2004,  from  $184.5  million for the three  months  ended
September 30, 2003. The income from  discontinued  operations was related to the
estimated gain on our sale of Principal  Residential  Mortgage and our Argentine
companies in 2004 and a change in the estimated loss on disposal of BT Financial
Group in 2003. The cumulative change in accounting  principle was related to our
implementation of FIN 46 in 2003.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003

Premiums and other  considerations  increased $88.6 million,  or 3%, to $2,736.8
million for the nine months ended September 30, 2004, from $2,648.2  million for
the nine months ended  September  30,  2003.  Life and Health  segment  premiums
increased $53.7 million primarily due to strong sales and favorable retention in
our specialty  benefits  business and health insurance rate increases  partially
offset by a decline in premiums  resulting  from a shift in  marketing  emphasis
from individual  traditional life insurance products to individual universal and
individual variable universal life insurance products. In addition, the increase
reflected a $44.3 million increase from the  International  Asset Management and
Accumulation  segment,  primarily a result of an increase in Chile due to record

                                       54

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  $227.8 million,  or 27%, to $1,060.4 million
for the nine months ended  September 30, 2004,  from $832.6 million for the nine
months  ended  September  30,  2003.  The  increase  was largely due to a $157.3
million  increase  from the  U.S.  Asset  Management  and  Accumulation  segment
primarily  related  to fees  from  our  separate  accounts,  due to  prior  year
improvements in the equity markets and net cash flow from customers,  which have
led to higher account values.  In addition,  Life and Health  Insurance fees and
other revenues increased $56.5 million primarily due to growth in the individual
universal life and individual variable universal life insurance business and the
acquisition of the Molloy Companies effective January 2, 2004.

Net investment  income  decreased $25.3 million,  or 1%, to $2,397.9 million for
the nine months ended  September 30, 2004,  from  $2,423.2  million for the nine
months ended  September  30,  2003.  The  decrease  was  primarily  related to a
decrease  in  annualized  investment  yields.  The  annualized  yield on average
invested  assets and cash was 5.7% for the nine months ended September 30, 2004,
compared to 6.3% for the nine months ended  September  30, 2003.  This  reflects
lower yields on invested assets due in part to a lower interest rate environment
and a larger average cash balance that earns a lower yield. Partially offsetting
the decrease was a $4,756.6 million,  or 9%, increase in average invested assets
and cash.

Net  realized/unrealized  capital losses  increased  $39.5  million,  or 44%, to
$130.1 million for the nine months ended  September 30, 2004, from $90.6 million
for the nine months  ended  September  30,  2003.  The  increase in net realized
losses was primarily  due to higher mark to market losses  related to derivative
activities  and lower  gains  related  to mark to market of  certain  seed money
investments and a loss on the sale of a foreign investment offset by lower other
than temporary  declines in the value of certain fixed  maturity  securities and
less losses on fixed maturity sales.

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

                                                FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
                                 ---------------------------------------------------------------------------
                                                        OTHER NET                             NET REALIZED/
                                                        REALIZED                               UNREALIZED
                                                         GAINS              HEDGING           CAPITAL GAINS
                                   IMPAIRMENTS          (LOSSES)          ADJUSTMENTS          (LOSSES)
                                 ---------------------------------------------------------------------------
                                                                    (IN MILLIONS)

Fixed maturity securities (1)...  $   (36.3)          $     5.4          $     6.3            $   (24.6)
Equity securities (2)...........       (7.0)               12.5                -                    5.5
Mortgage loans on real
  estate (3)....................      (15.1)                -                  -                  (15.1)
Real estate.....................       (3.3)                7.5                -                    4.2
Derivatives.....................        -                   -                (85.2)               (85.2)
Other (4).......................        -                  (4.9)             (10.0)               (14.9)
                                 ---------------------------------------------------------------------------
  Total.........................  $   (61.7)          $    20.5          $   (88.9)           $  (130.1)
                                 ===========================================================================

- -----------------------
(1)  Impairments include $49.1 million of impairment losses and $12.8 million in
     recoveries on the sale of previously  impaired  assets.  Net realized gains
     (losses) on disposal  include  gross  realized  gains of $27.2  million and
     gross realized  losses of $21.8 million.  The realized losses are primarily
     related to sales of credit impaired securities.
(2)  Impairments  include $7.0 million of impairment  losses. Net realized gains
     (losses) on disposal  include  gross  realized  gains of $14.9  million and
     gross realized losses of $2.4 million.

                                       55

(3)  Includes  $16.1  million in realized  losses due to sale,  foreclosure,  or
     impairment  write-down  of mortgage  loans and a $1.0  million  decrease in
     the commercial mortgage valuation allowance.
(4)  Net realized gains (losses) on disposal  includes $14.1 million in realized
     gains on seed money and $24.5  million  in losses  related to the sale of a
     foreign investment.

Benefits,  claims and settlement  expenses  increased  $90.9 million,  or 3%, to
$3,645.2  million for the nine months ended  September  30, 2004,  from $3,554.3
million for the nine months ended September 30, 2003. The increase was primarily
due to a $72.5 million  increase from the  International  Asset  Management  and
Accumulation  segment,  primarily  a result of an  increase  in Chile due to the
strengthening  of the  Chilean  peso versus the U.S.  dollar and higher  reserve
expenses  related  to  record  sales  of  single  premium  annuities  with  life
contingencies  in  2004  following  a year  of  decreased  sales  due to  market
contraction.  In  addition,  the Life and  Health  Insurance  segment  benefits,
claims,  and  settlement  expense  increased  $41.5 million due to growth in our
specialty  benefits business.  Partially  offsetting these increases was a $20.9
million  decrease  for the  U.S.  Asset  Management  and  Accumulation  segment,
reflecting a decrease in our pension full-service  accumulation  products due to
lower interest credited on our non-participating  deposit type business and to a
lesser  extent  due to  decreases  in cost of  interest  credited  on  declining
business from our participating block.

Dividends to policyholders decreased $13.0 million, or 6%, to $219.7 million for
the nine months  ended  September  30,  2004,  from $232.7  million for the nine
months ended  September 30, 2003. The decrease was primarily  attributable  to a
$10.4 million  decrease from the Life and Health  Insurance  segment,  resulting
from changes in the individual life insurance  dividend interest crediting rates
due to a declining interest rate environment.

Operating expenses increased $123.8 million,  or 8%, to $1,593.9 million for the
nine months ended September 30, 2004, from $1,470.1  million for the nine months
ended  September  30,  2003.  The  increase  was largely due to a $71.4  million
increase  from the U.S  Asset  Management  and  Accumulation  segment  due to an
increase in amortization of DPAC, non-deferrable expenses and our acquisition of
Post Advisory in the fourth quarter of 2003. In addition, the operating expenses
for the Life and Health Insurance  segment increased $33.2 million primarily due
to growth in our specialty  benefit  business and the  acquisition of the Molloy
Companies in 2004.

Income taxes  decreased  $17.6  million,  or 13%, to $119.3 million for the nine
months ended  September  30, 2004 from $136.9  million for the nine months ended
September 30, 2003.  The  effective  income tax rate was 20% for the nine months
ended  September 30, 2004 and 25% for the nine months ended  September 30, 2003.
The effective  income tax rate for the nine months ended  September 30, 2004 was
lower  than the  corporate  income tax rate of 35%  primarily  due to income tax
deductions  allowed for corporate  dividends  received,  interest exclusion from
taxable  income,  and 2004 tax credits on our  investment  in a  synthetic  fuel
production  facility.  The  effective  income tax rate for the nine months ended
September 30, 2003 was lower than the corporate income tax rate of 35% primarily
due to income tax  deductions  allowed  for  corporate  dividends  received  and
interest  exclusion from taxable income.  The decrease in the effective tax rate
to 20% for the nine  months  ended  September  30,  2004,  from 25% for the nine
months  ended  September  30,  2003,  was  primarily  due to tax  credits on our
investment  in a synthetic  fuel  production  facility and reduced  state income
taxes.

As a  result  of  the  foregoing  factors  and  the  inclusion  of  income  from
discontinued operations and the cumulative changes in accounting principle,  net
of related income taxes, net income  increased $69.7 million,  or 13%, to $612.1
million for the nine months ended  September 30, 2004,  from $542.4  million for
the  nine  months  ended  September  30,  2003.  The  income  from  discontinued
operations  was related to our sale of  Principal  Residential  Mortgage and our
Argentine companies in 2004 and a change in the estimated loss on disposal of BT
Financial  Group in 2003.  The  cumulative  effect of  accounting  changes  were
related to our  implementation of SOP 03-1 in 2004 and our implementation of FIN
46 in 2003.

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

                                       56

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:

                                                      AS OF OR FOR THE THREE            AS OF OR FOR THE NINE
                                                          MONTHS ENDED                      MONTHS ENDED
                                                          SEPTEMBER 30,                     SEPTEMBER 30,
                                                  -------------------------------    ------------------------------
                                                      2004              2003             2004             2003
                                                  --------------    -------------    -------------    -------------
                                                                              (IN MILLIONS)
                                                                                           
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation........     $     931.3       $     864.8      $   2,731.4      $   2,606.7
International Asset Management and
   Accumulation...............................           136.0              98.3            371.3            279.0
Life and Health Insurance.....................         1,051.8             995.7          3,117.8          3,009.8
Corporate and Other (1).......................            (7.3)             18.9            (17.6)            19.9
                                                  --------------    -------------    -------------    -------------
   Total segment operating revenues...........         2,111.8           1,977.7          6,202.9          5,915.4
Net realized/unrealized capital losses,
   including recognition of front-end fee
   revenues and certain market value
   adjustments to fee revenues(2).............           (23.2)             (5.6)          (137.9)          (102.0)
                                                  --------------    -------------    -------------    -------------
   Total revenue per consolidated statements
     of   operations..........................     $   2,088.6       $   1,972.1      $   6,065.0      $   5,813.4
                                                  ==============    =============    =============    =============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation .......     $     123.5       $     107.9      $     364.7      $     308.5
International Asset Management and
   Accumulation...............................            10.9               7.8             28.8             26.3
Life and Health Insurance.....................            71.6              52.8            203.3            174.8
Mortgage Banking..............................             -                (5.0)           (10.3)           (13.4)
Corporate and Other ..........................            (0.8)              3.8            (21.4)           (11.6)
                                                  --------------    -------------    -------------    -------------
   Total segment operating earnings...........           205.2             167.3            565.1            484.6
Net realized/unrealized capital losses, as
   adjusted(2)................................           (10.6)              1.4            (78.2)           (65.2)
Other after-tax adjustments(3)................           104.2              15.8            125.2            123.0
                                                  --------------    -------------    -------------    -------------
   Net income per consolidated statements of
     operations...............................     $     298.8       $     184.5      $     612.1      $     542.4
                                                  ==============    =============    =============    =============
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation (4)....     $   90,264.3      $  79,307.0      $  90,264.3      $  79,307.0
International Asset Management and
   Accumulation...............................         3,375.5           2,724.0          3,375.5          2,724.0
Life and Health Insurance.....................        12,899.4          11,903.1         12,899.4         11,903.1
Mortgage Banking (5)..........................             -             7,810.4              -            7,810.4
Corporate and Other (6).......................         3,237.2           1,970.1          3,237.2          1,970.1
                                                  --------------    -------------    -------------    -------------
   Total assets...............................     $ 109,776.4       $ 103,714.6      $ 109,776.4      $ 103,714.6
                                                  ==============    =============    =============    =============

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

(2)  In addition to sales  activity and other than  temporary  impairments,  net
     realized/unrealized   capital  gains  (losses)  include   unrealized  gains
     (losses) on mark to market  changes of certain seed money  investments  and
     investments  classified as trading securities,  as well as unrealized gains

                                       57

     (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.

                                                          FOR THE THREE                      FOR THE NINE
                                                           MONTHS ENDED                      MONTHS ENDED
                                                          SEPTEMBER 30,                      SEPTEMBER 30,
                                                  -------------------------------    ------------------------------
                                                      2004              2003             2004             2003
                                                  -------------     -------------    -------------    -------------
                                                                              (IN MILLIONS)

Net realized/unrealized capital losses...........     $(21.3)        $   (6.4)        $ (130.1)        $  (90.6)
Certain market value adjustments to fee
  revenues.......................................       (1.9)             -               (7.7)           (16.5)
Recognition of front-end fee revenues............        -                0.8             (0.1)             5.1
                                                  -------------     -------------    -------------    -------------
  Net realized/unrealized capital losses,
    including recognition of front-end fee
    revenues and certain market value
    adjustments to fee revenues .................      (23.2)            (5.6)          (137.9)          (102.0)
Amortization of deferred policy acquisition and
    sales inducement costs related to net
    realized/unrealized capital gains (losses)...       (0.6)            (0.3)             2.0              3.0
Capital gains distributed........................       (0.1)            (1.0)            (1.3)            (2.0)
Minority interest capital (gains) losses.........       (0.1)             0.1             (0.3)             0.4
                                                  -------------     -------------    -------------    -------------
  Net realized/unrealized capital losses,
    including recognition of front-end fee
    revenues and certain market value
    adjustments to fee revenues, net of related
    amortization of deferred policy acquisition
    and sales inducement costs, capital gains
    (losses) distributed and minority capital
    gains (losses)...............................      (24.0)            (6.8)          (137.5)          (100.6)
Income tax effect ...............................       13.4              8.2             59.3             35.4
                                                  -------------     -------------    -------------    -------------
  Net realized/unrealized capital gains (losses),
    as adjusted...................................     $(10.6)        $    1.4         $  (78.2)        $  (65.2)
                                                  =============     =============    =============    =============

(3)  For the three months ended September 30, 2004, other after-tax  adjustments
     of $104.2 million  included the positive effects of: (a) the estimated gain
     on disposal of Principal  Residential  Mortgage ($94.1 million) and (b) the
     estimated gain on disposal of our Argentine companies ($10.1 million).  For
     the three months ended September 30, 2003,  other after-tax  adjustments of
     $15.8  million  included (1) the  positive  effects of: (a) a change in the
     estimated  loss on disposal of BT  Financial  Group  ($12.4  million);  (b)
     income  from  discontinued  operations  related  to the  sale of  Principal
     Residential  Mortgage  ($6.2  million);  and (c) income  from  discontinued
     operations  related to the sale of our Argentine  companies  ($0.6 million)
     and (2) the negative  effect of a cumulative  effect of  accounting  change
     related to the implementation of FIN 46 ($3.4 million). For the nine months
     ended September 30, 2004,  other  after-tax  adjustments of $125.2 included
     (1) the positive  effects of: (a)  discontinued  operations  related to the
     sale  of  Principal   Residential   Mortgage   ($120.6   million)  and  (b)
     discontinued  operations  related  to the sale of our  Argentine  companies
     ($10.3 million) and (2) the negative effect from a cumulative  effect of an
     accounting  change,  a  result  of our  implementation  of SOP  03-1  ($5.7
     million).  For the nine months ended  September 30, 2003,  other  after-tax
     adjustments  of $123.0  million  included (1) the positive  effects of: (a)
     income  from  discontinued  operations  related  to the  sale of  Principal
     Residential  Mortgage  ($117.1  million) and (b) a change in the  estimated
     loss on disposal of BT Financial Group ($11.3 million) and (2) the negative
     effects of: (a) a cumulative  effect of  accounting  change  related to the
     implementation  of FIN 46 ($3.4  million) and (b) a loss from  discontinued
     operations related to the sale of our Argentine companies ($2.0 million).

(4)  U.S. Asset  Management  and  Accumulation  separate  account assets include
     shares of Principal  Financial Group stock allocated to a separate account,
     a result of our  demutualization.  The value of the  separate  account  was
     $736.7  million at September 30, 2004,  and $834.3 million at September 30,

                                       58

     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  included  the full  consolidation  of  Principal
     Residential  Mortgage Capital  Resources,  LLC ("PRMCR"),  which provided a
     source of funding  for our  residential  mortgage  loan  production.  As of
     September  30,  2003,  PRMCR held $3.5  billion in mortgage  loans held for
     sale,  which were  reported  as assets of  discontinued  operations  on our
     consolidated statement of financial position. On May 11, 2004, we entered
     into a definitive agreement for the sale of Principal  Residential Mortgage
     to CitiMortgage, Inc. We closed the sale on July 1, 2004.

(6)  Includes  inter-segment  elimination amounts related to an internal line of
     credit, long-term borrowings,  and internally generated mortgage loans. The
     Corporate  and Other  segment  managed a  revolving  line of credit used by
     another 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.

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

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

                                                      FOR THE THREE                      FOR THE NINE
                                                      MONTHS ENDED                       MONTHS ENDED
                                                      SEPTEMBER 30,                      SEPTEMBER 30,
                                              -------------------------------    ------------------------------
                                                  2004              2003             2004             2003
                                              --------------    -------------    -------------    -------------
                                                                       (IN MILLIONS)
                                                                                       
OPERATING EARNINGS DATA:
Operating revenues(1):
  Premiums and other considerations.....       $      83.3       $      71.5      $    249.3       $    259.7
  Fees and other revenues...............             242.1             195.1           727.1            573.4
  Net investment income.................             605.9             598.2         1,755.0          1,773.6
                                              --------------    -------------    -------------    -------------
    Total operating revenues............             931.3             864.8         2,731.4          2,606.7

Expenses:
  Benefits, claims and settlement
    expenses, including dividends to
    policyholders.......................             524.5             506.3         1,527.2          1,550.5
  Operating expenses....................             243.4             213.1           723.3            652.9
                                              --------------    -------------    -------------    -------------
    Total expenses......................             767.9             719.4         2,250.5          2,203.4
                                              --------------    -------------    -------------    -------------
Pre-tax operating earnings..............             163.4             145.4           480.9            403.3
Income taxes............................              39.9              37.5           116.2             94.8
                                              --------------    -------------    -------------    -------------
Operating earnings......................             123.5             107.9           364.7            308.5

Net realized/unrealized capital losses,
  as adjusted ..........................             (23.6)            (19.7)          (81.1)           (79.8)

Other after-tax adjustments.............               -                 0.9            (5.0)             6.0
                                              --------------    -------------    -------------    -------------
U. S. GAAP REPORTED:
Net income..............................       $      99.9       $      89.1      $    278.6       $    234.7
                                              ==============    =============    =============    =============

(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.

                                       59

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

Premiums and other  considerations  increased  $11.8  million,  or 17%, to $83.3
million for the three months ended  September  30, 2004,  from $71.5 million for
the three months ended September 30, 2003. The increase  primarily resulted from
a $9.0 million increase in individual payout annuity sales due to stronger sales
from our outside distribution channels.

Fees and other revenues  increased $47.0 million,  or 24%, to $242.1 million for
the three months ended  September  30, 2004,  from $195.1  million for the three
months ended  September 30, 2003.  Pension  full-service  accumulation  fees and
other revenue  increased $34.3 million primarily due to an increase in fees from
our separate accounts,  due to prior year improvements in the equity markets and
net cash flow  from  customers,  which  have led to higher  account  values.  In
addition,  Principal  Global  Investors fees and other  revenues  increased $7.1
million primarily due to increased management fees stemming from our acquisition
of Post  Advisory  in fourth  quarter of 2003 and an  increase  in assets  under
management.

Net investment  income increased $7.7 million,  or 1%, to $605.9 million for the
three months ended  September 30, 2004, from $598.2 million for the three months
ended  September  30, 2003.  The  increase  primarily  resulted  from a $1,881.5
million,  or 5%, increase in average  invested assets and cash. The increase was
slightly offset by a decrease in the average annualized yield on invested assets
and cash, which was 5.8% for the three months ended September 30, 2004, compared
to 5.9% for the three  months ended  September  30, 2003.  This  reflects  lower
yields on fixed maturity  securities  and commercial  mortgages due in part to a
lower interest rate  environment  and a larger average cash balance that earns a
lower yield.

Benefits, claims and settlement expenses,  including dividends to policyholders,
increased  $18.2  million,  or 4%, to $524.5  million for the three months ended
September 30, 2004, from $506.3 million for the three months ended September 30,
2003. The increase primarily related to a $14.1 million increase from individual
payout annuity due to higher benefit payments and an increase in reserves due to
our  growing  individual  payout  annuity  business  and to a lesser  extent  an
increase in cost of  interest  credited  associated  with our  deferred  annuity
business.  In addition,  our pension  full-service  payout  benefit,  claims and
settlement expenses increased $8.7 million primarily due to an increase in sales
of single premium group annuities with life  contingencies and an improvement in
mortality  experience.   Furthermore,   our  pension  investment  only  business
increased  $8.2 million due to an increase in cost of interest  credited on this
block of  business  as a result of an  increase  in  account  values.  Partially
offsetting  the overall  increase  was a $11.5  million  decrease in our pension
full-service  accumulation  products  due  to  lower  interest  credited  on our
non-participating  deposit type business and to a lesser extent due to decreases
in cost of interest credited on declining business from our participating block.

Operating  expenses  increased $30.3 million,  or 14%, to $243.4 million for the
three months ended  September 30, 2004, from $213.1 million for the three months
ended September 30, 2003. The increase  primarily  resulted from a $17.8 million
increase in pension full-service accumulation due to an increase in amortization
of DPAC and  non-deferrable  expenses.  In addition,  individual  fixed  annuity
operating  expenses increased $5.8 million primarily due to our growing block of
fixed  deferred  annuity  business.  Furthermore,   Principal  Global  Investors
operating  expenses  increased $4.2 million  primarily due to our acquisition of
Post  Advisory in the fourth  quarter of 2003 and to a lesser extent an increase
in minority interest expense.

Income  taxes  increased  $2.4  million,  or 6%, to $39.9  million for the three
months ended  September 30, 2004,  from $37.5 million for the three months ended
September 30, 2003.  The effective  income tax rate for this segment was 24% for
the three months ended  September  30, 2004,  and 26% for the three months ended
September 30, 2003.  The  effective  income tax rates for the three months ended
September 30, 2004 and 2003,  were lower than the  corporate  income tax rate of
35%  primarily  due to income tax  deductions  allowed for  corporate  dividends
received and other tax-exempt income. The decrease in the effective tax rate was
primarily due to an increase in the dividends received deduction.

                                       60

As a  result  of the  foregoing  factors,  operating  earnings  increased  $15.6
million, or 14%, to $123.5 million for the three months ended September 30, 2004
from $107.9 million for the three months ended September 30, 2003.

Net realized/unrealized capital losses, as adjusted,  increased $3.9 million, or
20%, to $23.6 million for the three months ended  September 30, 2004, from $19.7
million  for the three  months  ended  September  30,  2003.  The  increase  was
primarily  due to higher mark to market  losses  related to hedging  activities,
which were  offset by lower  other than  temporary  declines in value of certain
fixed maturity securities and losses on fixed maturity sales.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income  increased $10.8 million,  or 12%, to $99.9 million for
the three months ended  September  30,  2004,  from $89.1  million for the three
months ended  September 30, 2003. For the three months ended September 30, 2003,
net income included the positive effect of other after-tax  adjustments totaling
$0.9  million  related to: (1) the positive  effect of income from  discontinued
operations  associated  with the sale of Principal  Residential  Mortgage  ($2.6
million) and (2) the negative effect of a cumulative effect of accounting change
related to our implementation of FIN 46 ($1.7 million).

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003

Premiums and other  considerations  decreased  $10.4  million,  or 4%, to $249.3
million for the nine months ended  September 30, 2004,  from $259.7  million for
the nine months ended September 30, 2003. The decrease primarily resulted from a
$5.3 million decrease in individual  payout annuity sales,  primarily related to
increased  competitive  pressures  earlier  in 2004.  Also  contributing  to the
decrease was a $5.1  million  decrease in pension  full-service  payout sales of
single premium group annuities with life contingencies, which are typically used
to fund defined  benefit plan  terminations.  The premium  income  received from
these  contracts  fluctuates  due to the  variability  in the number and size of
pension plan  terminations,  the interest  rate  environment  and the ability to
attract new sales.

Fees and other revenues increased $153.7 million,  or 27%, to $727.1 million for
the nine months  ended  September  30,  2004,  from $573.4  million for the nine
months ended  September 30, 2003.  Pension  full-service  accumulation  fees and
other revenue  increased $91.9 million primarily due to an increase in fees from
our separate accounts,  due to prior year improvements in the equity markets and
net cash flow  from  customers,  which  have led to higher  account  values.  In
addition,  Principal  Global  Investors fees and other revenues  increased $44.2
million primarily due to increased management fees stemming from our acquisition
of Post  Advisory  in fourth  quarter of 2003 and an  increase  in assets  under
management.

Net investment  income  decreased $18.6 million,  or 1%, to $1,755.0 million for
the nine months ended  September 30, 2004,  from  $1,773.6  million for the nine
months ended September 30, 2003. The decrease primarily resulted from a decrease
in the average  annualized yield on invested assets and cash, which was 5.7% for
the nine months ended  September 30, 2004,  compared to 6.2% for the nine months
ended  September  30,  2003.  This  reflects  lower  yields  on  fixed  maturity
securities  and  commercial  mortgages  due in  part to a  lower  interest  rate
environment  and a larger  average cash  balance  that earns a lower yield.  The
decrease was partially offset by a $3,164.9 million,  or 8%, increase in average
invested assets and cash.

Benefits, claims and settlement expenses,  including dividends to policyholders,
decreased  $23.3 million,  or 2%, to $1,527.2  million for the nine months ended
September 30, 2004,  from $1,550.5  million for the nine months ended  September
30, 2003. The decrease  primarily  resulted from a $31.8 million decrease in our
pension full-service accumulation products due to a decrease in cost of interest
credited on our  non-participating  deposit type business and to a lesser extent
due to decreases in cost of interest  credited on  declining  business  from our
participating  block.  Partially  offsetting  the  overall  decrease  was a $7.7
million  increase in our pension  investment only business due to an increase in
cost of  interest  credited on this block of business as a result of an increase
in account values.

Operating  expenses  increased $70.4 million,  or 11%, to $723.3 million for the
nine months ended  September 30, 2004,  from $652.9  million for the nine months
ended September 30, 2003. The increase  primarily  resulted from a $30.3 million

                                       61

increase in pension  full-service  accumulation  expenses  due to an increase in
amortization of DPAC and non-deferrable expenses. In addition,  Principal Global
Investors  operating  expenses  increased  $24.3  million  primarily  due to our
acquisition  of Post  Advisory  in the  fourth  quarter  of 2003 and to a lesser
extent an increase in minority interest expense.  Furthermore,  individual fixed
annuity operating  expenses increased $11.8 million primarily due to our growing
block of fixed deferred annuity business.

Income taxes  increased  $21.4  million,  or 23%, to $116.2 million for the nine
months ended  September  30, 2004,  from $94.8 million for the nine months ended
September 30, 2003.  The effective  income tax rate for this segment was 24% for
the nine months  ended  September  30,  2004,  and 24% for the nine months ended
September  30, 2003.  The  effective  income tax rates for the nine months ended
September 30, 2004 and 2003,  were lower than the  corporate  income tax rate of
35%  primarily  due to income tax  deductions  allowed for  corporate  dividends
received and other tax-exempt income.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $56.2
million,  or 18%, to $364.7 million for the nine months ended September 30, 2004
from $308.5 million for the nine months ended September 30, 2003.

Net realized/unrealized capital losses, as adjusted,  increased $1.3 million, or
2%, to $81.1 million for the nine months ended  September  30, 2004,  from $79.8
million for the nine months ended  September 30, 2003. The increase is primarily
due to higher mark to market losses  related to hedging  activities,  which were
offset by lower other than temporary declines in value of certain fixed maturity
securities and lower losses on fixed maturity sales.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $43.9 million,  or 19%, to $278.6 million for
the nine months  ended  September  30,  2004,  from $234.7  million for the nine
months ended  September 30, 2003. For the nine months ended  September 30, 2004,
net income included the negative effect of other after-tax  adjustments totaling
$5.0 million related to: (1) a loss from discontinued operations associated with
the sale of Principal  Residential  Mortgage ($3.5 million) and (2) a cumulative
effect  of  accounting  change  due to our  implementation  of  SOP  03-1  ($1.5
million).  For the nine months ended September 30, 2003, net income included the
positive effect of other after-tax adjustments totaling $6.0 million related to:
(1) the positive effect of income from discontinued  operations  associated with
the sale of Principal  Residential  Mortgage ($7.7 million) and (2) the negative
effect of a cumulative effect of accounting change related to our implementation
of FIN 46 ($1.7 million).

                                       62

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                      FOR THE NINE
                                                  MONTHS ENDED                       MONTHS ENDED
                                                  SEPTEMBER 30,                      SEPTEMBER 30,
                                         --------------------------------    ------------------------------
                                             2004              2003             2004              2003
                                         -------------     --------------    ------------     -------------
                                                                   (IN MILLIONS)
                                                                                    
OPERATING EARNINGS DATA:
Operating revenues (1):
  Premiums and other consideration...      $   62.7           $   49.0         $ 173.8          $  129.5
  Fees and other revenues............          21.6               19.6            63.8              50.5
  Net investment income..............          51.7               29.7           133.7              99.0
                                         -------------     --------------    ------------     -------------
    Total operating revenues.........         136.0               98.3           371.3             279.0

Expenses:
  Benefits, claims and settlement
    expenses.........................          97.9               64.4           256.2             183.7
  Operating expenses.................          28.8               25.0            80.5              65.3
                                         -------------     --------------    ------------     -------------
    Total expenses...................         126.7               89.4           336.7             249.0
                                         -------------     --------------    ------------     -------------
Pre-tax operating earnings...........           9.3                8.9            34.6              30.0
Income taxes (benefits)..............          (1.6)               1.1             5.8               3.7
                                         -------------     --------------    ------------     -------------
Operating earnings...................          10.9                7.8            28.8              26.3

Net realized/unrealized capital
    gains (losses), as adjusted......           4.4                3.2             8.4              (0.7)

Other after-tax adjustments..........          10.1               13.0             7.0               9.3
                                         -------------     --------------    ------------     -------------
U.S. GAAP REPORTED:
Net income...........................      $   25.4           $   24.0         $  44.2          $   34.9
                                         =============     ==============    ============     =============
OTHER DATA:
Operating earnings:
  Principal International............      $   10.9           $    7.8         $  28.8          $   26.3
  BT Financial Group.................           -                  -               -                 -

Net income:
  Principal International............      $   25.4           $   11.6         $  44.2          $   23.6
  BT Financial Group.................           -                 12.4             -                11.3

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

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

Premiums and other  considerations  increased  $13.7  million,  or 28%, to $62.7
million for the three months ended  September  30, 2004,  from $49.0 million for
the three months ended September 30, 2003. An increase of $15.5 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 $2.0 million, or 10%, to $21.6 million for the
three months ended  September 30, 2004,  from $19.6 million for the three months
ended  September 30, 2003. An increase of $1.6 million in Hong Kong was a result
of an increase in assets under  management  primarily due to the  acquisition of
Dao Heng Fund Management in 2004.

                                       63

Net investment income increased $22.0 million,  or 74%, to $51.7 million for the
three months ended  September 30, 2004,  from $29.7 million for the three months
ended  September 30, 2003.  The increase was primarily due to an increase in the
annualized  yield on  average  invested  assets and cash,  excluding  our equity
investment in subsidiaries,  which was 9.5% for the three months ended September
30, 2004,  compared to 6.7% for the three months ended  September  30, 2003.  In
addition,  the increase  was related to a $475.4  million,  or 30%,  increase in
average   invested  assets  and  cash,   excluding  our  equity   investment  in
subsidiaries.

Benefits,  claims and settlement  expenses  increased $33.5 million,  or 52%, to
$97.9 million for the three months ended  September 30, 2004, from $64.4 million
for the three months ended  September  30, 2003. An increase of $33.0 million in
Chile was primarily related to inflation,  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  $3.8  million,  or 15%, to $28.8 million for the
three months ended  September 30, 2004,  from $25.0 million for the three months
ended September 30, 2003. An increase of $2.2 million in Hong Kong was primarily
due to the unlocking of DPAC in 2003 coupled with higher  investment  management
fees in 2004  caused  by an  increase  in  assets  under  management  due to the
acquisition  of Dao Heng Fund  Management in 2004.  In addition,  an increase of
$1.9 million in Chile was primarily due to the strengthening of the Chilean peso
versus the U.S. dollar.

Income  tax  benefits  increased  $2.7  million  to $1.6  million  of income tax
benefits  for the three months ended  September  30, 2004,  from $1.1 million of
income tax expense for the three months ended  September 30, 2003.  The increase
was  partially  a result of tax  adjustments  related  to the sale of  Principal
Residential  Mortgage.  Since we file a  consolidated  tax  return,  the taxable
income generated from the third quarter sale of Principal  Residential  Mortgage
enabled our  international  operations to utilize  previously  unrecognized  net
operating  losses generated in prior periods.  In addition,  an increase in Hong
Kong was primarily due to a removal of a deferred tax valuation  allowance since
we will be  able  to use the  related  tax  credits  to  offset  future  taxable
earnings.

As a result of the foregoing factors, operating earnings increased $3.1 million,
or 40%, to $10.9  million for the three months ended  September  30, 2004,  from
$7.8 million for the three months ended September 30, 2003.

Net realized/unrealized  capital gains, as adjusted,  increased $1.2 million, or
38%, to $4.4 million for the three months ended  September  30, 2004,  from $3.2
million for the three  months  ended  September  30,  2003.  An increase of $3.2
million in Mexico was primarily due to realized gains on equity securities while
restructuring  our investment  portfolios from equity securities to fixed income
securities.  In addition,  an increase of $1.1 million was  primarily due to tax
adjustments related to the sale of Principal Residential Mortgage. Since we file
a consolidated  tax return,  the taxable income generated from the third quarter
sale of Principal  Residential Mortgage enabled our international  operations to
utilize previously unrecognized net operating losses generated in prior periods.
Partially offsetting these increases was a decrease of $3.0 million in Hong Kong
primarily due to a change in the fair value of embedded derivatives.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $1.4 million, or 6%, to $25.4 million for the
three months ended  September 30, 2004,  from $24.0 million for the three months
ended  September 30, 2003.  For the three months ended  September 30, 2004,  net
income  included the positive  effect of other  after-tax  adjustments  totaling
$10.1  million  related  to the  estimated  gain on  disposal  of the  Argentina
operations.  For the three months ended  September 30, 2003, net income included
the positive  effect of other  after-tax  adjustments  totaling  $13.0  million,
related to: (1) the change in the  estimated  loss on  disposal of BT  Financial
Group ($12.4 million) and (2) the income from discontinued operations related to
the sale of our Argentine companies ($0.6 million).

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003

Premiums and other  considerations  increased  $44.3 million,  or 34%, to $173.8
million for the nine months ended  September 30, 2004,  from $129.5  million for
the nine months ended  September 30, 2003. An increase of $42.5 million in Chile

                                       64

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  $13.3 million,  or 26%, to $63.8 million for
the nine months ended September 30, 2004, from $50.5 million for the nine months
ended  September 30, 2003. An increase of $5.6 million in Hong Kong was a result
of an increase in assets under  management  primarily due to the  acquisition of
Dao Heng Fund  Management  in 2004.  An increase  of $3.8  million in Mexico was
primarily a result of an increase in the number of retirement plan  participants
due to the  acquisition of AFORE Tepeyac in February 2003 and the acquisition of
Principal Genera, S.A. de C.V.,  Operadora de Fondos de Inversion  ("Genera") in
July 2003.  In addition,  an increase of $3.2  million in India was  primarily a
result of accounting for Principal PNB Asset  Management  Company using the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003;  prior to third quarter 2003,  results were reported  using equity
method of accounting.

Net investment income increased $34.7 million, or 35%, to $133.7 million for the
nine months ended  September  30, 2004,  from $99.0  million for the nine months
ended September 30, 2003. The increase was primarily due to a $475.4 million, or
30%,  increase  in  average  invested  assets  and cash,  excluding  our  equity
investment in subsidiaries. In addition, the increase was related to an increase
in the  annualized  yield on average  invested  assets and cash,  excluding  our
equity  investment  in  subsidiaries,  which was 7.9% for the nine months  ended
September  30, 2004,  compared to 7.8% for the nine months ended  September  30,
2003.

Benefits,  claims and settlement  expenses  increased $72.5 million,  or 39%, to
$256.2 million for the nine months ended September 30, 2004, from $183.7 million
for the nine months ended  September  30, 2003.  An increase of $65.8 million in
Chile was primarily a result of the strengthening of the Chilean peso versus the
U.S.  dollar and higher  reserve  expenses due to record sales of single premium
annuities with life  contingencies  in 2004 following a year of decreased  sales
due to market contraction.

Operating  expenses  increased  $15.2 million,  or 23%, to $80.5 million for the
nine months ended  September  30, 2004,  from $65.3  million for the nine months
ended September 30, 2003. An increase of $5.0 million in Chile was primarily due
to  the   strengthening   of  the  Chilean  peso  versus  the  U.S.  dollar  and
non-deferrable commissions on record sales of single premium annuities with life
contingencies.  An increase of $4.3 million in Hong Kong was  primarily a result
of increased  marketing efforts and higher investment  management fees caused by
an increase in assets under  management due to the  acquisition of Dao Heng Fund
Management  in 2004.  In  addition,  an increase  of $3.1  million in Mexico was
primarily  due to the  acquisition  of Genera in July 2003.  An increase of $2.5
million in India was  primarily a result of  accounting  for Principal PNB Asset
Management Company using the full consolidation  method of accounting due to our
majority  ownership  beginning third quarter 2003;  prior to third quarter 2003,
results were reported using equity method of accounting.

Income taxes increased $2.1 million, or 57%, to $5.8 million for the nine months
ended  September 30, 2004, from $3.7 million for the nine months ended September
30, 2003.  The increase was primarily a result of an increase in deferred  taxes
related to our Brazilian equity method investment.

As a result of the foregoing factors, operating earnings increased $2.5 million,
or 10%, to $28.8  million for the nine months ended  September  30,  2004,  from
$26.3 million for the nine months ended September 30, 2003.

Net  realized/unrealized  capital gains, as adjusted,  increased $9.1 million to
$8.4 million of net realized/unrealized  capital gains for the nine months ended
September 30, 2004, from $0.7 million of net realized/unrealized  capital losses
for the nine months ended  September  30,  2003.  An increase of $4.2 million in
Hong  Kong  was  primarily  due  to a  change  in the  fair  value  of  embedded
derivatives.  In addition,  an increase of $3.6 million in Mexico was  primarily
due to realized gains on equity  securities while  restructuring  our investment
portfolios from equity securities to fixed income securities.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments, net income increased $9.3 million, or 27%, to $44.2 million for the
nine months ended  September  30, 2004,  from $34.9  million for the nine months

                                       65

ended  September 30, 2003.  For the nine months ended  September  30, 2004,  net
income included the effect of other after-tax adjustments totaling $7.0 million,
related to: (1) the positive  effect of discontinued  operations  related to the
sale of our Argentine  companies  ($10.3 million) and (2) the negative effect of
cumulative effect of an accounting  change related to the  implementation of SOP
03-1 ($3.3  million).  For the nine months ended  September 30, 2003, net income
included  the  effect of other  after-tax  adjustments  totaling  $9.3  million,
related  to:  (1) the  positive  effect of the change in the  estimated  loss on
disposal of BT Financial  Group ($11.3  million) and (2) the negative  effect of
the loss  from  discontinued  operations  related  to the sale of our  Argentine
companies ($2.0 million).

LIFE AND HEALTH INSURANCE SEGMENT

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

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

                                                         FOR THE THREE                     FOR THE NINE
                                                         MONTHS ENDED                      MONTHS ENDED
                                                         SEPTEMBER 30,                     SEPTEMBER 30,
                                                 ------------------------------    -----------------------------
                                                     2004             2003            2004             2003
                                                 -------------    -------------    ------------     ------------
                                                                           (IN MILLIONS)
                                                                                         
OPERATING EARNINGS DATA:
Operating Revenues(1):
  Premiums and other considerations........       $    776.8       $    747.3       $ 2,312.7        $ 2,259.0
  Fees and other revenues..................            108.7             85.0           309.5            253.0
  Net investment income....................            166.3            163.4           495.6            497.8
                                                 --------------   -------------    ------------     ------------
    Total operating revenues...............          1,051.8            995.7         3,117.8          3,009.8

Expenses:
  Benefits, claims and settlement expenses.            618.5            607.1         1,871.1          1,829.6
  Dividends to policyholders...............             71.0             76.4           216.1            226.5
  Operating expenses.......................            253.7            232.9           723.3            690.3
                                                 --------------   -------------    ------------     ------------
    Total expenses.........................            943.2            916.4         2,810.5          2,746.4
                                                 --------------   -------------    ------------     ------------
Pre-tax operating earnings.................            108.6             79.3           307.3            263.4
Income taxes...............................             37.0             26.5           104.0             88.6
                                                 --------------   -------------    ------------     ------------
Operating earnings.........................             71.6             52.8           203.3            174.8

Net realized/unrealized capital gains
  (losses), as adjusted....................              1.7             (1.1)           (6.1)           (11.5)
Other after-tax adjustments................              -                -              (0.9)             -
                                                 --------------   -------------    ------------     ------------
U.S. GAAP REPORTED:
Net income.................................       $     73.3       $     51.7       $   196.3        $   163.3
                                                 ==============   =============    ============     ============

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

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

Premiums and other  considerations  increased  $29.5  million,  or 4%, to $776.8
million for the three months ended  September 30, 2004,  from $747.3 million for
the three months ended September 30, 2003. Specialty benefits insurance premiums
increased $22.4 million  primarily due to strong sales and favorable  retention.
In addition, health insurance premiums increased $14.8 million, primarily due to

                                       66

rate increases  partially offset by a slight decrease in average covered medical
members.  Partially offsetting these increases was a decrease of $7.7 million in
individual life insurance  premiums,  primarily a result of a shift in marketing
emphasis to universal  and  variable  universal  life  insurance  products  from
traditional life insurance products.  Unlike traditional premium-based products,
individual  universal life and variable life insurance premiums are not reported
as GAAP revenue.

Fees and other revenues  increased $23.7 million,  or 28%, to $108.7 million for
the three months ended  September  30,  2004,  from $85.0  million for the three
months ended September 30, 2003. Fee revenues from our individual life insurance
business increased $12.1 million, primarily due to a shift in marketing emphasis
to fee-based  universal and variable  universal  life  insurance  products.  Fee
revenues from our health insurance business increased $11.4 million, primarily a
result of the acquisition of the Molloy Companies  effective January 2, 2004 and
vendor fees.

Net investment  income increased $2.9 million,  or 2%, to $166.3 million for the
three months ended  September 30, 2004, from $163.4 million for the three months
ended September 30, 2003. The increase primarily relates to a $321.1 million, or
3%, increase in average  invested assets and cash for the segment.  The increase
was partially  offset by a decrease in the average  annualized yield on invested
assets and cash,  which was 6.5% for the three months ended  September 30, 2004,
compared to 6.6% for the three months ended September 30, 2003.

Benefits,  claims and settlement  expenses  increased  $11.4 million,  or 2%, to
$618.5  million for the three  months  ended  September  30,  2004,  from $607.1
million  for the three  months  ended  September  30,  2003.  Specialty  benefit
insurance  benefits,  claims and settlement  expenses  increased  $16.1 million,
primarily  driven by growth in the business and moderated to a certain extent by
a group  disability  reserve  refinement.  Individual  life insurance  benefits,
claims and settlement  expenses decreased $3.3 million,  primarily due to slower
growth in reserves as a result of the  continuing  shift to  universal  life and
variable  universal  life  insurance  products from  traditional  life insurance
policies.  Health insurance  benefits,  claims and settlement expenses decreased
$1.4 million  primarily due to reserve  refinements and slightly reduced medical
members partially offset by higher claim costs per member.

Dividends to policyholders  decreased $5.4 million,  or 7%, to $71.0 million for
the three months ended  September  30,  2004,  from $76.4  million for the three
months ended September 30, 2003. The decrease is primarily related to a decrease
in the individual  life insurance  dividend  interest  crediting rates resulting
from a declining interest rate environment.

Operating  expenses  increased  $20.8 million,  or 9%, to $253.7 million for the
three months ended  September 30, 2004, from $232.9 million for the three months
ended September 30, 2003.  Specialty  benefits operating expenses increased $8.0
million  primarily  resulting  from  growth in the  business  and some  one-time
expense  items.  Health  insurance  operating  expenses  increased $6.9 million,
primarily a result of the acquisition of the Molloy  Companies.  Individual life
insurance operating expenses increased $5.9 million,  primarily due to increased
DPAC amortization, resulting from the normal unlocking process.

Income taxes  increased  $10.5  million,  or 40%, to $37.0 million for the three
months ended  September 30, 2004,  from $26.5 million for the three months ended
September 30, 2003.  The  effective  income tax rate for the segment was 34% for
the three  months  ended  September  30, 2004 and 33% for the three months ended
September 30, 2003.  The  effective  income tax rates for the three months ended
September 30, 2004 and 2003 were lower than the corporate income tax rate of 35%
primarily due to tax-exempt income.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $18.8
million, or 36%, to $71.6 million for the three months ended September 30, 2004,
from $52.8 million for the three months ended September 30, 2003.

Net  realized/unrealized  capital gains, as adjusted,  increased $2.8 million to
$1.7 million of net realized/unrealized capital gains for the three months ended
September 30, 2004, from $1.1 million of net realized/unrealized  capital losses
for the three months ended  September  30, 2003.  The increase is primarily  the
result of lower  other than  temporary  declines  in the value of certain  fixed

                                       67

maturity  securities and lower commercial  mortgage losses primarily driven by a
decrease in the commercial mortgage valuation allowance.

As a result of the foregoing  factors,  net income  increased $21.6 million,  or
42%, to $73.3 million for the three months ended  September 30, 2004, from $51.7
million for the three months ended September 30, 2003.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003

Premiums and other  considerations  increased $53.7 million,  or 2%, to $2,312.7
million for the nine months ended September 30, 2004, from $2,259.0  million for
the nine months ended September 30, 2003.  Specialty benefits insurance premiums
increased $63.9 million  primarily due to strong sales and favorable  retention.
In addition, health insurance premiums increased $18.4 million, primarily due to
rate increases  partially offset by a slight decrease in average covered medical
members and the establishment of a premium refund accrual for pending litigation
related to a business exited in the 1990's. Partially offsetting these increases
was a decrease of $28.6 million in individual life insurance premiums, primarily
a result of a shift in marketing  emphasis to universal  and variable  universal
life  insurance  products  from  traditional  life  insurance  products.  Unlike
traditional premium-based products,  individual universal life and variable life
insurance premiums are not reported as GAAP revenue.

Fees and other revenues  increased $56.5 million,  or 22%, to $309.5 million for
the nine months  ended  September  30,  2004,  from $253.0  million for the nine
months ended September 30, 2003. Fee revenues from our health insurance business
increased  $28.4  million,  primarily a result of the  acquisition of the Molloy
Companies  effective  January 2, 2004.  Fee revenues  from our  individual  life
insurance  business  increased  $27.7  million,  primarily  due  to a  shift  in
marketing emphasis to fee-based  universal and variable universal life insurance
products.

Net  investment  income  decreased  $2.2 million to $495.6  million for the nine
months ended  September 30, 2004,  from $497.8 million for the nine months ended
September 30, 2003. The decrease  primarily relates to a decrease in the average
annualized yield on invested assets and cash, which was 6.5% for the nine months
ended  September 30, 2004,  compared to 6.8% for the nine months ended September
30, 2003.  This reflects lower yields on invested  assets due in part to a lower
interest  rate  environment.  The  decrease  was  partially  offset  by a $490.6
million, or 5%, increase in average invested assets and cash for the segment.

Benefits,  claims and settlement  expenses  increased  $41.5 million,  or 2%, to
$1,871.1  million for the nine months ended  September  30, 2004,  from $1,829.6
million  for the  nine  months  ended  September  30,  2003.  Specialty  benefit
insurance  benefits,  claims and settlement  expenses  increased  $41.5 million,
primarily due to growth in the business.  Health insurance benefits,  claims and
settlement  expenses  increased  $15.8 million due to increased  claim costs per
member  partially  offset  by  the  impact  of  decreased  members  and  reserve
refinements.  Partially  offsetting these increases was a $15.8 million decrease
in the individual  life  insurance  benefits,  claims and  settlement  expenses,
primarily due to slower growth in reserves as a result of the  continuing  shift
to universal and variable  universal life insurance  products and to lower death
claims.

Dividends to policyholders decreased $10.4 million, or 5%, to $216.1 million for
the nine months  ended  September  30,  2004,  from $226.5  million for the nine
months  ended  September  30, 2003.  The  decrease is  primarily  related to the
dividend  scale  decrease  effective in February  2003 and the a decrease in the
individual  life insurance  dividend  interest  crediting rates resulting from a
declining interest rate environment.

Operating  expenses  increased  $33.0 million,  or 5%, to $723.3 million for the
nine months ended  September 30, 2004,  from $690.3  million for the nine months
ended September 30, 2003.  Specialty benefits operating expenses increased $17.1
million  primarily  resulting  from  growth in the  business.  Health  insurance
operating  expenses   increased  $16.6  million,   primarily  a  result  of  the
acquisition of the Molloy Companies.

Income taxes  increased  $15.4  million,  or 17%, to $104.0 million for the nine
months ended  September  30, 2004,  from $88.6 million for the nine months ended
September 30, 2003.  The  effective  income tax rate for the segment was 34% for

                                       68

the nine months ended  September  30, 2004 and 2003.  The  effective  income tax
rates for the nine months ended  September 30, 2004 and 2003 were lower than the
corporate income tax rate of 35% primarily due to tax-exempt income.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $28.5
million, or 16%, to $203.3 million for the nine months ended September 30, 2004,
from $174.8 million for the nine months ended September 30, 2003.

Net realized/unrealized capital losses, as adjusted,  decreased $5.4 million, or
47%, to $6.1 million for the nine months ended  September  30, 2004,  from $11.5
million for the nine months ended  September 30, 2003. The decrease is primarily
the result of lower other than temporary  declines in the value of certain fixed
maturity securities and lower commercial mortgage losses primarily driven by the
decrease in the commercial mortgage valuation allowance.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $33.0 million,  or 20%, to $196.3 million for
the nine months  ended  September  30,  2004,  from $163.3  million for the nine
months ended  September 30, 2003. For the nine months ended  September 30, 2004,
net income included the negative effect of other after-tax  adjustments totaling
$0.9 million,  due to a cumulative effect of accounting  change, a result of our
implementation of SOP 03-1.

MORTGAGE BANKING SEGMENT

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

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

Expenses:
  Total expenses........................             -                7.9          16.7             21.6
                                               -----------     -----------    ------------    -------------
Pre-tax operating loss..................             -               (7.9)        (16.7)           (21.6)
Income tax benefits.....................             -               (2.9)         (6.4)            (8.2)
                                               -----------     -----------    ------------    -------------
Operating loss..........................             -               (5.0)        (10.3)           (13.4)

Net realized/unrealized capital losses,
  as adjusted ..........................             -                -             -                -
Other after-tax adjustments.............            94.1             (6.4)        124.1             99.4
                                               ------------    -----------    ------------    -------------
U. S. GAAP REPORTED:
Net income (loss).......................       $    94.1       $    (11.4)     $  113.8        $    86.0
                                               ============    ===========    ============    =============

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

Our Mortgage Banking segment,  which includes Principal Residential Mortgage, is
accounted for as a discontinued  operation,  under SFAS 144 and  therefore,  the
results of operations  (excluding corporate overhead) have been removed from our
results of continuing operations, cash flows, and segment operating earnings for
all periods  presented.  Corporate  overhead  allocated to our Mortgage  Banking
segment does not qualify for  discontinued  operations  treatment under SFAS 144
and was included in our results of continuing  operations and segment  operating
earnings prior to July 1, 2004.

                                       69

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                   FOR THE NINE
                                                            MONTHS ENDED                    MONTHS ENDED
                                                            SEPTEMBER 30,                   SEPTEMBER 30,
                                                     -----------------------------   ----------------------------
                                                        2004             2003           2004            2003
                                                     ------------    -------------   -----------     ------------
                                                                              (IN MILLIONS)
                                                                                           
OPERATING EARNINGS DATA:
Operating Revenues (1):
  Total operating revenues.......................      $ (7.3)         $ 18.9         $ (17.6)         $  19.9

Expenses:
  Total expenses.................................        14.7            13.3            44.8             38.1
                                                     ------------    -------------   -----------     ------------
Pre-tax operating earnings (loss)................       (22.0)            5.6           (62.4)           (18.2)
Income taxes (benefits)..........................       (21.2)            1.8           (41.0)            (6.6)
                                                     ------------    -------------   -----------     ------------
Operating earnings (loss)........................        (0.8)            3.8           (21.4)           (11.6)

Net realized/unrealized capital gains, as
  adjusted.......................................         6.9            19.0             0.6             26.8

Other after-tax adjustments......................         -               8.3             -                8.3
                                                     ------------    -------------   -----------     ------------
Net income (loss)................................      $  6.1          $ 31.1         $ (20.8)         $  23.5
                                                     ============    =============   ===========     ============

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

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

Total operating  revenues decreased $26.2 million to a negative $7.3 million for
the three months ended September 30, 2004, from a positive $18.9 million for the
three months ended  September 30, 2003. Net investment  income  decreased  $29.0
million due to unusually  high mortgage  prepayment  income in the prior year as
well as a decrease in average annualized  investment yields for the segment.  In
addition,  the company acquired a significant  variable interest in a coal-based
synthetic  fuel  production   facility  in  June  2004  resulting  in  increased
investment  expenses,  which are more than offset by a decrease in income taxes.
Furthermore,  the decrease in total revenues was partially due to a $1.5 million
increase  in  inter-segment  eliminations  included in this  segment,  which was
offset by a  corresponding  change in total expenses.  Partially  offsetting the
decrease in total  revenue  was an  increase of $5.3  million in fee revenue for
transitional  services  that are provided to  CitiMortgage,  Inc. on a temporary
basis  related to the sale of Principal  Residential  Mortgage,  which is mostly
offset by a corresponding change in total expenses.

Total expenses  increased  $1.4 million,  or 11%, to $14.7 million for the three
months ended  September 30, 2004,  from $13.3 million for the three months ended
September 30, 2003. The increase in expenses was partially due to an increase of
$5.2 million for transitional  services that are provided to CitiMortgage,  Inc.
on a  temporary  basis  that are  related to the sale of  Principal  Residential
Mortgage,  which is mostly offset in total revenue. In addition,  an increase of
$4.1 million is related to corporate  initiatives  funded by this  segment.  The
increases were largely offset by a decrease of $6.0 million in interest  expense
related  to  the  reduction  in  corporate  debt.  In  addition,   inter-segment
eliminations  included in this segment  increased  $1.5 million,  resulting in a
decrease in total expenses.

Income tax  benefits  increased  $23.0  million  to $21.2  million of income tax
benefits  for the three months ended  September  30, 2004,  from $1.8 million of
income tax expense for the three months ended  September 30, 2003.  The increase
was primarily a result of an increase in pre-tax  operating  loss as well as tax
credits on our investment in a synthetic fuel production facility.

                                       70

As a result of the foregoing  factors,  operating loss increased $4.6 million to
$0.8 million for the three months ended September 30, 2004, from $3.8 million of
operating earnings for the three months ended September 30, 2003.

Net realized/unrealized capital gains, as adjusted,  decreased $12.1 million, or
64%, to $6.9 million for the three months ended  September 30, 2004,  from $19.0
million  for the three  months  ended  September  30,  2003.  The  decrease  was
primarily due to the mark to market of certain seed money investments.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income decreased $25.0 million, or 80%, to $6.1 million of net
income for the three months ended  September 30, 2004, from $31.1 million of net
income for the three months ended September 30, 2003. For the three months ended
September 30, 2003, net income  included the positive  effect of other after-tax
adjustments  totaling $8.3 million,  due to the cumulative  effect of accounting
change, a result of our implementation of FIN 46.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003

Total operating revenues decreased $37.5 million to a negative $17.6 million for
the nine months ended  September 30, 2004, from a positive $19.9 million for the
nine months ended  September 30, 2003. Net  investment  income  decreased  $38.8
million  due to a  decrease  in  average  annualized  investment  yields for the
segment and  unusually  high  mortgage  prepayment  income in the prior year. In
addition,  the company acquired a significant  variable interest in a coal-based
synthetic  fuel  production   facility  in  June  2004  resulting  in  increased
investment  expenses,  which are more than offset by a decrease in income taxes.
The decrease in total revenue was partially offset by a $5.3 million increase in
fee revenue for transitional services that are provided to CitiMortgage, Inc. on
a  temporary  basis  that  are  related  to the  sale of  Principal  Residential
Mortgage, which is mostly offset by a corresponding change in total expenses.

Total  expenses  increased  $6.7 million,  or 18%, to $44.8 million for the nine
months ended  September  30, 2004,  from $38.1 million for the nine months ended
September  30, 2003.  The increase in total  expenses  was  partially  due to an
increase  of  $7.2  million  related  to  a  prepayment  penalty  recognized  on
redemption of our surplus notes due 2024. An increase in total  expenses of $5.2
million was related to transitional  services that are provided to CitiMortgage,
Inc. on a temporary basis that are related to the sale of Principal  Residential
Mortgage,  which is mostly  offset in total  revenues.  In  addition,  corporate
initiatives funded by this segment increased $2.7 million. The increase in total
expenses  was largely  offset by $10.3  million  decrease  in  interest  expense
related to the reduction in corporate debt.

Income tax benefits increased $34.4 million to $41.0 million for the nine months
ended  September 30, 2004, from $6.6 million for the nine months ended September
30,  2003.  The  increase  was  primarily  a result of an  increase  in  pre-tax
operating  loss, tax credits on our  investment in a synthetic  fuel  production
facility  as  well as a tax  benefit  associated  with  the  sale  of a  foreign
investment.

As a result of the foregoing factors,  operating loss increased $9.8 million, or
84%, to $21.4 million for the nine months ended  September 30, 2004,  from $11.6
million for the nine months ended September 30, 2003.

Net realized/unrealized capital gains, as adjusted,  decreased $26.2 million, or
98%, to $0.6 million for the nine months ended  September  30, 2004,  from $26.8
million for the nine months ended September 30, 2003. The decrease was primarily
due to the mark to market of certain  seed money  investments  and a loss on the
sale of a foreign  investment.  These losses were  partially  offset by gains on
sales of invested assets in 2004 and lower other than temporary impairments.

As a result of the foregoing factors,  net loss increased $44.3 million to $20.8
million for the nine months ended  September 30, 2004, from $23.5 million of net
income for the nine months ended  September 30, 2003.  For the nine months ended
September 30, 2003, net income  included the positive  effect of other after-tax
adjustments  totaling $8.3 million,  due to the cumulative  effect of accounting
change, a result of our implementation of FIN 46.

                                       71

LIQUIDITY AND CAPITAL RESOURCES

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

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

SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS

Net cash  provided by operating  activities  was  $1,995.1  million and $2,124.3
million for the nine months ended September 30, 2004 and 2003, respectively. The
decrease in cash provided by our continuing operations between periods primarily
related to a decrease in mortgage escrow balances held in our banking operations
that were paid out as a result of the sale of Principal  Residential Mortgage to
CitiMortgage  Inc. This decrease in cash was partially  offset by the settlement
of  intercompany  arrangements  received  as a result  of the sale of  Principal
Residential Mortgage.

Net cash used in investing  activities was $1,792.9 million and $2,738.6 million
for the nine  months  ended  September  30,  2004 and  2003,  respectively.  The
decrease in cash used in  investing  activities  between  periods was  primarily
related to cash  proceeds from the sale of  subsidiaries,  including the sale of
Principal  Residential  Mortgage to CitiMortgage,  Inc. Also contributing to the
decrease  was an increase in the net sales of  mortgage  loans and real  estate.
These were slightly offset by an increase in net purchases of available for sale
securities.

Net cash provided by financing  activities was $507.8 million and $503.1 million
for the nine  months  ended  September  30,  2004 and  2003,  respectively.  The
increase in net cash  provided by financing  activities  was  primarily due to a
decrease in net  withdrawals  of investment  contracts  offset by an increase in
payment of long term debt,  a  decrease  in bank  deposits  and an  increase  in
treasury stock acquired.

On October 22,  2004,  our Board of  Directors  declared  an annual  dividend of
approximately  $166.4million,  equal to $0.55 per share, payable on December 17,
2004, to  shareholders  of record as of November 12, 2004.

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

Although  we  generate  adequate  cash  flow to meet  the  needs  of our  normal
operations,  periodically  the need may  arise  to issue  debt to fund  internal
expansion,  acquisitions,  investment  opportunities  and retirement of existing
debt and equity. In December 2003, we filed a shelf registration  statement with
the Securities and Exchange Commission, which became effective on June 30, 2004.
The shelf  registration  totals  $3.0  billion,  with the  ability to issue debt
securities,  preferred stock, common stock,  warrants,  stock purchase contracts
and stock purchase  units of Principal  Financial  Group,  Inc ("PFG") and trust
preferred  securities of three subsidiary  trusts.  If we issue  securities,  we
intend  to use the  proceeds  from the sale of the  securities  offered  by this

                                       72

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.  PFSI  unconditionally  guarantees our obligations with respect to
one or more  series  of debt  securities  described  in the  shelf  registration
statement. As of September 30, 2004, no amounts have been issued under our shelf
registration.

DIVIDENDS FROM PRINCIPAL LIFE

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

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

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

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

On May 19, 2004, Principal Life declared a dividend of up to $1.2 billion. Total
ordinary  stockholder  dividends  paid by Principal  Life to its parent  company
through September 30, 2004 were $494.0 million. In March of this year, Principal
Life redeemed  $200.0 million of its surplus notes at a cost of $207.2  million.
Principal Life and the Commissioner have agreed that this $207.2 million will be
applied against Principal Life's 2004 ordinary dividend  capacity.  As a result,
Principal Life may not pay an additional  ordinary  dividend in 2004.  Principal
Life has  requested  and received  permission  from the  Commissioner  to pay an
extraordinary  dividend in the amount of $700.0 million, of which $630.0 million
was paid as of September 30, 2004.

COMMON STOCK ISSUED AND TREASURY STOCK ACQUIRED

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

In May 2004,  our Board of Directors  authorized  a repurchase  program of up to
$700.0  million of our  outstanding  common stock.  This program began after the
completion of the May 2003 repurchase  program,  which authorized the repurchase
of up to $300.0  million of our  outstanding  common  stock.  We  acquired  14.5
million  shares in the open market at an aggregate cost of $505.5 million during
the nine months ended  September  30, 2004.  As of  September  30, 2004,  $341.5
million remains  available for additional  repurchases  under the May 2004 share
repurchase authorization.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION OPERATIONS

Prior to 2004,  we have  received  approximately  U.S.  $890.0  million of total
proceeds from our sale of  substantially  all of BT Financial  Group to Westpac.
This amount  includes cash proceeds from Westpac,  expected tax benefits,  and a
gain from  unwinding  the hedged  asset  associated  with our  investment  in BT
Financial Group. An additional future contingent  receipt of approximately  U.S.
$109.0 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 nine months ended  September  30, 2004 and 2003.  These cash
flows have been historically maintained at the local country level for strategic

                                       73

expansion purposes and local capital requirements.  Our international operations
have  required  infusions  of capital  primarily to fund  acquisitions  and to a
lesser  extent,  to meet the cash  outflow and capital  requirements  of certain
operations.  Our capital  funding of these  operations  is  consistent  with our
long-term  strategy to establish viable companies that can sustain future growth
from internally generated sources.

RATIO OF EARNINGS TO FIXED CHARGES

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

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

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

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

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

                                                         FOR THE NINE
                                                         MONTHS ENDED           FOR THE YEAR ENDED
                                                         SEPTEMBER 30,              DECEMBER 31,
                                                       -----------------    ----------------------------
                                                        2004       2003       2003      2002      2001
                                                       ------    -------    -------    ------    -------

Ratio of earnings to fixed charges before interest
 credited on investment products....................    8.8       7.4        8.3        4.5       3.2
Ratio of earnings to fixed charges...................   1.9       1.8        2.0        1.4       1.3

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of September 30, 2004, we had $847.2  million of long-term  debt  outstanding
compared to $1,374.3  million at  December  31,  2003.  On March 10,  1994,  our
subsidiary,  Principal Life issued $300.0  million of surplus  notes,  including
$200.0  million  due March 1, 2024,  at a 7.875%  annual  interest  rate and the
remaining $100.0 million due March 1, 2044, at an 8% annual interest rate. After
receiving  approval from the Commissioner,  the surplus notes due March 1, 2024,
were  optionally  redeemed  by  Principal  Life on March 1, 2004,  in whole at a
redemption price of approximately 103.6% of par. Total cash paid for the surplus
note redemption on March 1, 2004, was $207.2 million.

                                       74

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

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

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

Long-term debt.......      $  847.2          $ 27.8           $ 32.0       $32.2       $ 108.9       $ 76.6        $ 569.7
Long-term debt
  interest...........         302.9            29.1             64.0        61.7          60.5         51.6           36.0
Operating leases.....         167.4            13.2             43.1        34.8          23.0         18.8           34.5

SHORT-TERM DEBT

As of September 30, 2004, we had $145.4 million of short-term  debt  outstanding
compared to $702.8  million at December 31, 2003.  As of September  30, 2004, we
had credit facilities with various financial institutions in an aggregate amount
of $2.1 billion. Our credit facilities include a $1.0 billion back-stop facility
to provide 100% support for our commercial paper program, of which there were no
outstanding  balances as of  September  30,  2004.  On  November  1, 2004,  this
facility  was  reduced to $600  million  due to a  reduction  in the  short-term
financing need as a result of the sale of Principal  Residential  Mortgage.  Our
credit   facilities   also  include  $700.0  million  to  finance  a  commercial
mortgage-backed securities ("CMBS") pipeline, $100.0 million to purchase certain
CMBS  securities  for  investment  purposes and $300.0  million in various other
credit  facilities.  Short-term  debt was reduced  due to the sale of  Principal
Residential Mortgage.

OFF-BALANCE SHEET ARRANGEMENTS

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

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 September 30, 2004,  was  approximately
$197.0  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,  were  determined  to be
insignificant.

                                       75

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. $180.0 million as of September 30, 2004).
New  Zealand  securities  regulations  allow  Australian  issuers to issue their
securities  in New Zealand  provided that certain  documents  are  appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to  constitutions  and compliance plans be filed in
New Zealand.  In April 2003, the New Zealand  Securities  Commission opined that
such late filings would result in certain New Zealand  investors  having a right
to the 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,
Principal  Residential  Mortgage,  and  other  divestitures,   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; 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.  We
have accrued for the fair value of such indemnifications issued after January 1,
2003.

INVESTMENTS

We had total consolidated assets as of September 30, 2004, of $109.8 billion, of
which $55.2 billion were  invested  assets.  The rest of our total  consolidated
assets are comprised  primarily of separate  account  assets for which we do not
bear  investment  risk.  Because we generally do not bear any investment risk on
assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $53.0 billion were held by
our  U.S.   operations   and  the  remaining  $2.2  billion  were  held  by  our
International  Asset  Management and Accumulation  segment.  On May 11, 2004, we
entered  into a  definitive  agreement  for the  sale of  Principal  Residential
Mortgage to CitiMortgage, Inc, which was completed on July 1, 2004. The invested
assets and cash have been reclassified to assets from discontinued operations on
the consolidated statements of financial position.

U.S. INVESTMENT OPERATIONS

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

                                       76

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 and  reviewing and
approving all  investments.  As of September 30, 2004,  there are ten members on
the Investment Committee, one of whom is a member of our board of directors. The
remaining members are senior management  members  representing  various areas of
our company.

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

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

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

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

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

o    significant management or organizational changes;

o    significant uncertainty regarding the issuer's industry;

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

o    violation of financial covenants; and

o    other business factors that relate to the issuer.

A dedicated risk management  team is responsible  for centralized  monitoring of
the commercial mortgage portfolio.  We apply a variety of strategies to minimize
credit risk in our commercial  mortgage loan  portfolio.  When  considering  the
origination  of  new  commercial   mortgage  loans,  we  review  the  cash  flow

                                       77

fundamentals  of the  property,  make a physical  assessment  of the  underlying
security,  conduct a comprehensive  market analysis and compare against industry
lending  practices.  We use a proprietary  risk rating model to evaluate all new
and a majority of existing  loans within the  portfolio.  The  proprietary  risk
model is designed to stress  projected cash flows under  simulated  economic and
market downturns.  Our lending  guidelines are designed to encourage 75% or less
loan-to-value ratios and a debt service coverage ratio of at least 1.2 times. We
analyze  investments  outside of these  guidelines  based on cash flow  quality,
tenancy  and  other  factors.  The  weighted  average   loan-to-value  ratio  at
origination for brick and mortar  commercial  mortgages in our portfolio was 66%
and the debt  service  coverage  ratio  at loan  inception  was 2.4  times as of
September 30, 2004.

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

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

OVERALL COMPOSITION OF U.S. INVESTED ASSETS

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

                              U.S. INVESTED ASSETS

                                                           AS OF SEPTEMBER 30,        AS OF DECEMBER 31,
                                                         ------------------------  ------------------------
                                                                  2004                      2003
                                                         ------------------------  ------------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                         -------------- ---------  ------------- ----------
                                                                            ($ IN MILLIONS)
                                                                                       
Fixed maturity securities
   Public.........................................        $  25,688.8        48%   $  24,785.0      48%
   Private........................................           12,446.9        24       11,343.0      22
Equity securities.................................              771.6         1          657.4       1
Mortgage loans
   Commercial ....................................           10,035.0        19        9,630.4      19
   Residential ...................................            1,167.7         2        1,288.1       3
Real estate held for sale ........................              157.0         -          513.0       1
Real estate held for investment...................              906.4         2        1,003.6       2
Policy loans......................................              809.7         2          804.1       2
Other investments ................................            1,012.2         2        1,198.8       2
                                                         -------------- --------   ------------- ----------
   Total invested assets..........................           52,995.3       100%      51,223.4     100%
                                                                        ========                 ==========
Cash and cash equivalents.........................            1,818.9                  1,121.1
                                                         --------------            -------------
   Total invested assets and cash ................        $  54,814.2              $  52,344.5
                                                         ==============            =============

                                       78

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
5.8% for the three months  ended  September  30, 2004,  compared to 6.2% for the
three months ended  September 30, 2003.  The annualized  yield on U.S.  invested
assets  and on cash and cash  equivalents  was  5.6% for the nine  months  ended
September  30, 2004,  compared to 6.3% for the nine months ended  September  30,
2003. We calculate  annualized yields using a simple average of asset classes at
the beginning and end of the reporting period.

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

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

Fixed maturity securities.................     6.0%        $  560.7        6.1%         $   552.0
Equity securities.........................     6.3             11.3        9.3                8.1
Mortgage loans - Commercial...............     7.2            177.4        7.8              191.7
Mortgage loans - Residential..............     4.5             13.4        3.6               10.0
Real estate...............................     4.4             11.6        5.8               20.9
Policy loans..............................     6.3             12.7        6.7               13.6
Cash and cash equivalents.................     2.1              8.3        2.2                4.7
Other investments.........................     1.8              4.8        8.0               20.1
                                                         ------------               -----------------
  Total before investment expenses........     6.0            800.2        6.4              821.1

Investment expenses.......................     0.2             29.4        0.2               29.4
                                                         ------------               -----------------
  Net investment income...................     5.8%        $  770.8        6.2%         $   791.7
                                                         ============               =================

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

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

Fixed maturity securities.................     5.9%        $1,634.0        6.4%         $ 1,653.3
Equity securities.........................     6.2             33.3        8.3               21.8
Mortgage loans - Commercial...............     7.0            514.9        7.4              538.1
Mortgage loans - Residential..............     4.0             37.0        3.7               30.8
Real estate...............................     7.0             67.5        6.1               62.7
Policy loans..............................     6.3             38.1        6.8               41.3
Cash and cash equivalents.................     1.5             16.6        3.0               13.4
Other investments.........................     2.2             18.3        6.0               45.7
                                                         ------------               -----------------
  Total before investment expenses........     5.8          2,359.7        6.5            2,407.1

Investment expenses.......................     0.2             95.5        0.2               82.9
                                                         ------------               -----------------
  Net investment income...................     5.6%        $2,264.2        6.3%         $ 2,324.2
                                                         ============               =================

                                       79

FIXED MATURITY SECURITIES

Fixed maturity  securities  consist of short-term  investments,  publicly traded
debt  securities,  privately  placed debt  securities and  redeemable  preferred
stock,  and  represented  72% of total U.S.  invested assets as of September 30,
2004 and 70% as of December 31, 2003.  The fixed maturity  securities  portfolio
was  comprised,  based on  carrying  amount,  of 67% in  publicly  traded  fixed
maturity  securities and 33% in privately placed fixed maturity securities as of
September 30, 2004 and 69% in publicly traded fixed maturity  securities and 31%
in privately placed fixed maturity  securities as of December 31, 2003. Included
in the  privately  placed  category as of September  30, 2004,  and December 31,
2003, were $5.5 billion and $4.3 billion,  respectively,  of securities eligible
for  resale  to  qualified  institutional  buyers  under  Rule  144A  under  the
Securities Act of 1933.  Fixed maturity  securities were diversified by category
of issuer as of  September  30, 2004,  and  December  31, 2003,  as shown in the
following table:

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

                                                           AS OF SEPTEMBER 30,        AS OF DECEMBER 31,
                                                         ------------------------   ------------------------
                                                                   2004                      2003
                                                         ------------------------   ------------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                         --------------  --------   ------------- ----------
                                                                             ($ IN MILLIONS)
                                                                                         
U.S. Government and agencies...........................   $     296.5         1%     $     610.9       2%
States and political subdivisions......................         843.2         2            537.0       1
Non-U.S. governments...................................         469.9         1            422.4       1
Corporate - public.....................................      19,013.4        50         18,033.4      50
Corporate - private....................................      10,260.3        27          9,693.1      27
Residential pass-through securities....................       1,483.4         4          2,070.3       6
CMBS...................................................       3,445.3         9          2,917.4       8
Residential collateralized mortgage obligations........         653.9         2            294.6       1
Asset-backed securities................................       1,669.8         4          1,548.9       4
                                                         --------------  --------   ------------- ----------
  Total fixed maturities...............................   $  38,135.7       100%     $  36,128.0     100%
                                                         ==============  ========   ============= ==========

We held $7,252.4 million of  mortgage-backed  and asset-backed  securities as of
September 30, 2004, and $6,831.2 million as of December 31, 2003.

We believe that it is desirable to hold residential mortgage-backed pass-through
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.  In addition,  our  residential  collateralized
mortgage  obligation  portfolio offers structural features that allow cash flows
to be matched to our liabilities.

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

                                       80

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
$5,617.8 million, or 15% of total fixed maturity securities, as of September 30,
2004,  comprised of corporate and foreign government fixed maturity  securities.
Of the $5,617.8 million as of September 30, 2004,  investments  totaled $1,518.3
million in the United  Kingdom,  $1,436.9  million in the  continental  European
Union,  $703.6 million in Asia, $450.7 million in South America,  $403.3 million
in Australia  and $10.6  million in Japan.  The  remaining  $1,094.4  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 September 30, 2004, our  investments in Canada totaled  $1,354.6
million.

The  following  tables  present  the  amortized  cost of our  top ten  exposures
including  approved  counterparty  exposure limits as of September 30, 2004, and
December 31, 2003.
                                                      AS OF SEPTEMBER 30,
                                                             2004
                                                 ----------------------------
                                                          AMORTIZED
                                                            COST
                                                 ----------------------------
                                                        (IN MILLIONS)
HSBC Holdings PLC (1)(4).......................           $   508.3
MBIA Inc. (2)(3)...............................               454.8
General Electric Co.(3)........................               425.3
Bank of America Corp. (4)......................               418.9
American International Group Inc.(3)(4)........               407.8
JP Morgan Chase & Co. (4)......................               344.9
Citigroup Inc..(3)(4)..........................               334.9
Morgan Stanley (3)(4)..........................               333.1
Royal Bank of Scotland Group PLC (4)...........               297.6
Goldman Sachs Group Inc (4)....................               280.7
                                                          --------------
  Total Top Ten Exposures.....................            $ 3,806.3
                                                          ==============

- ----------------------
(1)  Includes a $238.3 million  investment  classified as an equity security for
     GAAP. The  investment  issuer  engages in managing  investment  grade third
     party bond  investments and HSBC paper. All non-HSBC paper has the ultimate
     benefit of price  support  protection  provided  by HSBC Bank,  PLC.  Since
     Principal Life Insurance  Company has the senior priority in the issuer, we
     believe  many third party bonds could be  liquidated  to satisfy our claim.
     While we calculate our exposure on a gross basis, the value we attribute to
     the underlying collateral is $125 million.

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

(3)  Includes  short term exposure  classified as cash and cash  equivalent  for
     GAAP.

(4)  Includes approved counterparty limit. The actual and the stressed potential
     exposures are less than the approved limit.

                                       81

                                                       AS OF DECEMBER 31, 2003
                                                   ----------------------------
                                                            AMORTIZED
                                                              COST
                                                   ----------------------------
                                                         (IN MILLIONS)
HSBC Holdings PLIC (1)(3)........................         $    518.7
MBIA Inc. (2)....................................              380.6
American International Group Inc (3).............              363.1
Citigroup Inc. (3)...............................              292.2
Bank of America Corp. (3)........................              265.6
Royal Bank of Scotland Group PLC (3).............              263.3
Verizon Communications Inc.......................              261.9
General Electric Co..............................              249.1
Morgan Stanley (3)...............................              228.8
Bear Stearns Co..................................              223.9
                                                          ----------------
  Total Top Ten Exposures........................         $  3,047.2
                                                          ================

- ----------------------
(1)  Includes a $238.3 million  investment  classified as an equity security for
     GAAP. The  investment  issuer  engages in managing  investment  grade third
     party bond  investments and HSBC paper. All non-HSBC paper has the ultimate
     benefit of price  support  protection  provided  by HSBC Bank,  PLC.  Since
     Principal  Life  Insurance  Company has senior  priority in the issuer,  we
     believe  many third party bonds could be  liquidated  to satisfy our claim.
     While we calculate our exposure on a gross basis, the value we attribute to
     the underlying collateral is $125 million.

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

(3)  Includes approved counterparty limit. The actual and the stressed potential
     exposures are less than the approved limit.

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

Valuation  techniques  for  the  fixed  maturity  securities  portfolio  vary by
security  type and the  availability  of market data.  Pricing  models and their
underlying  assumptions  impact the amount  and timing of  unrealized  gains and
losses recognized,  and the use of different pricing models or assumptions could
produce different  financial  results.  Interactive Data Corporation  ("IDC") or
direct  broker  quotes are our sources for external  prices for our public bonds
and those private placement securities that are actively traded in the secondary
market. In cases where quoted market prices are not available,  a matrix pricing
valuation approach is used.  Securities are grouped into pricing categories that
vary by asset class, sector,  rating, and average life. Each pricing category is
assigned a risk  spread  based on studies of  observable  public  market data or
market  clearing  data from the  investment  professionals  assigned to specific
security  classes.  The expected cash flows of the security are then  discounted
back at the current  Treasury curve plus the appropriate  risk spread.  Although
the  matrix  valuation  approach  provides  a fair  valuation  of  each  pricing
category,  the valuation of an individual  security within each pricing category
may actually be impacted by company specific factors. Certain market events that
could impact the valuation of securities include issuer credit ratings, business
climate,  management changes,  litigation,  and government actions among others.
The resulting prices are then reviewed by pricing analysts.  All loans placed on
the "watch  list" are valued  individually  by the  investment  analysts  or the
analysts  that focus on  troubled  securities  ("Workout  group").  Although  we
believe our estimates reasonably reflect the fair value of those securities, the
key assumptions  about risk premiums,  performance of underlying  collateral (if
any) and other factors involve significant assumptions and may not reflect those
of an active  market.  To the  extent  that bonds have  longer  maturity  dates,

                                       82

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 September 30, 2004, the
percentage,  based on  estimated  fair  value,  of  total  publicly  traded  and
privately  placed fixed maturity  securities that were investment  grade with an
NAIC Designation 1 or 2 was 94%.

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

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

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

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

1               Aaa/Aa/A.............  $ 19,028.7     $20,192.4        53%         $ 17,299.2    $  18,415.1        51%
2               Baa..................    14,630.8      15,728.6        41            13,579.3       14,657.1        41
3               Ba...................     1,538.7       1,656.0         5             1,998.0        2,123.1         6
4               B....................       347.8         357.0         1               517.4          514.5         1
5               Caa and lower........        50.9          46.5         -               230.9          225.4         1
6               In or near default...       153.5         155.2         -               220.7          192.8         -
                                      ------------   -----------  --------------  ------------  -------------  --------------
                  Total fixed
                    maturities.......  $ 35,750.4     $38,135.7       100%         $ 33,845.5    $  36,128.0       100%
                                      ============   ===========  ==============  ============  =============  ==============

- -----------------------
(1)  Includes 134 securities with an amortized cost of $1,173.4  million,  gross
     gains of $34.4 million,  gross losses of $5.5 million and a carrying amount
     of $1,202.3  million as of  September  30, 2004,  that are still  pending a
     review  and  assignment  of a rating by the SVO.  Due to the timing of when

                                       83

     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 September  30, 2004,  we had invested 1.7% 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
September 30, 2004, and December 31, 2003.

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

                                                         AS OF SEPTEMBER 30,         AS OF DECEMBER 31,
                                                     ----------------------------  -------------------------
                                                                 2004                       2003
                                                     ----------------------------  -------------------------
                                                        CARRYING        % OF          CARRYING       % OF
                                                         AMOUNT          TOTAL         AMOUNT        TOTAL
                                                     --------------  ------------  -------------  ----------
                                                                         ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance - Bank..........................               $  3,484.7          12%      $ 3,041.9          11%
Finance - Insurance.....................                  2,460.2           9         1,718.1           6
Finance - Other.........................                  3,738.7          13         3,337.5          12
Industrial - Consumer...................                    919.1           3           879.4           3
Industrial - Energy.....................                  2,677.1           9         2,779.5          10
Industrial - Manufacturing..............                  5,509.8          19         5,729.6          21
Industrial - Other......................                    136.8           1           158.7           1
Industrial - Service....................                  4,499.7          15         4,503.0          16
Industrial - Transport..................                    904.3           3           967.8           4
Utility - Electric......................                  3,036.2          10         2,751.2          10
Utility - Other.........................                     57.6           -            67.4           -
Utility - Telecom.......................                  1,849.5           6         1,792.4           6
                                                     --------------  -----------   -------------  ----------
    Total...............................               $ 29,273.7         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

                                       84

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 a
credit 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  losses should be
recognized.  The analysis  focuses on each issuer's ability to service its debts
in a timely  fashion and the length of time the security has been trading  below
cost.  Formal  documentation  of the  analysis  and the  company's  decision  is
prepared and approved by management.

We consider  relevant facts and  circumstances in evaluating  whether the credit
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  credit  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 credit impairments of fixed
maturity  securities  were $36.3 million for the nine months ended September 30,
2004.  Following  is a summary of our  material  impairments  taken for the nine
months ended September 30, 2004:

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

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

o    $7.5  million on private  fixed  maturity  securities  of a U.S.  prime and
     sub-prime  auto lending  company.  The company  filed Chapter 11 bankruptcy
     protection  during late 2002 and emerged from bankruptcy  during  September

                                       85

     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.

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

For the nine months ended  September  30,  2004,  we realized  $21.8  million of
losses upon disposal of bonds excluding  hedging  adjustments.  Included in this
$21.8 million is $15.2  million  related to sales of seventeen  credit  impaired
names. We generally intend to hold securities in unrealized loss positions until
they mature or recover.  However,  we do sell bonds under certain  circumstances
such as when we have  evidence of a  significant  deterioration  in the issuer's
creditworthiness,  when  a  change  in  regulatory  requirements  modifies  what
constitutes a permissable investment or the maximum level of investments held or
when there is an increase in capital requirements or a change in risk weights of
debt securities. Sales generate both gains and losses.

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

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

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

Finance - Bank..........................       $   3,304.5    $   186.6      $     6.4      $   3,484.7
Finance - Insurance.....................           2,348.6        118.1            6.5          2,460.2
Finance - Other.........................           3,544.7        206.2           12.2          3,738.7
Industrial - Consumer...................             860.6         59.9            1.4            919.1
Industrial - Energy.....................           2,445.6        240.8            9.3          2,677.1
Industrial - Manufacturing..............           5,140.3        373.9            4.4          5,509.8
Industrial - Other......................             128.3          8.5            -              136.8
Industrial - Service....................           4,187.0        321.4            8.7          4,499.7
Industrial - Transport..................             848.4         71.5           15.6            904.3
Utility - Electric......................           2,839.3        202.9            6.0          3,036.2
Utility - Other.........................              49.1          8.5            -               57.6
Utility - Telecom.......................           1,690.1        162.2            2.8          1,849.5
                                             -------------- --------------- -------------- ----------------
   Total corporate securities...........          27,386.5      1,960.5           73.3         29,273.7
U.S. Government and agencies............             287.9          8.9            0.3            296.5
States and political subdivisions.......             793.8         50.1            0.7            843.2
Non-U.S. governments....................             410.4         59.5            -              469.9
Mortgage-backed and other
   asset-backed securities..............           6,778.7        395.4           22.9          7,151.2
                                             -------------- --------------- -------------- ----------------
   Total fixed maturity securities,
     available-for-sale.................       $  35,657.3    $ 2,474.4      $    97.2      $  38,034.5
                                             ============== =============== ============== ================

                                       86

                              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 $97.2 million and $151.6  million as of September 30, 2004 and December 31,
2003,  respectively.  Of the  $97.2  million  in gross  unrealized  losses as of
September 30, 2004,  there were $0.4 million in losses  attributed to securities
scheduled  to  mature  in one year or  less,  $11.0  million  is  attributed  to
securities  scheduled  to mature  between  one to five years,  $27.0  million is
attributed to securities  scheduled to mature  between five to ten years,  $35.9
million is  attributed to  securities  scheduled to mature after ten years,  and
$22.9 million is related to mortgage-backed  and other asset-backed  securities.
The gross unrealized losses as of September 30, 2004 were concentrated primarily
in  Mortgage-backed  and  other  asset-backed   security,   Finance-Other,   and
Industrial-Transportation  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 September 30, 2004, and December 31, 2003.

                                       87

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

                                                              AS OF SEPTEMBER 30, 2004
                                               ---------------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED       CARRYING
                                                  COST          GAINS         LOSSES           AMOUNT
                                               ------------- -------------  -------------  -------------
                                                                     (IN MILLIONS)
                                                                                
Investment Grade:
   Public...................................   $  22,883.0    $ 1,566.5      $    34.8      $  24,414.7
   Private..................................      10,683.4        748.2           26.5         11,405.1
Below Investment Grade:
   Public...................................       1,214.9         76.9           17.7          1,274.1
   Private..................................         876.0         82.8           18.2            940.6
                                               ------------- -------------  -------------  -------------
Total fixed maturity securities,
   available-for-sale.......................   $  35,657.3    $ 2,474.4       $   97.2      $  38,034.5
                                               ============= =============  =============  =============

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

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

                                       88

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

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

Three months or less..................   $     668.8   $    3.5      $  804.7          $  5.2      $1,473.5     $    8.7
Greater than three to six months......       1,306.2       16.0         506.9             5.8       1,813.1         21.8
Greater than six to nine months.......         241.6        5.1         119.6             2.8         361.2          7.9
Greater than nine to twelve months....          19.0        0.5          78.2             2.1          97.2          2.6
Greater than twelve to twenty-four
    months............................         246.5        7.9         250.2            10.1         496.7         18.0
Greater than twenty-four to thirty-
    six months........................           3.2        0.1           -               -             3.2          0.1
Greater than thirty-six months........          22.4        1.7           5.1             0.5          27.5          2.2
                                        ------------- ------------- -------------  -------------- -----------  --------------
    Total fixed maturities, available-
      for-sale........................   $   2,507.7   $   34.8      $1,764.7          $ 26.5      $4,272.4     $   61.3
                                        ============= ============= =============  ============== ===========  ==============

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

                                       89

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

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

Three months or less..................   $    17.8     $     3.0     $    53.2       $     4.8     $    71.0    $     7.8
Greater than three to six months......        49.3           1.9           8.3             -            57.6          1.9
Greater than six to nine months.......        36.6           3.4           -               -            36.6          3.4
Greater than nine to twelve months....         -             -             6.6             1.2           6.6          1.2
Greater than twelve to twenty-four
    months............................         7.5           0.2          10.9             1.1          18.4          1.3
Greater than twenty-four to thirty-
    six months........................        17.7           3.8          38.1             3.3          55.8          7.1
Greater than thirty-six months........        27.4           5.4          56.0             7.8          83.4         13.2
                                        ------------ -------------- -------------  -------------- -----------   ------------
    Total fixed maturities, available-
       for-sale.......................   $   156.3     $    17.7     $   173.1       $    18.2     $   329.4    $    35.9
                                        ============ ============== =============  ============== ===========   ============

                              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 September 30, 2004 and December 31, 2003,
$61.3  million and $76.4 million were related to  investment  grade  securities,
respectively.   Gross  unrealized  losses  related  to  below  investment  grade
securities  were $35.9  million and $75.2  million as of September  30, 2004 and
December 31, 2003, respectively.

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

                                       90

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

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

Three months or less.................   $   6.7         $    1.8     $     8.9        $    3.3       $  15.6      $   5.1
Greater than three to six months.....       -                -             -               -             -            -
Greater than six to nine months......       -                -             -               -             -            -
Greater than nine to twelve months...       -                -             -               -             -            -
Greater than twelve months...........       9.5              2.8           -               -             9.5          2.8
                                     ----------------- ------------ ---------------- -------------  ------------ -------------
   Total fixed maturity securities,
       available-for-sale............   $  16.2         $    4.6     $     8.9        $    3.3       $  25.1      $   7.9
                                     ================= ============ ================ =============  ============ =============

                              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  $7.9  million  as of
September  30,  2004 and  $38.4  million  as of  December  31,  2003.  The gross
unrealized  losses  attributed to those  securities  considered to be "problem",
"potential  problem" or "restructured" were $4.6 million and $36.2 million as of
September 30, 2004, and December 31, 2003, respectively.

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

                                       91

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

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

Total fixed maturity securities (public and private)............            $   38,135.7            $  36,128.0
                                                                            ============            ===========
Problem fixed maturity securities...............................            $       80.0            $     152.5
Potential problem fixed maturity securities.....................                   127.3                  230.1
Restructured fixed maturity securities..........................                    21.5                   39.9
                                                                            ------------            -----------
   Total problem, potential problem and restructured fixed
     maturity securities........................................            $      228.8            $     422.5
                                                                            ============            ===========
   Total problem, potential problem and restructured fixed
     maturity securities as a percent of total fixed maturity
     securities.................................................                     1%                     1%

MORTGAGE LOANS

Mortgage  loans  comprised  21% and 22% of  total  U.S.  invested  assets  as of
September 30, 2004, and December 31, 2003, respectively.  Mortgage loans consist
of  commercial  and  residential  loans.  Commercial  mortgage  loans  comprised
$10,035.0  million as of September 30, 2004, and $9,630.4 million as of December
31,  2003,  or 90% and 88% of total  mortgage  loan  investments,  respectively.
Residential  mortgages  comprised  $1,167.7 million as of September 30, 2004 and
$1,288.1  million as of December 31, 2003, or 10% and 12% of total mortgage loan
investments,  respectively.  Principal  Bank holds the  majority of  residential
loans to comply with federal thrift charter requirements.

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

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

o    enhancing total returns; and

o    providing strategic portfolio diversification.

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

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

California  accounted for 19% of our  commercial  mortgage loan  portfolio as of
September 30, 2004. We are,  therefore,  exposed to potential  losses  resulting
from the risk of catastrophes,  such as earthquakes, that may affect the region.
Like other  lenders,  we  generally  do not  require  earthquake  insurance  for
properties  on  which  we  make  commercial  mortgage  loans.  With  respect  to
California properties, however, we obtain an engineering report specific to each
property. The report assesses the building's design  specifications,  whether it
has been  upgraded to meet seismic  building  codes and the maximum loss that is
likely to result from a variety of different  seismic  events.  We also obtain a
report that assesses by building and  geographic  fault lines the amount of loss
our commercial  mortgage loan portfolio  might suffer under a variety of seismic
events.

                                       92

Our commercial loan portfolio is highly diversified by borrower. As of September
30, 2004,  36% of the U.S.  commercial  mortgage loan portfolio was comprised of
mortgage  loans with principal  balances of less than $10.0  million.  The total
number of commercial  mortgage  loans  outstanding  as of September 30, 2004 and
December  31, 2003 was 1,325 and 1,447,  respectively.  The average loan size of
our commercial mortgage portfolio was $7.6 million as of September 30, 2004.

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

We state commercial  mortgage loans at their unpaid principal  balances,  net of
discount accrual and premium amortization,  valuation allowances and write downs
for impairment.  We provide a valuation  allowance for commercial mortgage loans
based  on  current  market  factors  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  $(1.0)  million for the nine  months  ended  September  30, 2004 and
$(34.0) million for the year ended December 31, 2003.

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

We maintain the allowance for losses on loans at a level management  believes to
be adequate to absorb  estimated  probable credit losses.  Management  bases its
periodic  evaluation  of the adequacy of the  allowance  for losses on known and
inherent  risks  in the  portfolio,  adverse  situations  that  may  affect  the
borrower's  ability to repay, the estimated value of the underlying  collateral,
composition  of the  loan  portfolio,  current  economic  conditions  and  other
relevant  factors.  The  evaluation  is  inherently  subjective  as it  requires
estimating  the amounts and timing of future cash flows  expected to be received
on impaired  loans that may change.  We evaluate the adequacy of our  commercial
mortgage loan allowance at December 31, 2003 and released $23.9 million from the
allowance.  As a result of a change in the economic  state used in the valuation
calculation,  $8.9 million was released  from the  valuation  allowance  for the
three months ended September 30, 2004.

                                       93

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

                              U.S. INVESTED ASSETS
                     COMMERCIAL MORTGAGE VALUATION ALLOWANCE

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

Beginning balance..........................................          $          49.6           $          83.6
Provision..................................................                     13.7                       1.3
Release....................................................                    (14.7)                    (35.3)
                                                                     ---------------           ---------------
Ending balance.............................................          $          48.6           $          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 SEPTEMBER 30,        AS OF DECEMBER 31,
                                                               -----------------------  ------------------------
                                                                          2004                      2003
                                                               -----------------------  ------------------------
                                                                                 ($ IN MILLIONS)

Total commercial mortgages ................................            $     10,035.0           $        9,630.4
                                                                       ==============           ================
Problem commercial mortgages(1)............................            $         45.3           $           45.9
Potential problem commercial mortgages ....................                      68.0                       99.3
Restructured commercial mortgages .........................                      61.6                       65.3
                                                                       --------------           ----------------
   Total problem, potential problem and
     restructured commercial mortgages.....................            $        174.9           $          210.5
                                                                       ==============           ================
   Total problem, potential problem and restructured
     commercial mortgages as a percent of total commercial.                       2%                         2%

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

EQUITY REAL ESTATE

We hold commercial equity real estate as part of our investment portfolio. As of
September 30, 2004,  and December 31, 2003,  the carrying  amount of equity real
estate  investment was $1,063.4 million and $1,516.6  million,  or 2% and 3%, of
U.S. invested assets, respectively. Our commercial equity real estate is held in
the form of wholly owned real estate,  real estate acquired upon  foreclosure of
commercial  mortgage loans, and interests,  both majority owned and non-majority
owned, in real estate joint ventures.

Equity real estate is categorized as either "real estate held for investment" or
"real  estate held for sale".  Real estate held for  investment  totaled  $906.4
million as of September 30, 2004, and $1,003.6  million as of December 31, 2003.
The carrying value of real estate held for investment is generally  adjusted for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and accordingly, are reflected in our
consolidated results of operations. For the nine months ended September 30, 2004
and twelve  months  ended  December  31,  2003,  there  were no such  impairment
adjustments.

                                       94

The carrying  amount of real estate held for sale as of September 30, 2004,  and
December  31,  2003,  was $157.0  million and $513.0  million,  net of valuation
allowances of $8.1 million and $19.1 million,  respectively.  Once we identify a
real estate  property to be sold and commence a plan for marketing the property,
we classify  the property as held for sale.  We establish a valuation  allowance
subject to periodical revisions,  if necessary,  to adjust the carrying value of
the  property  to reflect the lower of its  current  carrying  value or the fair
value, less associated selling costs.

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

Equity real estate is distributed  across geographic regions of the country with
larger  concentrations  in the South  Atlantic,  West South  Central and Pacific
regions of the United States as of September 30, 2004. By property  type,  there
is a concentration in office buildings that represented approximately 39% of the
equity real estate portfolio as of September 30, 2004.

OTHER INVESTMENTS

Our other  investments  totaled  $1,012.2  million  as of  September  30,  2004,
compared to $1,198.8 million as of December 31, 2003.  Derivatives accounted for
$549.5  million in other  investments  as of September  30, 2004.  The remaining
invested  assets  include  minority  interests  in  unconsolidated  entities and
properties owned jointly with venture partners and operated by the partners.

INTERNATIONAL INVESTMENT OPERATIONS

As of September 30, 2004, our international investment operations consist of the
investments  of  Principal  International  comprised of $2.2 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 September  30, 2004,  and  December 31, 2003,  were fixed  maturity
securities and residential mortgage loans:

                                       95

                          INTERNATIONAL INVESTED ASSETS

                                                           AS OF SEPTEMBER 30,        AS OF DECEMBER 31,
                                                         -----------------------  ------------------------
                                                                   2004                      2003
                                                         -----------------------  ------------------------
                                                            CARRYING      % OF       CARRYING       % OF
                                                             AMOUNT       TOTAL       AMOUNT        TOTAL
                                                         ------------- ---------  --------------- --------
                                                                            ($ IN MILLIONS)
                                                                                         
Fixed maturity securities
   Public.........................................         $  1,647.1        74%      $  1,312.3      66%
   Private........................................                -           -             81.0       4
Equity securities.................................               26.1         1             41.8       2
Mortgage loans
   Residential....................................              346.1        16            333.1      17
Real estate held for investment...................                9.3         -              9.5       1
Other investments ................................              211.4         9            213.3      10
                                                         ------------- ---------  --------------- --------
   Total invested assets..........................            2,240.0       100%         1,991.0     100%
                                                                       =========                  ========
Cash and cash equivalents.........................               83.6                       71.4
                                                         -------------            ---------------
   Total invested assets and cash ................         $  2,323.6                 $  2,062.4
                                                         =============            ===============

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK EXPOSURES AND RISK MANAGEMENT

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

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

o    rebalance our existing asset or liability portfolios;

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

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

INTEREST RATE RISK

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

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

As of  September  30,  2004,  the  difference  between  the asset and  liability
durations on our primary duration managed  portfolio was +.13. 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. Our goal is to minimize the duration gap. Currently, our guidelines
indicate that total  duration  gaps between the asset and  liability  portfolios

                                       96

should  be  within  +/-0.25.  The  value of the  assets  in this  portfolio  was
$32,001.0 million as of September 30, 2004.

For products such as whole life  insurance and term life insurance that are less
sensitive  to interest  rate risk,  and for other  products  such as  individual
single  premium  deferred  annuities,  we manage  interest  rate risk based on a
modeling process that considers the target average life,  maturities,  crediting
rates and  assumptions of policyholder  behavior.  As of September 30, 2004, the
weighted-average  difference between the asset and liability  durations on these
portfolios  was  +.42.  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  $14,330.9  million as of September  30,
2004.

We also have a block of  participating  general  account  pension  business that
passes the actual  investment  performance  of the assets to the  customer.  The
investment  strategy  of this  block is to  maximize  investment  return  to the
customer on a "best efforts" basis,  and there is little or no attempt to manage
the duration of this  portfolio  since there is little or no interest rate risk.
The value of the assets in these portfolios was $1,834.5 million as of September
30, 2004.

Using the  assumptions  and data in effect as of September 30, 2004, we estimate
that a 100 basis point immediate,  parallel increase in interest rates decreases
the net  fair  value of our  portfolio  by  approximately  $102.0  million.  The
following table details the estimated changes by risk management  strategy.  The
table also gives the  weighted-average  duration of the asset portfolio for each
category, and the net duration gap (i.e. the weighted average difference between
the asset and liability durations).

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

Primary duration-managed..........     $32,001.0               4.01             .13          $    (41.6)
Duration-monitored................      14,330.9               5.07             .42               (60.4)
Non duration-managed..............       1,834.5               5.84             N/A                 N/A
                                    -------------------                                    ----------------
   Total..........................     $48,166.4                                             $   (102.0)
                                    ===================                                    ================

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

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

CASH FLOW VOLATILITY

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

                                       97

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

DERIVATIVES

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

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

We have increased our credit exposure  through credit default swaps by investing
in $42.5 million of  subordinated  tranches of a synthetic  collateralized  debt
obligation.  The outstanding notional amount as of September 30, 2004 was $500.0
million  and the mark to market  value was $11.8  million.  We also  invested in
credit  default  swaps  creating  replicated  assets  with a notional  of $448.3
million and mark to market value of $4.8 million as of September 30, 2004.

We  also  offer  a  guaranteed  fund  as an  investment  option  in our  defined
contribution  plans in Hong Kong. This fund contains an embedded option that has
been  bifurcated  and accounted for separately in realized  gains  (losses).  We
recognized a $0.1 million  pre-tax gain for the nine months ended  September 30,
2004.

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

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

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

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

o    diversifying our risk across numerous approved counterparties;

o    limiting exposure to A+ credit or better;

                                      98

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

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

o        daily monitoring of counterparty credit ratings.

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

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

               DERIVATIVE FINANCIAL INSTRUMENTS - NOTIONAL AMOUNTS

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

Interest rate swaps.............................           $  6,088.4         53%       $  5,025.0         49%
Foreign currency swaps..........................              3,042.2         27           2,823.4         27
Credit default swaps ...........................                948.2          8             863.2          8
Bond forwards...................................                510.0          4             467.2          5
Swaptions.......................................                439.0          4             315.0          3
Currency forwards...............................                191.7          2             282.0          3
MBS forwards....................................                186.3          2             522.1          5
Call options....................................                 39.8          -              30.0          -
Put options.....................................                 21.0          -               -            -
Bond options....................................                 17.5          -              17.5          -
U.S. Treasury futures...........................                  0.3          -              27.8          -
Other...........................................                  1.5          -               1.5          -
                                                         ---------------  ------------ -------------  ----------
   Total........................................           $ 11,485.9        100%       $ 10,374.7        100%
                                                         ===============  ============ =============  ==========

                                      99

               DERIVATIVE FINANCIAL INSTRUMENTS - CREDIT EXPOSURES

                                                            AS OF SEPTEMBER 30,           AS OF DECEMBER 31,
                                                         -------------------------  ----------------------------
                                                                    2004                         2003
                                                         -------------------------  ----------------------------
                                                              CREDIT        % OF       CREDIT           % OF
                                                             EXPOSURE       TOTAL     EXPOSURE          TOTAL
                                                         ---------------  --------  --------------   -----------
                                                                                ($ IN MILLIONS)
                                                                                         
Foreign currency swaps..........................         $     471.9         77%      $  637.1        78%
Interest rate swaps.............................                45.9          7           69.0         9
Bond forwards...................................                61.3         10           52.1         6
Credit default swaps............................                19.0          3           45.9         6
Call options....................................                 6.5          1            6.6         1
Swaptions ......................................                11.0          2            1.8         -
Currency forwards...............................                 0.9          -            0.3         -
Put options.....................................                 0.7          -            -           -
                                                         ---------------  --------  --------------   -----------
   Total credit exposure........................               617.2        100%         812.8       100%
                                                                          ========                   ===========
Less:  Collateral received......................              (213.5)                   (334.5)
                                                         ---------------            --------------
   Total........................................         $     403.7                  $  478.3
                                                         ===============            ==============

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

Interest rate swaps..................        $  6,088.5            5.80(1)      $ (247.7)       $  (58.3)      $    83.5
Bond forwards........................             510.0            2.00(5)          90.8            60.8            32.5
Swaptions............................             439.0            1.56(4)         (29.6)          (18.5)          (18.7)
Mortgage-backed forwards and options.             186.3            0.04(5)           3.9             0.3            (3.3)
Bond options.........................              17.5            2.04(5)          (2.5)           (0.6)            -
Put options..........................              21.0            4.72(5)           0.4             0.7             1.2
U.S. Treasury futures................               0.3            0.22(3)           -               -               -
                                           ------------------                   --------------  -----------  ---------------
   Total.............................        $  7,262.6                         $ (184.7)       $  (15.6)      $    95.2
                                           ==================                   ==============  ===========  ===============

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

                                      100

DEBT ISSUED AND OUTSTANDING

As of September 30, 2004,  the aggregate fair value of long-term debt was $949.9
million. A 100 basis point, immediate, parallel decrease in interest rates would
increase the fair value of debt by approximately $35.8 million.

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

8.2% notes payable, due 2009.......................        $      568.4         $      545.3          $      523.3
8% surplus notes payable, due 2044.................               119.5                108.5                  98.0
Non-recourse mortgages and notes payable...........               229.8                228.3                 223.0
Other mortgages and notes payable..................                68.0                 67.8                  67.1
                                                           ------------         ------------          ------------
   Total long-term debt............................        $      985.7         $      949.9          $      911.4
                                                           ============         ============          ============

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

EQUITY RISK

Equity  risk is the risk  that we will  incur  economic  losses  due to  adverse
fluctuations  in a particular  common stock.  As of September 30, 2004, the fair
value of our equity securities was $797.7 million. A 10% decline in the value of
the equity securities would result in an unrealized loss of $79.8 million. As of
September 30, 2004, a 10% immediate and sustained  decline in the equity markets
would result in a decrease of asset-based fee revenues of $10.3 million over the
next three  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 September 30, 2004, was $2,780.8 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 September 30, 2004, the fair value of our foreign currency
denominated fixed maturity  securities was $317.9 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
September  30,  2004,  was  $240.2  million.  With  regard to our  international
operations,  we  attempt  to do as  much  of our  business  as  possible  in the
functional  currency  of the country of  operation.  At times,  however,  we are
unable to do so, and in these  cases,  we use foreign  exchange  derivatives  to
hedge the resulting risks.  Additionally,  we may take measures to hedge our net
equity  investments  in our foreign  subsidiaries  from  currency  risks.  As of
September  30,  2004,  we used  currency  forwards to hedge a portion of our net
equity  investment in our Mexican  operations  from currency  fluctuations.  The
outstanding   notional  amount  of  the  currency  forwards  relating  to  these
operations was $30.4 million  (approximately  $350 million Mexican pesos) and we
recognized a $0.1 million  pre-tax  gain in other  comprehensive  income for the
nine months ended September 30, 2004.

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

                                      101

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 September
30, 2004, and have  concluded  that our  disclosure  controls and procedures are
effective.

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

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are regularly involved in litigation,  both as a defendant and as a plaintiff
but  primarily as a defendant.  Litigation  naming us as a defendant  ordinarily
arises out of our  business  operations  as a provider of asset  management  and
accumulation  products and services,  and life, health and disability insurance.
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.

In  October  of 2004,  several  lawsuits  were  filed  against  other  insurance
companies  and  insurance  brokers  alleging  improper  conduct  relating to the
payment and non-disclosure of contingent  compensation and bid-rigging activity.
Several of these suits were filed as purported  class actions.  No lawsuits have
been filed  against us relating to these  issues.  We have been  monitoring  the
regulatory and legal issues raised by these lawsuits.

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.

                                      102

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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                        SHARES (OR UNITS)      THAT MAY YET BE
                                                 NUMBER OF       AVERAGE        PURCHASED AS PART      PURCHASED UNDER
                                                 SHARES (OR     PRICE PAID       OF PUBLICLY             THE PLANS OR
                                                   UNITS)       PER SHARE         ANNOUNCED              PROGRAMS (IN
                   PERIOD                        PURCHASED      (OR UNIT)      PLANS OR PROGRAMS          MILLIONS)
- ---------------------------------------------- --------------- ------------- ---------------------- ---------------------
                                                                                                  
January 1, 2004 - January 31, 2004......                644(3)      $33.07               -                    $147.0 (1)
February 1, 2004 - February 29, 2004....                 -            -                  -                    $147.0 (1)
March 1, 2004 - March 31, 2004..........              9,600(4)      $36.37               -                    $147.0 (1)
April 1, 2004 - April 30, 2004..........          2,237,500         $35.48           2,237,500                $ 67.6 (1)
May 1, 2004 - May 31, 2004..............          2,104,811         $34.77           2,104,811                $694.4 (1),(2)
June 1, 2004 - June 30, 2004............          1,964,600         $35.32           1,964,600                $625.0 (2)
July 1, 2004 - July 31, 2004............          1,931,053         $34.80           1,925,000                $558.0 (2)
August 1, 2004 - August 31, 2004........          2,855,800         $33.14           2,855,800                $463.4 (2)
September 1, 2004 - September 30, 2004            3,454,000         $35.29           3,454,000                $341.5 (2)
                                               ---------------               ----------------------
Total...................................         14,558,008         $34.76          14,541,711                $341.5 (2)
                                               ===============               ======================

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

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

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

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

                                      103

ITEM 6.  EXHIBITS

         EXHIBIT
         NUMBER                                                DESCRIPTION

           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

                                      104

                                    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:  November 3, 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

                                      105

   EXHIBIT INDEX

    EXHIBIT
    NUMBER                                        DESCRIPTION              PAGE

    12         Statement Regarding Computation of Ratio of Earnings
                to Fixed Charges.......................................... 107
    31.1        Certification of J. Barry Griswell ....................... 108
    31.2        Certification of Michael H. Gersie ....................... 109
    32.1        Certification Pursuant to Section 1350 of Chapter 63 of
                Title 18 of the United States Code -  J. Barry
                Griswell ................................................. 110
    32.2        Certification Pursuant to Section 1350 of Chapter 63 of
                Title 18 of the United States Code -  Michael H.
                Gersie ................................................... 111

                                      106

                                                              Exhibit 12

                         PRINCIPAL FINANCIAL GROUP, INC.

                 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO

                                                    FOR THE
                                                   NINE MONTHS
                                                      ENDED                                 FOR THE
                                                   SEPTEMBER 30,                    YEAR ENDED DECEMBER 31,
                                             -----------------------  ---------------------------------------------------------
                                                2004       2003         2003         2002       2001       2000       1999
                                             ---------- ------------  ----------- ----------- ---------- ---------- -----------
                                                                              ($ IN MILLIONS)

1.  Income from continuing operations
        before income taxes..................$  606.2    $  556.3      $  824.3   $  371.5     $  249.9   $  751.1   $  975.3
2.  Interest expense.........................    72.1        77.4         104.3       99.2         96.7      116.8      145.4
3.  Interest factor of rental expense........     3.5         6.0           4.6        8.0          9.4       15.1        9.9
4.  Undistributed income from equity
        investees............................   (14.6)      (19.0)        (18.3)       4.3        (17.4)     (27.1)     (99.7)
                                             ---------- ------------  ----------- ----------- ---------- ---------- -----------
5. Earnings before interest credited on
        investment products..................   667.2       620.7         914.9      483.0        338.6      855.9    1,030.9
6.  Interest credited on investment products.   559.1       551.4         735.7      743.4        773.1      723.5      708.5
                                             ---------- ------------  ----------- ----------- ---------- ---------- -----------
7.  Earnings.................................$1,226.3    $1,172.1      $1,650.6   $1,226.4     $1,111.7   $1,579.4   $1,739.4
                                             ========== ============  =========== =========== ========== ========== ===========

8.  Interest expense.........................$   72.1    $   77.4      $  104.3   $   99.2     $   96.7   $  116.8   $  145.4
9.  Interest factor of rental expense........     3.5         6.0           4.6        8.0          9.4       15.1        9.9
10. Preferred stock dividend requirements
        of majority-owned subsidiaries
        (non-intercompany) ..................     -           0.6           1.2        0.4          -          -          -
                                             ---------- ------------  ----------- ----------- ---------- ---------- -----------
11. Fixed charges before interest credited
        on investment products...............    75.6        84.0         110.1      107.6        106.1      131.9      155.3
12. Interest credited on investment products.   559.1       551.4         735.7      743.4        773.1      723.5      708.5
                                             ---------- ------------  ----------- ----------- ---------- ---------- -----------
13. Fixed charges............................$  634.7    $  635.4      $  845.8   $  851.0     $  879.2   $  855.4   $  863.8
                                             ========== ============  =========== =========== ========== ========== ===========
14. Ratio of earnings to fixed charges
        before interest credited on
        investment products (Line item 5/
        Line item 11)........................     8.8         7.4           8.3        4.5          3.2        6.5        6.6

15. Ratio of earnings to fixed charges
        (Line item 7/Line item 13)...........     1.9         1.8           2.0        1.4          1.3        1.8        2.0

                                      107

                                                                    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:  November 3, 2004

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

                                      108

                                                                   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:  November 3, 2004

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

                                      109

                                                                   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  September 30, 2004 fully complies with the  requirements of Section 13(a)
of the Securities Exchange Act of 1934 and (ii) the information contained in the
Form 10-Q for the quarter  ended  September  30, 2004  fairly  presents,  in all
material  respects,  the  financial  condition  and  results  of  operations  of
Principal Financial Group, Inc.

                                                /S/ J. BARRY GRISWELL
                                                ----------------------------
                                                J. Barry Griswell
                                                Chairman, President and Chief
                                                Executive Officer
                                                Date: November 3, 2004

                                      110

                                                                    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  September 30, 2004 fully complies with the  requirements of Section 13(a)
of the Securities Exchange Act of 1934 and (ii) the information contained in the
Form 10-Q for the quarter  ended  September  30, 2004  fairly  presents,  in all
material  respects,  the  financial  condition  and  results  of  operations  of
Principal Financial Group, Inc.

                                             /S/ MICHAEL H. GERSIE
                                             ---------------------------------
                                             Michael H. Gersie
                                             Executive Vice President and Chief
                                             Financial Officer
                                             Date: November 3, 2004

                                      111